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FHA Mortgage Loans
By Kirk Haverkamp
Updated and reviewed Jul 8, 2013
Since the 1930s, the Federal Housing Administration (FHA) has been helping families become homeowners with a set of loan programs commonly known as FHA mortgage loans. Despite the longevity and popularity of these loan programs, many would-be homeowners don't really know all they should about them.
The FHA is an agency of the Federal government that insures private loans that are issued for new and existing housing, as well as loans approved for home repairs. Essentially, it acts as a buffer for lenders by reducing their risk in issuing loans, which makes it easier for borrowers to obtain loans as well. Formed in 1934 by Congress, the FHA became part of the Department of Housing and Urban Development's Office of Housing (HUD) in 1965.
FHA loans are not just for first-time buyers - they are available to anyone looking to purchase or refinance a home. You can even refinance with an FHA mortgage even though your current mortgage is not an FHA loan.
The most popular FHA home loan program nationwide is the 203(b) FHA home loan, which allows borrowers to make down payments of as little as 3.5 percent of the home purchase price. In addition, 100% of the money needed to close - including the down payment - may be a gift from a relative, non-profit organization or government agency.
The FHA plays a critical role in financing for minority borrowers, first time home buyers, borrowers who have troubled credit history, and borrowers who have little money to put down on a home.
- About half of first-time homebuyers used FHA loans in 2012, according to various estimates, and first-time buyers made up about three-quarters of FHA home purchase loans that year.
- For minority home buyers, FHA mortgages account for about half of all home loans for both African American and Hispanic/Latino homebuyers, compared to about one-quarter of all home purchase mortgages nationwide, according to the Department of Housing and Urban Development (HUD).
FHA Loan Limits
The FHA is self-financed, designed to perform entirely by generating its own income at no cost to the taxpayer. Funds generated by mortgage insurance paid by homeowners with FHA mortgages are used to operate the program. As of early 2013, the FHA has never received taxpayer funds during its 80-year history, including the aftermath of the 2008 economic crash. The FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools and other forms of revenue.
One of the big attractions of an FHA home loan is that the credit criteria for a first-time borrower is not as strict as on conforming loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or a short credit history may have an easier time obtaining FHA financing.
Another advantage of FHA home loans are they are assumable, meaning that if you sell the home the new buyer can simply take over the mortgage payments rather than obtain a new loan. This can be a major selling point if you bought the home at a time of low mortgage rates.
It used to be that the FHA required that certain closing costs, called non-allowable costs, be paid by te seller or lender, on the grounds that the buyer should not have to borrow additional money to pay for them. However, these were largely eliminated in 2006 and today the only cost that sellers must pay for is the Tax Service Fee for tax lien searches on the property.
FHA mortgages require an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan amount. While this is an expense other mortgages do not have, it can be rolled into the loan amount, resulting in a minor increase in one's monthly payments. The upfront premium is also partially refundable if the loan is paid off in the first three years.
In addition to the upfront insurance premium, FHA mortgages also require annual mortgage insurance premiums on any home loan with less than a 20 percent down payment. These fees tend to be higher than what you'd pay for private mortgage insurance (PMI) on conventional mortgages, and range from 1.30 - 1.35 percent of the loan amount on 30-year fixed-rate mortgages and 0.45 percent to 0.70 percent on 15-year fixed-rate mortgages.
In addition, FHA borrowers who make less than a 10 percent down payment or have less than 10 percent equity when refinancing will be required to carry mortgage insurance for the life of the loan, for loans originated on or after June 3, 2013. That's in contrast to PMI on conventional mortgages, which can be cancelled once the loan balance falls to 80 percent of the home value. FHA borrowers who put up at least 10 percent but less than 20 percent must carry mortgage insurance for at least 11 years.
FHA Allowing Loans After Foreclosure
Borrowers who suffered a foreclosure or bankruptcy during the recent recession may still be able to qualify for an FHA mortgage under new guidelines established by the Department of Housing and Urban Development (HUD).
The new rules allow borrowers whose credit was damaged due to a temporary loss of employment or income to still qualify for an FHA mortgage if they've recovered from that situation and maintained a clean credit history for at least 12 months.
That means that borrowers who recently experienced a bankruptcy, foreclosure, short sale, loan delinquencies, debt collections or other events that had a negative impact on their credit may still be able to qualify for an FHA loan in as little as one year after that event.
