What is an FHA Loan? Home ownership rates in America continue to increase at a steady
rate due in a large part to the implementation of FHA home loans
more than seventy years ago. Over the years, FHA has helped Americans
gain the financial independence that comes with owning a home.
By creating jobs and reasonable mortgage rates for the middle
class, financing military housing, and producing housing for
the low income and the elderly, FHA has helped Americans become
some of the best housed people in the world with over 73 million
Americans currently owning their own homes. Statistics show that
by 2005, home ownership rates in the US have climbed to 69 percent.
HOW IT WORKS
By serving as an umbrella under which lenders have the confidence
to extend loans to those who may not meet conventional loan requirements,
FHA's mortgage insurance allows individuals to qualify who may
have been previously denied for a home loan by conventional underwriting
guidelines.
FHA loans benefit those who would like to purchase a home but
haven't been able to put money away for the purchase, like recent
college graduates, newlyweds, or people who are still trying to
complete their education. It also allows individuals to qualify
for a FHA loan whose credit has been marred by bankruptcy or foreclosure.
NUTS AND BOLTS
The most popular FHA home loan is the 203(b). This fixed-rate loan
often works well for first time home buyers because it allows
individuals to finance up to 97 percent of their home loan which
helps to keep down payments and closing costs at a minimum. The
203(b) home loan is also the only loan in which 100 percent of
the closing costs can be a gift from a relative, non-profit,
or government agency.
Insurance on FHA mortgages are often rolled into the total monthly
payment at 0.5 percent of the total loan amount which is roughly
half of the price of mortgage insurance on a conventional loan.
After five years or when the loan balance reaches 78 percent, the
additional mortgage insurance is typically met and therefore drops
off the total monthly payment.
GUIDELINES
It is not necessary to meet a minimum income requirement in order
to qualify for a FHA loan but debt ratios specific to the state
in which the home will be purchased have been put into place
to prevent borrowers from getting into a home they cannot afford.
This is done through a close analysis of income and monthly expenses.
Purchase a Home with an FHA Loan
Purchasing a home is one of life's major landmarks and for some,
it is even a dream come true. At FHA.com we understand the magnitude
of this decision and it is our goal to make your transition into
home ownership unforgettable. Regardless of whether this is your
first or your fifth home purchase we will do our best to ensure
that getting you into your new home is a pleasant and memorable
experience.
FIRST STEPS
When you begin to seriously consider purchasing a new home it is
important that you follow some simple steps to make sure that
the process runs smoothly.
The first thing you should do is an analysis of your debt to income
ratio. This important step will let you know what type of home
you can afford based on your monthly income and expenses.
The next important step in purchasing a new home is to get pre-approved
for a home loan. The peace of mind that comes with knowing that
your mortgage loan and credit report have been approved will allow
you to shop for your new home with confidence. And when you find
a home and are ready to make an offer the fact that you have already
been pre-approved for your loan amount will give the seller confidence
in you as a buyer. Remember, the FHA does not make home loans.
They insure the FHA loans that we can assist you in getting.
About FHA
The Federal Housing Administration (FHA), an agency of the federal
government, insures private loans that are issued for new and
existing housing, and loans that are approved for home repairs.
Created by congress in 1934, the FHA became part of the Department
of Housing and Urban Development's Office of Housing (HUD) in
1965. Today the mission of the FHA includes helping borrowers
get amounts they qualify for, and assisting lenders by reducing
their risk in issuing loans. To find out if you might be eligible
for an FHA-insured loan, contact us.
Credit Problems and a HUD Housing Loan
It is advisable to approach any FHA loan with your best possible
credit rating. If you have had credit problems in the past, the
FHA recommends a Consumer Credit Counseling program to avoid
being denied an FHA loan. A good credit counselor can talk to
you about income-to-debt ratio, maintaining satisfactory payments
and challenging errors on your credit report. The FHA recommends
creating a satisfactory payment history for at least one year
before applying for any FHA loan program.
