FHA Loan

FHA Mortgage Insurance

The FHA loan insurance program was created to help first-time buyers get into homes. However, first-time buyers usually don’t have 20% down payments and may have a spottier credit history. In order to provide and protect taxpayers from paying for defaulted FHA mortgages, the loans include mortgage insurance premiums (MIP).


The FHA Mortgage Insurance Premium

FHA mortgage insurance is similar to the private mortgage insurance (PMI) required for conventional mortgages with down payments below 20%, but there are some key differences.

Up-front fees: Unlike the traditional PMI, the FHA MIP includes a 1.75% up-front fee at time of closing. The fee is usually included in the loan, so you pay it over the life of the loan.

Rate: The FHA MIP is also mandated at .55% of the loan amount per year, divided over 12 months. PMI rates are also usually .55% divided over 12 months.

Removal: Unlike PMI, the FHA MIP is mandatory for the first five years of loans with terms of more than 15 years, even if your loan balance reaches 78% of the original home value or sales price. PMI premiums can often be removed if the loan balance is below 80% of the current market value. Conventional lenders are required to automatically remove PMI when the loan balance falls to 78% of the original loan amount.

Exceptions: There are some exceptions to the mandated FHA mortgage insurance premium. If you have a loan term of 15 years or less AND put down 10% or more, the MIP will be cancelled when the loan balance is 78% of the original appraised value or original sales price, whichever is less. If you pay 20% down on a 15-year loan, you won’t be required to pay the MIP.

How the MIP Affects Your Loan Decision

Most people want to avoid paying mortgage insurance because it adds no value to the home and doesn’t go towards the principal. If you don’t have a 20% down payment, then you will most likely have to pay it for any loan, whether it’s from the FHA or a Conventional Lender. In that case, carefully compare the costs of each loan.

If you’ve saved a 20% down payment and have a good credit history, then a conventional mortgage is probably better for you because you won’t have to pay PMI on a 30-year mortgage, as you would with an FHA loan. However, if your down payment is a family loan or gift, you may not qualify for a conventional loan even with 20% down. In that case, an FHA loan with MIP may be your only option. If you can afford the higher payments for a 15-year mortgage, that may be the best option.

FHA Mortgage Limits

A Video example of how to find out what FHA Mortgage Limits are in an given area.

https://entp.hud.gov/idapp/html/hicostlook.cfm

FHA Loan Types

FHA-insured loans are available in urban and rural areas for single family homes, Town Houses, 2-unit, 3-unit, 4-unit properties, and for condominiums.Interest rates on FHA loans are generally slightly higher than market rates, while down payment requirements are lower than conventional loans. Down payments can be as low as 3.5 percent. In many cases, closing costs can be wrapped into the mortgage.

With an FHA-insured mortgage, you can make extra payments toward the principal when you make your regularly monthly payment. By making extra payments, you can repay the loan faster and save on interest. You can also pay off the entire balance of your FHA-insured mortgage at any time, with no penalty to you.

FHA Loan Section 203(b) is the most popular FHA program. You may use this program to purchase new or existing 1-4 family homes, condos or townhomes, in both urban and rural areas. A section 203(b) fixed mortgage may be repaid in monthly payments over 15 or 30 years. Available in Fixed and Adjustable Rates.

Section 234(c) provides mortgage insurance for buyers who wish to purchase a unit in a condominium project. The condominium may consist of more than one building, such as a group of row apartments, high-rise buildings, townhouses, or any combination of these structures. Any condominium project must be approved by HUD. Available in Fixed and Adjustable Rates.

FHA also insures loans for home improvements — 203(k) loans. Section 203(k) mortgages allow you to purchase and rehabilitate a home at least 1 year old. A portion of the loan proceeds are used to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The improvements financed with Section 203(k) mortgage proceeds must comply with HUD’s Minimum Property Standards and all local codes and ordinances.  Available in Fixed and Adjustable Rates.

FHA Loan Section 251 Adjustable Rate Mortgage program which provides insurance for Adjustable Rate Mortgages. When interest rates are high, Adjustable Rate Mortgages keep the initial interest rate on a mortgage low which allows borrowers to qualify for the financing they need. While the Section 251 program helps to keep mortgage interest rates and payments low they may change over the life of the loan. The maximum amount of fluctuation in your interest rate in any given year cannot exceed 1 percentage point. And over the life of your loan, the interest rate cannot increase more than 5 percent from your initial rate.  The terms of the Adjustable Rate Mortgage will be disclosed when you apply for your mortgage loan. And should your interest rate increase, you will be informed at least 25 days before any changes are made to your total monthly payment.