Still regarded as good credit risks
"As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes," wrote Asst. Housing Secretary Carol Galante in a letter to lenders outlining the new guidelines. "FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage."
To qualify, borrowers must be able to show that their credit impairments were the result of a loss of employment and/or income that was beyond their control, and which reduced their income by at least 20 percent for a period of at least six months. They must have resolved any outstanding debt issues that were not cleared away by foreclosure or bankruptcy, and not have any credit blemishes over the past 12 months.
In addition, borrowers must undergo credit counseling in order to be approved, which may be done in person, by telephone, over the Internet or by any other method the FHA approves.
Special rules for renters
Borrowers with non-traditional credit may qualify if they have no history of missing rent payments, no more than one 30-day delinquency to other creditors and no history of collection accounts other than those arising from medical bills or identify theft.
Even before the new guidelines were announced, the FHA had considerably shorter waiting periods for borrowers who had gone through foreclosure or bankruptcy than for conventional mortgages. Formerly, borrowers could be approved for a new FHA mortgage in as little as three years after a foreclosure or two years after a Chapter 7 bankruptcy, assuming certain guidelines were met.
Foreclosures and bankruptcies will still remain on borrowers' credit reports for 7-10 years and will continue to negatively affect their credit scores during that time.
The new guidelines take effect immediately and will be in force through at least Sept. 30, 2016.
Types of FHA Loans
The Federal Housing Administration (FHA) has quietly supported the dream of homeownership for more than 70 years. Mortgage loans available through the FHA serve low- to middle-income homeowners and homebuyers.
If you think home ownership is out of your reach, perhaps you haven't been introduced to the FHA. Thanks to some recent increases in loan limits, this division of the federal office of Housing and Urban Development is set up to be the prospective homebuyer's new best friend.
FHA loans are characterized by reduced eligibility requirements, and down payments as low as 3 percent. The federal government doesn't fund these loans; they make them available to borrowers by arranging for low-cost mortgage insurance. While borrowers are responsible for the mortgage insurance premiums, the upfront portion can be financed into the loan. To obtain an FHA loan, the prospective borrower must apply with an FHA-approved lender. Loan amounts are subject to stated limits, which vary by county and change periodically. Below is an overview of the most popular programs.
Mortgage insurance for standard purchase and refinance mortgages
- The Section 203(b) program provides low-cost insurance for fixed-rate mortgages and refinances.
- Low-cost mortgage insurance for adjustable-rate mortgages is available through the FHA's Section 251 program.
- Condominium buyers can obtain mortgage insurance for 30-year mortgage loans under Section 234(c).
Insured rehabilitation mortgage
The 203(k) program allows for financing of a home purchase. plus the cost of necessary home repairs. Typically, a non-FHA loan won't finance repair costs until after those repairs have been completed. The FHA's program addresses this issue by establishing an escrow account from which the contractor will be paid. During the loan approval process, the borrower must provide a detailed scope of work, and cost estimates for the repair project.
Insured reverse mortgage
FHA reverse mortgages allow homeowners aged 62 and older to cash out the equity in their homes without obligating them to monthly debt repayments. The reverse mortgage isn't repaid until the homeowner sells the home or passes away.
Insured energy efficient mortgage (EEM)
The FHA's energy efficient mortgage program insures financing to pay for home energy improvements. To qualify, the borrower must be eligible for an FHA-backed loan in the amount of the purchase price. A home energy rating report determines how much additional financing is needed to cover the cost of the energy improvements.
Insured graduated payments mortgage (GPM)
A graduated payments mortgage is structured with low initial payments that increase over time; the FHA insures these mortgages under its Section 245 program. Exact loan structures vary, but borrowers have the option of having payments increase during the first five or 10 years of the mortgage loan.
When it's time to buy a home, the FHA really can be the ally you need. Check with an experienced FHA lender to decide which program is right for you.
FHA Loans Four Mistakes To Avoid
Strapped homeowners are crying "uncle" as home values dip and foreclosures continue. "Uncle" in this case would be "Uncle Sam" and his Federal Housing Administration (FHA) loans.
The U.S. government has long provided its citizens with a safety net when times are tough. One long-standing program is an FHA loan, in which the government agency insures loans against default. Approved lenders are allowed to issue the loans, which tend to be less restrictive to borrowers facing economic hardship.