The FHA TOTAL Scorecard
If you submit FHA paperwork electronically, the FHA TOTAL Scorecard
is used to measure the credit risk of all FHA loans submitted
through the automatic underwriting system. Your FHA loan is processed
through a qualified and approved FHA lender. Applications submitted
through FHA TOTAL are evaluated by a standardized scoring procedure
creating a quick, fair and seamless evaluation. The FHA's TOTAL
system is internet based and works in real time.
Applying for an FHA Loan
The FHA asks for a lot of information on your FHA loan application.
You will need to provide the FHA with a wide range of details
including:
All addresses where you have lived in the
previous two years.
Your employer's name and addresses for the
last two years, plus the amount of your Gross Monthly Salary.
W2s for the past two years.
Income tax forms submitted for the last two
years.
Gather all of this before you begin your FHA
application so you will have everything handy to complete your
FHA loan forms at one time.
Pre-qualify for an FHA Home Loan
To pre-qualify for an FHA loan, you should be able to demonstrate
employability, job stability and reliability. To the FHA, reliability
includes holding a steady job for at least two years with the
same company or employer and increasing or at least maintaining
consistent income. The FHA would like to see that any foreclosures
or bankruptcies on your record are at least three years old.
The FHA loan bottom line: demonstrate that you have been a good
credit risk for two years or more and you will have a much better
chance at pre-qualifying for an FHA loan.
FHA/HUD Insured Mortgages and Refunds
If you have an FHA loan or HUD insured mortgage, you may have paid
an "up-front" mortgage insurance premium at the closing
of your house. Assuming you did not default on your mortgage
payments, you may be eligible for a refund on part of your insurance
premium. Loans granted after September 1, 1983 may be entitled
to this refund. Check your FHA loan settlement paperwork or phone
your lender to learn more. If you need further assistance, contact
your FHA loan officer for help.
Popular FHA Loans
The 203(b) FHA Fixed Rate Mortgage Loan Program is the widely used
FHA home loan, especially among first time home buyers. The 203(b)
FHA loan keeps your down payment to a minimum. Your closing costs
may also be reduced. The 203(b) FHA loan will finance up to ninety-seven
percent of your loan. You must qualify with some debt-to-income
ratios, but the 203(b) does not have a minimum income requirement.
Check with a financial planner about your debt to income ratio,
or discuss your financial status with a lender. Find out how
to maximize your credit rating before you apply for your FHA
loan.
FHA Refinance Mortgage Options
Homeowners enjoy the benefits of investing in their property year
after year. For some, there comes a time when that investment
can come in handy. Refinancing with an FHA loan can prove to
be an effective way to put that equity to work.
Sending a child to college, consolidating bills, taking a much
needed vacation, or making home improvements are some of the ways
homeowners tap into the equity they have accumulated in their home
to help with these expenses. Keep in mind that FHA refinancing
is only available to homeowners who are currently using their home
as their principal residence.
FHA offers several different options to homeowners who are considering
an FHA refinance mortgage:
FHA REFINANCE: CASH OUT REFINANCING
This refinancing option is especially beneficial to homeowners
whose property has increased in market value since the home was
purchased. A Cash Out refinance allows homeowners to refinance
their existing mortgage by taking out another mortgage for more
than they currently owe, therefore repaying their current mortgage
and using the equity they have built up in their home to take
out another larger mortgage. This allows the homeowner to access
the equity they have built up in their home and put it to good
use where needed.
In order to get the most benefit from refinancing your mortgage,
it is often best to consider refinancing after you have had time
to build up a significant amount of equity in your home. If the
property was purchased more than one year prior to the refinance,
the homeowner can refinance the existing mortgage for up to 85
percent of the appraised value plus the allowable closing costs,
which vary from state to state.