FHA Loan Programs

FHA has multiple Loan Programs that can meet anyone’s expectations if they are looking to use an FHA Loan to purchase their home below are a list of the most common Loan Programs available to you:

• HUD Homes - Properties for Sale and Financed by FHA
• Officer Next Door – 50% Discounted properties and financing for police officers.
• Teacher Next Door – 50% discounted properties and financing for teachers.
• Neighborhood Gold – up to $15,000 gift funds with assistance of home seller
• CHFA Loans (CHAFA) - discounted financing option with income limitations
• 203K – FHA major home improvement, rehab loan.
• Single Family Home – standard FHA 203(b) loan.
• Units> Duplex  Triplex  Fourplex – unit financing
• Fixed Rate FHA Loans – standard FHA fixed rate loan
• FHA adjustable rate mortgages (ARM) – standard FHA ARM, Adjustable Rate Mortgage
• FHA Buydown Loans – FHA 1/1 or 2/1 buy down loan.

Required FHA Income & Assets

Income Guidelines

In order to qualify for an FHA loan, all income must be analyzed to ensure that it is sufficient to cover the mortgage and other obligations of the borrower. Also, the stability and likelihood of the income continuing must also be analyzed. Income from any source that cannot be verified, is not stable, or will not continue may not be used in calculating the borrower’s income ratios.

Debt Ratios

Debt Ratios are the relationship between ones income and ones expenses. Ratios are generally expressed as two numbers like 29 over 41 or 29/41. These are standard FHA ratios. The first number, the 29, represents the relationship between the borrower’s income and his new housing expense of principal, interest, taxes, insurance, and HOA’s. A borrower who makes $3,000 per month and has a housing expense of $870 would have 29% top end ratio.
The other number of 41% represents the total monthly debt, including the housing expense and all other debt such as credit cards, loans, child support, etc. Thus in our example of the borrower that makes $3,000 per month and had a total expense of $1,230, would have 41% bottom ratio.


With the use of automated approvals, a borrowers ratios can exceed the guidelines above. Also, with compensating factors a borrower may be able to exceed the ratio guidelines.

Stability of Income

FHA does impose an arbitrary minimum length of time a borrower must have held a position to be eligible. However, the lender must verify the borrower’s employment for the most recent two full years. If a borrower indicates he or she was in school or in the military during any of this time, the borrower must provide evidence supporting this such as college transcripts or discharge papers. The borrower must also explain any gaps in employment of a month or more.



Allowances for seasonal employment, such as is typical in the building trades, etc,. may be made.
The lender or underwriter is looking to show a steady source of constant earnings. Borrowers with frequent job changes generally show a lack of stability. Also, large swings or changes in income will also lead an underwriter to question the stability of the income. A borrower who changes jobs frequently within the same line of work, but continues to advance in income or benefits should be considered favorably.

Assets

Though FHA doesn’t require assets in the bank to close on a loan, each mortgage consultant might have you put a cushion in the bank of at least 2 months of all your expenses with a minimum of 2 months of mortgage payments.

FHA ANNOUNCES POLICY CHANGES TO ADDRESS RISK AND STRENGTHEN FINANCES

New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities

WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to home ownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.


“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens. “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”



Announced FHA Policy Changes:



1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.



If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP. This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing. The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.



2. Update the combination of FICO scores and down payments for new borrowers.
New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well. This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.



3.   Reduce allowable seller concessions from 6% to 3%
The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.



In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.

FHA Required Down Payment

The down payment requirement on FHA loans are 3.5%. This went into effect date on January 1, 2009, but the FHA loan limits discussed previously in FHA Mortgage Limits video will not go into effect until the expiration of the Economic Stimulus Package (December 31, 2008).

Stay tuned for an updated video as the government is proposing an increase to FHA Required Down Payment in the near future.

What Kind of Credit Score Requirements does an FHA Loan Have?

In addition to your ability to pay for a mortgage FHA will look at your ability to repay as indicated by your credit report. Your willingness will be judged by your credit report records — that is, how well you’ve paid your loans and other debts in the past.

If you are unsure what your credit report is like, you may want to begin by getting a lenders credit report that you can view immediately.

To help you understand why credit is important and why FHA will look at your credit, please try to understand the following:

Perfect credit is what you are supposed to have.

Whenever you borrower money (credit cards, auto loans, student loans, etc.) you are making a commitment to that creditor to pay them back on the terms mutually agreed upon. If you are late making the payment then you broke the commitment and the lender can indicate this on your credit report.

The lender does not know why you are late, they just know that you broke the commitment agreed upon. They are not responsible on helping you manage your bills and debt, as they simply make and offer and the borrower accepts the terms.

This is why your credit is very important in qualifying for a home loan. Although you are supposed to have perfect credit,  FHA will allow for minor past credit issues, as long as there is a “reasonable” reason why there was an issue.

FHA will look mostly at  the last two years of your credit history. If there are some credit issues, we may be able to overcome them with sufficient explanations and supporting documents of why the issues occurred.

