The Federal Housing Authority (FHA) provides mortgage insurance on loans made by FHA-approved lenders throughout the United States by protecting lenders against potential default. FHA IS NOT A LENDER; it insures loans that meet FHA lending standards which includes single family and multifamily homes as well as manufactured homes. Applicants pay for the insurance through monthly and lump sum mortgage insurance premium plans. Although Banks, Savings & Loans and other Private Lenders could utilize this insurance for their own holdings, most FHA loans are sold in the secondary market in GNMA (Government National Mortgage Association a.k.a. "Ginnie Mae") pools. It is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.
Borrowers are permitted only one FHA loan at a time. Under FHA, credit guidelines are very liberal, there is no minimum credit score for loan amounts of $417,000 and under. For loan amounts above $417,000, a minimum FICO score of 600 is required to obtain 95% financing and a 620 for 96.5% Loan To Value (LTV). Only 4 credit trade lines are necessary, one of which is housing and two of which could be utility accounts. One's credit report should also be free of Notice of Defaults (NODs), short sales and foreclosures for a period of 3 years. As of March 31, 2008 Fannie Mae sent out new guidelines regarding extending the period to 5 years for foreclosures. It remains to be seen whether FHA will adopt this policy, as well.
FHA has two loan tiers. The first tier or conforming loan amount is one that runs up to $417,000. Above that are what are termed conforming jumbos. These amounts vary by county. The max loan amount in San Diego is $697,500 ($729,750 in L.A.).
There are two primary types of properties eligible for FHA loans. They are often simply referred to by their section codes : 1) under section 203(b) of the National Housing Act financing is provided for single family residences (SFRs), 1-4 units, and planned unit developments (PUDs) and 2) since they became a popular form of property ownership in the urban areas of the country financing for condominiums is under section 234(c). Condos must be on an FHA approved condominium list and the project must have a minimum 51% owner occupancy rate.
FHA loans can be fixed or adjustable rate mortgages (ARMs). Fixed rate loans can be 10, 15, 20, 25 or 30 year terms. ARM programs that are available are the 3/1, 5/1, 7/1, and 10/1, all with 30 year terms.
ADJUSTABLE RATE FHAs
Adjustable rate mortgages (ARMs) under the FHA have different caps: The 1,3, and 5 year ARMs have a maximum annual adjustment (cap) of 1% and a 5% lifetime cap over the start rate. The 7 and 10 year ARMs have a max. annual cap of 2% and a 6% life cap over the start rate.
There are two kinds with an FHA loan, one, is what is termed an Upfront Mortgage Insurance Premium (UMIP). The UMIP is a kind of user fee that one pays to obtain an FHA loan; it is similar to the "Funding Fee" that one pays to obtain a VA loan. It is equal to 1.75% of the loan amount and can be financed into the loan.
The other form of mortgage insurance is the one that most borrowers are familiar with a Monthly Mortgage Insurance Premium (MMIP). FHA has a distinct advantage in this regard in that with a factor of .55% it is the cheapest mortgage insurance available, bar none. The MMIP is cancelled after 5 years or when loan balance reaches 78%, whichever is longer.
MAXIMUM DEBT TO INCOME RATIOS (DTIs)
Ideally, FHA would prefer that a borrower's housing expense (meaning payment of principal, interest, taxes & insurance) be no more than 31% of one's income and this ratio when consumer debt like credit cards and car payments) not exceed 43%. It is commonplace, though, with good FICO scores to see the back end ratio approach 50%, especially in cases where borrowers have received an approval via Fannie Mae's Desktop Originator (DO) engine.
An owner occupied property is also eligible for a cash-out refinance. The amount of cash out allowed on an FHA is contingent upon the value of the property and up to 95% of the acquisition cost may be borrowed. (With less than 12 months seasoning, cash-out is limited to 85% of LTV (lesser of acquisition price, or current appraised value). A temporary buy down is not allowed under the cash-out guidelines.
All FHA loans require a full appraisal. Loans above 95% LTV and over $417,000 require two full appraisals. They must be performed by an FHA appraiser. The lender or broker may order the appraisal. The subject property must meet FHA standards prior to loan funding. This will affect properties being sold "as is". Repairs noted on the appraisal must be complete before the closing. The appraiser must inspect the repairs and issue a clear inspection report prior to funding.
Appraisers inspect the property while appraising it. Among the items that they check are the utilities. They confirm that the electrical, gas, water and sewer systems are functional and that the heating, ventilations and air conditioning (HVAC) are in working order. They also inspect for health and safety code violations: site hazards, soil contamination, grading, wood destroying insects, structural deficiencies, and lead based paint hazards.
ADVANTAGES OF FHA FINANCING
During the housing boom in recent years, FHA's share of mortgages fell to only 7% of mortgage loans outstanding in 2007. With the recent debacle in the mortgage markets and lending guidelines becoming increasingly restrictive, FHA is suddenly the only choice for many borrowers. Many of the financing opportunities available to even prime borrowers have really been scaled back, through increased down payment requirements and [the requirement of] higher credit scores.