FHA REFINANCE: STREAMLINED REFINANCING BASICS
This refinancing option is considered streamlined because it allows
you to reduce the interest rate on your current home loan quickly
and oftentimes without an appraisal. FHA Streamlined Refinance
also cuts down on the amount of paperwork that must be completed
by your lender saving you valuable time and money. No appraisal,
no credit underwriting, no debt to income qualifications, no
credit check, no income verification.
In order to qualify for a Streamlined Refinance your original
home loan must be an FHA loan in good standing and the refinance
must lower your monthly interest payments. This type of refinancing
option reduces your monthly expenses by lowering your payments
but there is no option to receive cash back. This works well for
people who are in good financial standing with no significant debt
because it allows you a little extra money each month that can
be put to good use elsewhere.
FHA Secure Refinancing
The Federal Housing Administration (FHA) was established in 1934
to offer mortgage insurance on loans through FHA-approved lenders.
The FHA insures mortgages on single and multi-family homes, and
other approved purchases such as manufactured homes. The FHA
does not issue the loans themselves, but FHA mortgage insurance
is quite attractive for a prospective lender because FHA mortgage
insurance protects the lender's investment. Should a homeowner
default on the mortgage or go into foreclosure, the FHA pays
the lender.
Loans insured by the FHA feature low down payments, and costs
for FHA mortgage insurance are built into the mortgage payment.
Those costs disappear five years into the loan or when the loan
reaches 78% of the property value (whichever is longer).
Many homeowners with adjustable rate mortgages find themselves
in financial trouble because of current interest rate increases.
Foreclosure is a bigger threat than ever, but fortunately the FHA
has stepped in to help with FHASecure Refinancing. Starting July
14, an expanded FHASecure refinancing plan allows homeowners who
have missed up to three mortgage payments in the last 12 months
under certain circumstances to avoid foreclosure with FHASecure.
You don't need an existing FHA home loan to qualify
for an FHASecure refinance loan - the program is designed to specifically
to help those without FHA loans to get lower payments, prevent
default and foreclosure, and protect their investment.
Homeowners with current or delinquent non-FHA adjustable
rate mortgages are eligible.
You are not automatically disqualified based on
delinquency on your current loan.
You must have a dependable income and be able to
make your mortgage payment.
If you are in default, you must show delinquency
or default is the result of increased interest rates and the resulting
higher mortgage payments.
If you are current on your mortgage payments, any
type of conventional loan is eligible for FHASecure refinancing.
In addition to these specifications;
"Those who are current on mortgage payments can refinance
non-FHA fixed rate or adjustable rate mortgages. Those who are
behind on their mortgage payments may only refinance adjustable
rate mortgages.
"Borrowers may be required to verify their mortgage payment
history through the mortgage servicer or with cancelled mortgage
payment checks.
""Cash out refinancing" is not eligible
under FHASecure.
FHASecure refinancing is available for single-family
or multi-family homes and manufactured homes. A new FHA premium
pricing plan goes into effect on the same date the expanded FHASecure
refinancing program begins, July 14 2008. Borrowers should know
this "second
chance" refinancing does not indicate relaxed requirements
for credit. Borrowers applying for FHASecure are subject to the
same requirements as any other applicant for an FHA loan. Delinquency
issues for mortgage payments aside, loan officers still require
proof you are a good credit risk. Borrowers should;
Have steady income from a dependable source.
Show a reliable payment history on other debts.
Have a debt-to-income ratio below 41%.
Have a credit score appropriate for any home loan.
If you are need further explanation of the terms
or conditions of FHASecure, be sure to ask your loan officer for
clarification before you sign.
FHA Loans for Condominium Units
FHA Condominium Loans are specifically geared toward those who
purchase housing units in a condominium building. Condominium
ownership, in which separate owners of individual units jointly
own the development's common areas and facilities, is for some
a very popular alternative to home ownership. Insurance for this
type of housing is provided through FHA Section 234(c). This
FHA insurance is very important for low and moderate-income renters
who wish to avoid the risk of being displaced when their apartments
are converted into condominiums.