Following are some of the reasons FHA will accept:

• Lost of Job
• Job Transfer
• Serious Illness

As long as it seems to make sense, and it is not just because you did not make the payment or because you had too much other debt.

You should not rule yourself out of qualifying for FHA loan to buy a home because of credit issues until  a mortgage professional has reviewed your credit.

There are some credit issues that you must allow for a certain time (seasoning) to past before you can qualify for a FHA loan. They are as follows:

Two years from the date of discharge for a Bankruptcy

Three years from the date of Foreclosure

Also FHA would typically require that any outstanding collection accounts, judgments, charge off’s be paid off in full before closing your loan but not necessarily before “approving” your loan.

If you have a “Federal Tax Lien” that is in a repayment agreement, you do not have to pay it off in full but you must be able to qualify with the monthly payment of the repayment agreement.  “State Tax Liens” typically must be paid in full prior to closing your FHA loan.

Another advantage of FHA loans is that FHA does not require a credit scoring item called a FICO (Fair Issac Company) score. So if you have no credit at all you may still qualify for a FHA loan. If you have some credit you will typically need a minimum middle credit score of 620 to qualify for a FHA loan.

When you apply to get pre-approved for a FHA home loan, we will order a credit report for you. The credit report will show your record of payments on loans, charge cards and other similar debts. If you have never had a loan or a charge card, you can show that you have a good record of payment on your utility bills and rent payments.

We will review your credit report with you. Should you have some credit issues that prohibit you from qualifying for a FHA loan now, we will show you how to correct the issues so that we can help you qualify to purchase a home in the future.

In today’s world Lenders are looking for a credit score of a 620 or better in order to qualify for an FHA Mortgage.  But the truth is you can have a credit score lower than this with compensating factors.  For Credit Scores below 620 please contact your mortgage consultant for more information.

What Is An FHA Loan

An FHA Loan is a mortgage loan insured by the Federal Housing Administration (FHA). The FHA does not provide the loan; rather, it insures the loan for the lender. If the borrower defaults, the lender can seek recourse from the FHA. This lowers the lender’s risk and makes them more likely to issue a loan.

One of the benefits of an FHA-insured loan is low mortgage rates. For single-family homes, down payments can be as low as 3.5 percent, making it possible to afford a higher-priced home than with a more conventional 10 or 20 percent mortgage. The FHA can also help home buyers finance their closing costs, and even offers mortgage insurance.

In addition, the FHA does not allow lenders to charge prepayment penalties, meaning that if you pay off the loan ahead of schedule, you won’t be penalized.

As is customary with most loans, you’ll need to qualify for an FHA loan by meeting specific requirements, including:

• A good credit record;
• Enough money for a down payment, which can be as low as 3.5 percent;

To obtain an FHA-insured loan, you need to find FHA-approved lenders and compare their loan offerings. Inquire about the income qualifications, which will vary by area. Also keep in mind that the maximum amount you can receive from FHA-insured mortgages varies from county to county, and from state to state. These mortgages are also subject to periodic improved adjustment, and that may be offered only in areas where residential real estate prices are high.

For more information, visit the FHA Mortgage Limits page of the U.S. Department of Housing and Urban Development (HUD) Web site.

More information:

FHA Seller Concessions

One of the more attractive features of the FHA loan is the lack of limitations on seller-paid concessions.

When negotiating the purchase of any home, one of the most effective tools to reducing the closing cost of the home is using the FHA Loan combined with seller concession.

The average home has a total cost of anywhere from 3% to 6% in 3rd party closing costs.  These costs are addressed in the closing cost video.

By using HUD’s FHA guidelines, the average borrower can save thousands of dollars in buyer-paid costs by having a seller pay these typical closing fees.

Be sure when negotiating your purchase contract that you ask for closing costs concessions.  Most lenders, including FHA HUD insured loans, will allow up to 6% in seller concessions.  With conventional loans, lenders can place limits on a home buyer’s ability to ask for seller-paid closing costs.  These limits can reduce the amount to 3%, or can even completely strip your ability to get any seller concessions at all!

If you don’t have the funds to cover these costs, you’ll most certainly want to have these fees paid by the seller when possible. In a buyer’s market, you always want to ask.  The worst case scenario is your contract is turned down completely.  However, in the typical real estate transaction, a seller will simply counter your offer with what they are agreeable to. Your real estate agent can help you with these types of negotiations.

Seller paid concessions can pay the actual costs to close on your home purchase up to the percentage agreed to.  These third party paid fees can cover your prepaid items, which include home owner insurance and property taxes through the end of the tax year, along with title insurance fees and your lender fees.

Seller Concessions Example

For example, if you’re purchasing a home for $100,000, your typical costs to close would break down similar to this:

3.5% down payment – $3,500
5% closing costs – $5,000

Total cost to close – $8,500

By negotiating a closing cost concession into your contract, you can reduce the amount of funds you need to close to just your down payment.