FHA is playing an important role providing stability.
* Down payments as low as 3%
* Up to 6% seller contributions
* No minimum reserve requirement
* 100% gift funds allowed
* Citizenship is not required
* Geared toward, but not limited to first time homebuyers
* Cash out with no adjustments
* Fixed rate assumable loan
* Non-occupant co-borrowers allowed (usually needs to be a relative)
* Blended ratios with non-occupant co-borrowers allowed
* Less than perfect credit
* Great terms at a reasonable cost
DISADVANTAGES OF FHAs
* Maximum loan amounts vary by county
* Can't use buy downs for qualification purposes unlike with conventional financing
* Seller carry backs not allowed
* Non-owner occupied purchases (investment properties) are not allowed. Investment
properties are only allowed on Streamlines or HUD Repos.
BANKRUPTCY & FHA LOANS
Bankruptcy must be documented:
* Must be released for a minimum of 2 years
* Must have re-established satisfactory new credit
* Must have a good reason for a BK beyond the borrower's control e.g.
unemployment, strike, medical, etc. & be able to document
DOWN PAYMENT ASSISTANCE PROGRAMS (DAPs)
The Housing and Economic Recovery Act of 2008 eliminated DAPs such as H.A.R.T, Nehemia Corp. of America, and Ameridream Inc. programs on 10/1/2008 because Federal data showed such loans foreclosed at triple the rate of loans made to borrowers funding their own down payments. The programs allowed the seller to fund 3% of the purchase price by contributing this amount to various agencies such as the ones listed above plus a small surcharge of $500 and the agency would in turn gift the 3% back to the buyer thereby allowing them to qualify for 100% loan to value under FHA guidelines. Down payments from other sources such as municipalities and other government agencies can still provide down payment assistance and remain unaffected by the new legislation.
FEES AND CLOSING COSTS
* All reasonable closing costs and prepaid may be paid by the borrower with the
exception of the Tax Service Fee.
* An origination fee is limited to 1%
REMINDER: Mortgage Insurance (MI) is required for the first 5 years REGARDLESS OF LTV. After 5 years if the loan to Value is less than 78% of the original loan amount, MI can be cancelled.
SALES CONCESSIONS & FINANCING CONCESSIONS
1. Examples of sale concessions (seller paid) subtracted dollar-for dollar from sales
* Condo/HOA Dues
* Decorating Allowance
* Moving Expenses
* Personal Property
* Excess Rent Credit
2. Examples of financing concessions (seller paid) not subtracted dollar for dollar from sale price but limited to six (6%) of sales price based on sales price not mortgage amount:
* Discount Points
* Interest Rate Buy-downs
* Closing Costs
* Other payment supplements'mortgage interest and UFMIP
NOTE: It is important to close on an FHA transaction at the end of the month because under FHA guidelines the note holder has a right to collect interest from the date of the payoff until the end of the month. So, it behooves one to payoff an existing FHA loan prior to the end of the month to avoid paying an additional 30 days interest.
REFINANCES OR STREAMLINES
The underwriting philosophy of the FHA refinance program is simple. Is the borrower reducing their current payment? If so, it stands to reason that, if the borrower can afford the current, higher payment it will be even easier for him (her) to afford the lower payment. To facilitate this, FHA has implemented what is known as a "Streamline Refinance". The sole purpose of an FHA Streamline Refinance is to REDUCE the monthly principal and interest payment on an existing HUD insured 1st mortgage only. The borrower only needs to provide the following information:
* 12 month payment history on current mortgage
* Uniform Residential Loan Application
* Current appraisal to document property value has not deteriorated. This may not be
required if the loan amount is not being increased over the current loan amount.
* Verification of any funds needed to complete the closing and evidence of 1 month's
PITI (principal/interest/taxes/insurance) in reserve.
PRINCIPAL BALANCE ONLY IS ELIGIBLE FOR AN INVESTMENT PROPERTY REFINANCE.
A borrower cannot refinance from a 15 year loan to a 30 year loan. The maximum term of a streamline is the lesser of 30 years or the remaining term plus 12 years.
A Streamline Refinance can be used to refinance an investment property or a loan that was assumed under the assumption program. Under an assumption, however, the borrower must have made at least 6 mortgage payments.
FHA's 203(k) loan program is the Department's primary program for the rehabilitation and repair of single family residences, condominiums and 1-4 unit dwellings. As such they have no up front mortgage insurance premium (UMIP).
What follows is a list of exceptions or limitations:
* Compensating factors for exceeding standard ratios
* Three months reserves or limited debts
* 10% down
* Less than 10% housing payment increase
* Outside income not counted in effective income
* Non-taxable income or temporary/seasonal income
* Shorter mortgage term by 5 years
* Smaller family higher residual income
* Energy efficient dwellings 2% ratio increase up from 31/43% to 33/45%.
* 25% or more down payment ratios not considered important
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