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FHA Loans

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What is FHA Loan?

An FHA Mortgage is either a fixed or adjustable rate loan that is insured by the Federal Housing Administration (FHA). FHA loans are designed for low-to-moderate income borrowers who are unable to make a large down payment.

 

What are the advantages of FHA loan over conventional loan?

The greatest advantage to an FHA loan is that the conditions which need to be met by a borrower are generally less stringent than the conditions required for a Conventional (also known as a “Conforming”) loan.  As the conditions for an FHA mortgage are less stringent than a Conventional mortgage, the rates generally tend to be a bit higher to compensate for the additional risk.  In most but not all- cases, the borrower is required to pay for mortgage insurance in addition to the monthly mortgage payments.

 

What are the requirements of FHA Loan?

The requirements for an FHA Mortgage are a minimum credit score of 580. You can have a credit score below 580, to a number as low as 500, however, you will require a down payment of 10%. An FHA Mortgage also requires you to carry mortgage insurance safeguarding the lender against borrower default. Your total debt to income ratio can usually be up to 43% however many lenders offer a greater percentage of debt depending on individual circumstances and underwriting approvals.

An FHA Mortgage requires a minimum down payment of 3.5%. A key requirement of an FHA purchase loan is that the down payment must be made by the buyer. However, the seller can contribute towards some or all of the closing costs and other expenses related to the purchase of the house. Lenders generally have less rigid standards and lower interest rates because their risk is reduced on FHA loans by the requirement for borrowers to purchase Private Mortgage Insurance (PMI) on an FHA mortgage.

 

 When is an FHA loan a good idea?

FHA loans are designed for low to moderate income home buyers. Low to moderate income home buyers are able to afford a nicer house with this program because of the more lenient credit score and lower down payment requirements.

 

Who can qualify for an FHA loan?

Borrowers can qualify for an FHA loan with a down payment as little as 3.5% for a credit score of 580 or higher. The borrower’s credit score can be between 500 – 579 if a 10% down payment is made.

 

How do I apply for an FHA loan?

The basic eligibility requirements for an FHA loan include:

  • Minimum FHA loan credit score of 580. This is for a mortgage with a 3.5 percent down payment. 10 percent down is required for applicants with scores between 500 and 579.
  • 5 percent down payment from an acceptable source. Your down payment can come from savings, a loan or a gift, but not from anyone who would directly benefit from the transaction, such as the seller, agent or lender.
  • Documentation of income. Lenders are required by law to make sure you can afford your mortgage. You’ll have to supply pay stubs, W-2s and possibly tax returns.
  • Clear CAIVRS. CAIVRS is the government’s Credit Alert Interactive Verification Reporting System. It’s a database of people who have defaulted on government loans, owe back taxes or have other federal debt. If you turn up on this list, you must be cleared before you can get an FHA loan.
  • Primary residence. This loan cannot be used to purchase a vacation home or second home. However, FHA financing can be used to buy a primary home for a family member.

 

What banks do FHA home loans?

Most banks and lending institutions offer FHA loans.

 

What are the pros and cons of an FHA loan?

Advantages of FHA

  • Relaxed Credit Requirements
  • Low Down Payments.
  • Small Reserve Funds.
  • Increased Allowance for Closing Cost Financing.
  • Larger Debt to Income Ratios.

Disadvantages of FHA

  • Mortgage Insurance.
  • Minimum Property Standards.
  • Loan limits

 

How does an FHA home loan work?

Less rigorous lending standards and lower down-payment requirements make FHA loans popular with mortgage borrowers. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.

 

What is an FHA 30 year fixed loan?

The most common FHA-insured loan is the 30-year fixed-rate version. The Federal Housing Administration (FHA) offers at least 15 different insured mortgage programs. The most common of them is the traditional 30-year, fixed-rate mortgage.

 

How much is the mortgage insurance on an FHA loan?

FHA mortgage insurance protects lenders from losses in the event that borrowers default on their FHA mortgages. Without FHA insurance coverage, few lenders would be willing to fund home loans with minimal down payments to borrowers with low-to-moderate incomes or past credit problems.

