All About FHA Loans

All About FHA Loans Last updated: January 1, 2009 What is the FHA? The Federal Housing Administration, known more commonly as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. The Federal Housing Administration – which is part of the U.S. Department of Housing and Urban Development (HUD) – insures the loan, so your lender can offer applicants a better deal. FHA loans have been helping people become homeowners since 1934, insuring over 34 million properties since its inception. It is the largest insurer of mortgages in the world, insuring mortgages on single and multi-family homes, including manufactured homes and hospitals. Who May Benefit From an FHA Loan? By serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet conventional loan requirements, the FHA program allows individuals to qualify who may have been previously denied a home loan through conventional underwriting guidelines. FHA loans are designed for individuals who would like to purchase a home but may not have been able to save enough money for the purchase, such as recent college graduates, those still pursuing education, or a young couple starting out. It also allows individuals to qualify for a FHA loan whose credit has been marred by bankruptcy or foreclosure, as FICO (credit) scores can typically be lower than those for a conventional loan. At the current time, it is our understanding that the minimum FICO score for qualification for an FHA Loan is 620, but with extenuating circumstances variations to this limit may be possible- always discuss this with your mortgage professional. What are the Typical Rates and Terms for FHA Loans? As of January 1, 2009, Borrowers can finance 96.5% of the purchase price, which equates to a 3.5% downpayment. In some instances, when combined with other types of loans, the down payment can be zero. Some or all of the downpayment, closing costs or pre-paids can be money from a family member, employer or charitable organization. Documentation and trailing of funds will be required. FHA also allows for a "family loan"- if your relative is not gifting, but loaning funds-- with payments being counted in determining qualifying ratios. 401K loans are an acceptable source for all funds needed, and no payment is counted in the qualifying ratios. There is little or no adjustment to the interest rate for an FHA loan, as the rates vary within .125 percent of a conventional loan. As of January 1, 2009, the maximum mortgage limit in high-cost areas is 115% of local median prices, not to exceed $625,500. Click here to find the FHA Mortgage limits for your area. Mortgage insurance is funded into the loan, meaning a premium of 1.5% is added to the loan balance instead of being paid out-of-pocket. In addition, a small portion for the mortgage insurance premium is added to the monthly payment, but it is far less than private mortgage insurance premiums. What are the Current Underwriting Guidelines for FHA Loans? Credit guidelines have been revamped for FHA loans as well as most other types of loans, and even the minimum FHA credit standards are harder to meet in the current market. FHA placed a moratorium on tiered FHA monthly MIP until October 1, 2009. The tiered MIP was tied to credit scores and down payment amount. A stable 2-year employment record is required. Must have documentable payment patterns for at least one year for items such as cancelled checks for rent, phone bills, utilities, etc. Allowable debt ratios are typically slightly higher, at 31%/43%, than the debt-ratio limits imposed for conventional loans. This means your PITI payment cannot be more than 31% of your gross monthly income, and your debt to income ratio cannot exceed 43% of your monthly gross income. At least two months of cash reserves from the borrowers own funds must be available. FHA mortgage loan underwriting guidelines require property appraisal. Credit scores above 620 will most likely qualify easily through the automated application process. Scores below 620 will be rejected in the automated process and will be processed manually, including an interview with the applicant. If you've had a foreclosure, you need to have re-established credit and it must be over three years since the date of foreclosure. If you've had a bankruptcy, you need to have re-established credit. Applicants who are still making payments on a Chapter 13 bankruptcy filing are eligible after one year, and those who filed Chapter 7 are eligible after two years. The applicant cannot have any outstanding civil judgements or delinquencies on federal debts such as taxes or student loans. What Are the Different Types of FHA Loans Available? FHA fixed-rate mortgages, or Section 203(b) loans, are the most common and popular type of FHA mortgage. The interest rate does not change with a fixed-rate mortgage. A fixed-rate FHA mortgage insures the lender for the total amount of the mortgage in case the buyer defaults. Fixed-rate mortgages can be taken out for periods of 10, 15, 20, or 30 years. The FHA Renovation Mortgage, or 203(k), allows homeowners to borrow money for the purpose of renovating their home. Up to 110% of the cost needed to repair and renovate a home can be financed under this program. There are, however, restrictions regarding the types of renovations that will be allowed, and the minimum amount of the 203(k) is $5000. FHA adjustable-rate mortgages, or Section 215, have interest rates that vary contingent on the current federal index. An adjustable-rate mortgage, or ARM, may be attractive under certain economic conditions as the interest rates are initially lower than interest rates on a fixed-rate mortgage. Typically, an ARM will be most beneficial to homebuyers who don't intend to stay in the home for more than a few years, as interest rates tend to increase over time. FHA Bridal Registry Program allows a married couple to "register" with a lender, much like the namesake department store bridal registry. Relatives or friends can make gift payments into an interest-bearing account in the couple's name, which can later be used as a down payment towards a FHA mortgage. Officer and Teacher Next Door Program. Typically, the homes which qualify for this program are located in areas of revitalization, or in moderately low-income neighborhoods that may have many vacant houses that have been identified as good candidates for redevelopment efforts. Through HUD and FHA, qualified teachers and law enforcement officers are able to purchase houses at a 50 percent discount and are required to make only a $100 down payment if the house is financed with a FHA mortgage. In Summary: FHA loans are available to anybody but are used most often by first-time home buyers and low- to moderate-income buyers. The decreased down payment and lack of set income limit qualifications makes this type of mortgage even more desirable for many people, particularly first-time homebuyers and those with blemished credit. For more information, visit the HUD website at http://www.hud.gov/.