HOW IT WORKS
Of the many types of mortgage insurance offered by FHA.com, FHA
Condominium Loans are designed to encourage lenders to extend
affordable mortgage credit to those who have non-conventional
forms of ownership. The Section 234(c) program insures a loan
for 30 years to purchase a unit in a condominium building. The
building must contain at least four dwelling units and can be
comprised of detached and semidetached units, row houses, walkups,
or an elevator structure.
Through this and other types of mortgage insurance programs, FHA.com
helps low and moderate-income families purchase homes with FHA
loans by keeping the initial costs down. By serving as an umbrella
under which lenders have the confidence to extend loans to those
who may not meet conventional loan requirements, FHA loan insurance
allows individuals to qualify who may have been previously denied
for a home loan by conventional underwriting guidelines.
AVAILABLE ASSISTANCE
Many of the features of Section 234(c) mortgage insurance are similar
to those of FHA Section 203(b) for one to four-family homes.
Down payment requirements are low because these FHA loans allow
borrowers to finance up to 97 percent of their home loan and
some of the closing costs can also be financed, further reducing
up front costs. On a Section 234(c) loan, FHA sets limits on
the size of the loan which vary with location and the number
of units being purchased.
RESTRICTIONS
If the apartment is in a building that was converted from rental
housing, insurance may not be provided under Section 234(c) unless:
the conversion occurred more than one year
prior to the application for insurance.
the potential buyer or co-buyer was a tenant
of that rental housing.
the conversion of the property is sponsored
by a tenant's organization that represents a majority of the
households in the project.
Eighty percent of FHA mortgages in the project
must be made to owner-occupants. ELIGIBILITY
Any creditworthy persons who meet FHA underwriting criteria and
are intending to occupy the condominium unit as their principal
residence are eligible to apply.
Where FHA Mortgages Come From
FHA loans do not come directly from the FHA. The FHA guarantees
home loans, reducing the risk to lenders and offering increased
borrowing power to qualified applicants. You may bet better interest
rates thanks to FHA home loan insurance. FHA loans are particularly
helpful for who want a home, but have little or no money saved
for a down payment; including those just graduating college,
newly married couples, and also those who have had credit problems
in the past because of foreclosure or bankruptcy. Check out your
credit rating and get a list of lending limits for FHA loans
in your area which vary from state to state, and may even vary
by county.
The Increased FHA Loan Amount
In early 2006, a HUD press release announced an increase of nearly
thirty thousand dollars in FHA-insured home loan money being
made available to borrowers for single-family home mortgages.
This increase signals more borrowing power with your FHA home
loan, and it allows more people than ever the opportunity to
own a home. With only a three-percent down payment and a single-family
home mortgage limits coming closer to two hundred thousand dollars,
now may be the best time to apply for an FHA home loan. First,
evaluate your finances; your monthly housing costs should not
exceed more than 29% of your gross monthly income. Use gross
income, not net income, when evaluating your finances to apply
for your FHA loan.
FHA Mortgage Fees
"Reasonable and customary" mortgage loan fees can include
appraisals, inspections, credit reports, document preparation fees
and more. Ask your lender for a list of known fees due with your
type of FHA-insured home loan, FHA streamline refinance or other
FHA transaction. Have a list of the fees you are expected to pay,
when they are due, and determine how they affects the bottom line
of your loan.
Additional FHA Fees
Some of these include courier fees, wire fees, real estate broker
fees, recording fees and recording taxes. Depending on your FHA
loan, you may be eligible to get state or local assistance for
some or all costs related to home buying. Ask your lender what
programs are available to you in your state for additional financing,
grants or 'forgivable' loans. There can be a great deal of financial
help at your local level when seeking an FHA mortgage.
