A FHA loan, backed by the Federal Housing Administration, may be a good option for borrowers with a smaller down payment or lower credit score than those required for a conventional loan. An FHA Loan (Federal Housing Administration) has some more advantages over conventional loans. Since the government insures FHA loans, they generally have more lenient qualification requirements, lower down-payment requirements, and they are assumable loans. The maximum loan amount for an FHA loan (single-family) ranges depending on the county where you live. You can contact a mortgage specialist for these maximum amounts for your specific county. Government loans (including the FHA loan) make up 20 percent of residential mortgages in the U.S. An FHA Loan (Federal Housing Administration) has some advantages over conventional loans. Go to http://www.hud.gov for more information on FHA and other government loan options.
Some features of FHA loans include:
- Down payments as low as 3.5%
- Easier qualification guidelines than those of conventional mortgages
- FHA loan limits competitive with conforming loans, in most areas
- Parents able to co-borrow with a child earning minimal or no income without being an occupant of the home
- FHA 203(k) loans provide funds for renovation along with the home purchase or refinance
What is the FHA loan limit?
FHA loan limits vary throughout the country, from $271,050 in low-cost areas to $625,500 in high-cost areas including San Francisco, Washington, D.C., New York, and some parts of Los Angeles. The loan maximums for multi-unit homes are higher than those for single units and also vary by area. Because these maximums are linked to the conforming loan limit and average area home prices, FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits. In the more than 60 years since inception of the FHA, a great deal has changed and Americans are now arguably the best housed people in the world. FHA has contributed substantially to that achievement. Today, FHA is particularly important to minority and first-time homebuyers.
Graduate payment programs:
Section 245 enables a household with a limited income that is expected to rise to buy a home sooner by making mortgage payments that start small and increase gradually over time. HUD's Federal Housing Administration (FHA) administers mortgage insurance programs that help low- and moderate-income families become homeowners by lowering some of the initial costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise creditworthy borrowers who might not be able to meet conventional underwriting requirements by protecting the lender against loan default.
Type of Assistance:
Section 245 insures mortgages for first-time (and other) buyers who have low and moderate incomes--and who thus cannot meet standard mortgage payments--but who expect that their income will increase substantially in the next 5-10 years. Potential homeowners who are considering using a graduated-payment mortgage to purchase a home must remember that their monthly payments to principal and interest will increase each year for up to 10 years, depending on which of five available plans they select. Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first 5 years of the loan. The other two plans permit payments to increase 2 and 3 percent annually over 10 years. Starting at the sixth year of the 5-year plans and the eleventh-year of the 10-year plans, payments will stay the same for the remaining term of the mortgage.
Any person can apply who is able to meet the cash investment and credit requirements and to make the mortgage payments. The program is limited to owner-occupants. Applications can be made through the mortgage broker of your choice.
What is the debt-to-income ratio for FHA loans?
The FHA allows you to use 29% of your income that can be spent on housing and 41% towards housing costs and recurring debt together. Recurring debt includes credit card payments, auto payments, child support, etc. With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing and other debt.
FHA Mortgage Insurance
FHA requires a mortgage insurance premium (MIP) for its home buying programs. An up-front premium of the loan amount is paid at closing and can be financed into the mortgage amount. The UPMIP is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio. In addition, there is an Annual MIP Premium as well, see table below for Revision to the Annual MIP Premium – as per Mortgage Letter 2015-01:
Term <= 15 Years With LTV Above 78%
|Base Loan Amount||LTV||Effective||No Changes to Annual MIP|
|Any Loan Amount||< =78.00%||3-June-13||45 bps|
|< = $625,500||< =90.00%||1-April-13||45 bps|
|< = $625,500||>90.00%||1-April-13||70 bps|
|Above $625,500||< = 90.00%||1-April-13||70 bps|
|Above $625,500||>90.00%||1-April-13||95 bps|
Term > 15 Years
|Base Loan Amount||LTV||Effective||No Changes to Annual MIP|
|< = $625,500||< =95.00%||26-Jan-15||80 bps|
|< = $625,500||>95.00%||26-Jan-15||85 bps|
|Above $625,500||< = 95.00%||26-Jan-15||100 bps|
|Above $625,500||>95.00%||26-Jan-15||105 bps|
Down Payment Gifts
Most home buyers' biggest hurdle is coming up with the cash for a reasonable down payment. Federal Housing Administration (FHA) loans have several benefits to borrowers that conventional loans do not have. Not only do they have a minimum down payment as low as 3.5 percent, but also they allow borrowers to use gift funds for down payment money. The down payment can be 100% gift funds. This is one of the key benefits to the FHA program. Verification of the source of gift money is not required. However, it is necessary that the gift funds be deposited in the borrower's bank or savings account, or in an escrow account, prior to underwriting approval. Proof of deposit is required. Gift donors includes family members, close friends, employer, labor union, charitable institution or governmental agency. Contact your loan officer for complete information.
Streamline Refinancing for FHA Mortgages
FHA has permitted streamline refinances on insured mortgages since the early 1980's. The FHA streamline refinance program helps current FHA homeowners lower their rate and payment without most of the traditional refinance documentation. The streamline refers only to the amount of documentation and underwriting that needs to be performed by the mortgage company, and does not mean that there are no costs involved in the transaction.
- The basic requirements of a streamline refinance are:
- Borrower's original loan must already be an FHA insured loan.
- The mortgage to be refinanced must already be FHA insured.
- The mortgage to be refinanced should be current (not delinquent).
- The refinance must lower the principal and interest payments of the previous mortgage payment.
- No cash may be taken out on mortgages refinanced using the streamline refinance process.
- The mortgage must have been paid as agreed for the last twelve (12) months and must be up to date at the time of refinancing. Borrower must have had the FHA mortgage for 6 months.
- Borrower cannot receive any cash back.
- No income or employment verification - No pay stubs or W-2 forms - No termite report.
- Appraisal only required if rolling in the closing costs. Streamlines without an appraisal are limited to the unpaid principal balance, minus any refund credit of the mortgage insurance premium, plus the new upfront MIP if it is to be financed in the mortgage.
- Any other liens must be subordinated to the FHA loan.
- Borrower must be up-to-date on any federal debts.
Companies may offer streamline refinances in numerous ways. Very few companies offer "no cost" refinances (actually, no out-of-pocket expenses to the borrower) by charging a higher rate of interest on the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the company pays any closing costs that are incurred on the transaction. Companies may offer streamline refinances and include the closing costs into the new mortgage amount. This can only be done if there is sufficient equity in the property, as determined by an appraisal. Streamline refinances can also be done without appraisals, but the new loan amount cannot exceed what is currently owed, i.e., closing costs may not be added to the new mortgage with those costs either paid in cash or through the premium rate as described above. Investment properties (properties in which the borrower does not reside in as his or her principal residence) may only be refinanced without an appraisal and, thus, closing costs may not be included in the new mortgage amount.
Bankruptcy and Foreclosure
A credit report will be obtained on the borrower and any lates, collections, judgments, foreclosures, bankruptcies, etc. must have a justifiable explanation in writing by the borrower. In the event of a foreclosure, the borrower has three years from the date the claim was paid until he/she is eligible for another FHA loan, unless the foreclosure was the result of extenuating circumstances beyond the borrower's control and the borrower has since established good credit.
Chapter 7 bankruptcy requires the borrower to wait at least two years from the date of discharge.
Chapter 13 bankruptcy requires the borrower to have been paying on the bankruptcy for at least one year, performance must have been satisfactory and the borrower must also receive court approval to enter into the mortgage transaction.
Are FHA loans assumable?
Yes. You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is stream- lined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. And you must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.