The subprime mortgage crisis has produced plenty of homeowners facing tough times. If you find yourself in this situation and you're considering applying for an FHA loan, here are some common mistakes to avoid
1. Failing to look at your credit report
In considering your loan application, an FHA-approved lender will take a look at your credit report and score. Your credit report is a summary of your debt load and your ability to pay your bills on a timely basis. Before you apply for a loan, take a look at your credit report. It may contain some errors that could lower your score. Only after you've carefully reviewed your report should you initiate the pre-approval process.
2. Ignoring other options
A common mistake for many lenders is to apply only for an FHA loan. Before you make a lending decision, carefully analyze the pros and cons of other types of mortgage loans, as well. You'll want to take into account the fact that an FHA loan requires both an upfront and ongoing fee, much like private mortgage insurance. For homeowners who can't qualify for other loans, the fee is unavoidable. However, you may have the flexibility to qualify for other, less costly loans.
3. Bypassing the pre-qualification process
Getting pre-qualified for a loan should be a standard part of the shopping process. The process doesn't guarantee that you'll get a loan, but it will give you a general idea whether or not you meet the lender's requirements. It will cost you nothing, and your shopping will be much more efficient.
4. Carrying too much debt and overspending during the approval process
The FHA doesn't look approvingly on heavy debt burdens. Part of the approval process involves analyzing your debt-to-income ratios, which is the amount of your current debt compared to your income. You can improve your debt-to-income ratio by paying off credit card balances or other outstanding loans. You'll also want to put a moratorium on spending-particularly on big-ticket items. Putting a large purchase on the plastic will raise a red flag to any lender.
FHA loans have helped countless homeowners in the past. With rising foreclosure rates, their government backing makes them an attractive option to lenders and borrowers alike. They may be a good fit for you-just be sure to avoid these common mistakes before you apply.
Refinance with an FHA Loan
For more than 20 years, the FHA has been allowing FHA borrowers in good standing to refinance under a streamlined procedure that involves no asset, credit, employment, or income verification.
In The Wizard of Oz, Dorothy, Toto, Scarecrow, Tin Man, and the Lion, couldn't get lost on their way to Emerald City because they had the yellow brick road to guide them. FHA mortgage borrowers who want to refinance have their own yellow brick road, as well-it's known as the FHA streamline.
Quick and painless
FHA's streamlined approval process is an expedited mortgage refinancing program that's only available to existing agency borrowers. The process forgoes the usual asset, credit, employment, and income verification, allowing qualified borrowers to access lower prevailing interest rates and achieve a lower payment level as soon as possible.
This program isn't for at-risk borrowers; to be eligible, borrowers must have at least six months worth of payment history on the existing mortgage loan, with no late payments during the life of the loan or during the previous 12 months, whichever is shorter. Also, since the intention of the streamlined refinance process is to allow borrowers to lower their payments quickly, it can't be used for cash-out refinancing. In some cases, the streamlined process can be used to transition the borrower from an adjustable rate to a fixed rate; the rule of thumb here is that the payments on the new mortgage must be the same as, or lower than, those of the existing mortgage. If the payments are higher, the borrower must go through the traditional qualification process.
Flexible closing payments
Borrowers who are refinancing a primary residence through the streamlined process can finance their closing costs or pay them upfront
Financed closing costs
Borrowers must pay the closing costs, but they're rolled into the loan balance and paid off over time. Financing the closing costs is appropriate if the borrower is short on cash, as long as the home has sufficient equity to support the additional debt. The total debt on the new loan must be less than the funded amount of the previous one; otherwise, an appraisal may be required.
Closing costs paid upfront
A more traditional structure requires the borrower to pay the closing costs upfront and out-of-pocket. In the long run, this option usually makes the most sense. It results in a slightly lower payment, and reduces the total interest expense associated with the loan.
Investment properties can also be refinanced through the streamlined procedure, as long as an appraisal isn't required. If it's determined that an appraisal is necessary, the investment property refinance must proceed through the normal channels.
The FHA's streamlined process is the fast track to mortgage refinancing. It may not be taking borrowers to Emerald City, but it's allowing them access to lower payments right away-and that's the makings of an attractive destination.
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Additional FHA Resources
How to Apply for an FHA Loan FHA home loans offer many advantages to borrowers who qualify for these low-cost mortgages. Before applying for one, it helps to know what the requirements are, and how to improve your chances of getting approved without problems or delays.
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