Fees Prohibited by HUD
Your FHA mortgage is designed to get you into a home for a fair
price; you should not pay above and beyond the normal fees associated
with buying a home. Certain payments, fees and other charges
are illegal. If you are seeking an FHA loan, do not pay any 'unearned
fees'. FHA guidelines as well as federal, state and local laws
offer regulation against these kinds of illegal fees. If you
feel you are being asked to pay a prohibited fee, check with
the FHA, contact a housing counselor immediately, or consult
a lawyer with expertise in home lending.
FHA Mortgage Insurance
FHA mortgage insurance protects lenders in case of a default by
the borrower of the FHA loan. An FHA mortgage helps reduces the
cash needed to purchase a home. The FHA is funded solely from
the income it creates: from the revenue generated by FHA mortgage
insurance. This FHA mortgage insurance cost is borne by the homebuyer,
but it ends approximately five years later or when the FHA mortgage
balance is seventy-eight percent of the property value, whichever
occurs last. FHA mortgages have flexible payment schedules and
more inclusive definitions of monthly income, allowing more borrowers
to thus qualify for an FHA loan. Ask your lender to do a side-by-side
comparison between the FHA mortgage and the current non-FHA versions.
It will soon become apparent which is the best value for your
money, especially if you don't have a lot to invest in a down
payment.
FHA Connection
The FHA Connection is an online system that allows authorized lenders
and FHA business partners to access FHA computer systems to originate
loans. FHA Connection is a very important tool in the FHA loan
process and there is no charge to use the service, only the username
and password requirements. Using FHA Connection, lenders can
begin a new FHA loan, update existing FHA loan applications in
the system, and complete FHA loan insurance applications. These
are just a few of the many functions available.
How Mortgage Limits are Set
The FHA does set limits on FHA mortgage loans, and these lending
limits may differ by county and state. FHA mortgage loan limits
are based upon the Fannie Mae/Freddie Mac limits on conventional
mortgage loans. They are also set according to type of home-single
family, plus two, three and four family dwellings. If you find
that FHA mortgage loan limits in a nearby county are more lenient,
you may wish to consider buying a home in the area with the higher
limit. If you live on the edge of two counties, find out which
one offers the best FHA loan limits before making your home purchase.
FHA Loan Limit
In high-cost areas, the FHA loan limit can be as high as a little
over two hundred and ninety thousand dollars. In low-cost areas,
the FHA loan limit can be around a little over one hundred and
sixty thousand dollars. FHA loan limits can change based on factors
including average area home prices. FHA loan limits also increase
with the number of units. A multi-unit home will qualify for
a higher rate, but those FHA loan limits are subject to the same
factors as single unit homes.
FHA Insurance Fund
Some FHA mortgage holders may qualify for help in the form of a
one-time payment from the FHA insurance fund, to help bring your
FHA mortgage up to date. Requirements to qualify for this FHA
support include a mortgage loan that is at least 4 months, but
no more than one-year delinquent, and you can are able to begin
making full payments once again. You will need to sign a Promissory
Note and have a Lien on your home until the Promissory Note is
fully paid off. Remember that this is a one-time only FHA offer.
Protect your credit rating for future FHA loans, FHA mortgages
or FHA refinancing packages by maintaining good credit.
FHA Adjustable Rate Mortgage
The FHA Adjustable Rate Mortgage (ARM) offers a flexible interest
rate and requires you to be more informed. When shopping for
an FHA home, the FHA adjustable rate loan for your FHA home means
you should do some homework about the index, which is the measurement
of how the interest rate changes. Your lender uses this index
to determine interest rate flexibility. Ask your lender to explain
the index in detail and how it works. With the adjustable rate
mortgage on your FHA home, you can't predict when or how much
the interest rate may change. Ask how much the index for your
potential adjustable rate FHA home mortgage has changed recently,
and where the information is reported.
FHA Loan Options
FHA home mortgages can include FHA loans for a 'fixer-upper" home.
The FHA loan for fixer-upper property combines the purchase price
of the house and the cost of repairs. There are also FHA loans
available for qualified borrowers over the age of sixty-two, to
convert a portion of the equity in a home into cash. There are
FHA loans available for mobile homes and manufactured homes. In
addition to the other types of FHA loan guidelines that pertain
to specific types of purchases, there is also the FHA Energy Efficient
Mortgage, also known as EEM, providing mortgage insurance to buy
or refinance a residence and include the cost of energy-saving
upgrades. For an FHA Energy Efficient Mortgage, the borrower isn't
required to qualify for the extra money needed to include the energy
upgrades, and there is no down payment required for the extra amount.
Anyone concerned about the environment, saving money or just getting
the most efficient home they can afford should seriously consider
the FHA EEM.
Q: What is a FHA mortgage? A: A FHA mortgage is
a form of insurance. The FHA does not lend money; private lending organizations,
such as banks, credit unions, or savings and loans, lend money. FHA-approved
mortgage is insured to the lender in case the homebuyer defaults on the loan.
Q: What are the advantages of a FHA mortgage?
A: There are many advantages of a FHA mortgage.
Typically, only a 3 percent down payment is required to secure
a FHA mortgage. Unlike conventional mortgages, the money for down
payment does not have to be verified as the buyer's money; it can
be a gift to the home purchaser from outside sources. In addition,
the credit qualifications for a FHA mortgage are often less stringent
than qualifications for conventional mortgages. Bankruptcy or foreclosure
does not necessarily disqualify a borrower from approval if the
processes have been completed within the required time period.
Q: Are FHA mortgage processes complicated?
A: No more so than conventional mortgage processes.
FHA financing procedures have slimmed down in the past 20 years.
In some cases, it is easier to qualify for a FHA mortgage than
it is for a conventional mortgage.
Q: Who is eligible for a FHA mortgage?
A: Anyone who meets the credit, income, and
employment requirements is eligible for a FHA mortgage. U.S. citizenship
is not required for a FHA mortgage. The property secured with the
mortgage must be the purchaser's primary residence. A social security
card is necessary to qualify for a FHA mortgage.
Q: What is mortgage insurance, and how does
it apply to FHA mortgages?
A: Mortgage insurance is required to secure
a FHA mortgage. Insurance money is collected by the lender (the
bank, credit union, or savings and mortgage) and paid to the FHA.
If a buyer defaults on the mortgage, the money will be returned
to the lender in the form of insurance against the default. Mortgage
insurance costs are typically 1 percent of the total mortgage.
Private mortgage insurance may be required until 20 percent of
the equity in the home has been paid.
Q: What are the different types of FHA mortgages?
A: Like conventional mortgages, there are several
different types of FHA mortgages. A fixed-rate mortgage secures
an interest rate at the time of purchase and remains constant for
the life of the mortgage. There is also an adjustable-rate mortgage
(ARM). The interest rate on an ARM fluctuates throughout the life
of the mortgage, mirroring the current national index. There is
also a graduated-payment mortgage (GPM), which requires a down
payment and has negative amortization.
Q: What are the interest rates on FHA mortgages?
A: FHA mortgage interest rates are on par with the national
average for conventional mortgages. FHA mortgage interest rates reflect
current market conditions. A buyer may also use points when securing
a FHA mortgage. "Points" lower the interest rate, and
must be used as a down payment or financed through the mortgage.
Q: What are the expenses of a FHA mortgage?
A: When purchasing a house with a FHA mortgage
the buyer is responsible for the following: Down payment (usually
no more than 3 percent), appraisal fee, escrow, mortgage origination
fee (typically 1 percent of base mortgage amount), recording fees,
credit report charges, title insurance policy fees, MMI impounds,
hazard insurance and reserves, MIP (mortgage insurance, which can
be financed), and property taxes.