FHA mortgage insurance has two components – an upfront mortgage insurance premium (FHA MIP) that can be financed or paid out-of-pocket, and an annual premium based on the loan balance. The annual premium is divided into 12 monthly installments and added to borrowers’ monthly payments. The upfront mortgage insurance is 1.75 percent of the base loan amount, and the annual premiums are shown in these tables:

 

FHA MIP Chart for Loans Greater Than 15 Years
Base Loan Amount LTV Annual MIP
≤$625,500 ≤95.00% 0.80%
≤$625,500 >95.00% 0.85%
>$625,500 ≤95.00% 1.00%
>$625,500 >95.00% 1.05%

 

FHA MIP Chart for Loans Less Than or Equal to 15 Years
Base Loan Amount LTV Annual MIP
≤$625,500 ≤90.00% 0.45%
≤$625,500 >90.00% 0.70%
>$625,500 ≤78.00% 0.45%
>$625,500 78.01% – 90.00% 0.70%
>$625,500 >90.00% 0.95%

 

Do you have to have a down payment for an FHA loan?

Typically an FHA loan is one of the easiest types of mortgage loans qualifying because it requires a low down payment and you can have less-than-perfect credit. For FHA loans, down payment of 3.5 percent is required for maximum financing. Borrowers with credit scores as low as 500 can qualify for an FHA loan.

 

What is an FHA loan vs a conventional loan?

FHA loans have typically been known as loans for first-time homebuyers, filled with extra paperwork and complexity since it’s a government-insured program. But borrowers can use multiple FHA loans for purchasing or refinancing home loan.

The difference in processing time required for FHA loans — as compared to conventional loans — is negligible.

FHA loans also have some nice features that conventional do not. FHA loans are eligible for “streamline refinances” — which is a cheaper and quicker way to refinance your loan in a low-interest rate period. FHA loans are normally priced lower than comparable conventional loans.

Also, FHA loans are assumable loans; this may be a particularly good future resale point if the borrower would have an existing low-interest rate on the home they are selling. That interest rate and mortgage balance can be assumed by a new buyer. Conventional fixed rate loans do not offer this feature.

Conventional loans also have advantages in certain situations. If you make a 20 percent or more down payment for your home, you will not have to pay mortgage insurance to obtain your loan. An FHA loan -– no matter the amount of down payment — requires an upfront premium and also a monthly premium. Even if you put down less than 20 percent, the private mortgage insurance (PMI) charged to obtain the loan could potentially be a lot less than the FHA premiums and even less if your credit is good.

Private mortgage insurance is not only credit-sensitive, but it drops off much more quickly than FHA insurance at lower loan-to-value ratios. Conventional mortgage insurance will fall off automatically when the loan is paid down to 78 percent loan to value (LTV), whereas the FHA premiums will exist throughout the life of the loan if the down payment was less than 10 percent.

Conventional loans can also be used to purchase the investment property and second homes. Conventional loans are also used to do jumbo loans — which are loans that exceed the statutory limits. Currently, the maximum county limit in high-cost areas is $625,500.

 

FHA Loan Advantages

  • Low down payment required (3.5 percent minimum)
  • Can go as low as 500 credit score (620 minimum for conventional)
  • Not limited to 43 percent for debt-to-income ratio (qualified mortgage rule applies for conventional loans)
  • FHA loans are assumable
  • FHA loans are eligible for ”streamline” refinances
  • Shorter timeframe following major credit problems (3 years vs. 7 years for foreclosure and 2 years vs. 4 years for bankruptcy)
  • FHA loans typically will have a lower base interest rate than a comparable conventional loan
  • Non-occupant co-borrower (relative) may be used for qualifying by blending ratios

 

Conventional Loan Advantages

  • Low down payment required (3 percent minimum)
  • Mortgage insurance is required for loans exceeding 80 percent loan-to-value (Mortgage insurance is required on all FHA loans regardless of the loan-to-value)
  • Conventional mortgage insurance is only monthly or single premium (FHA is upfront and monthly premiums)
  • Conventional mortgage insurance will automatically end at 78 percent loan-to-value (FHA will stay for the entire life of the loan)
  • Conventional mortgage insurance is credit sensitive (For FHA, one premium fits all)
  • Conventional loans can cover much higher loan amounts (FHA over county limits)
  • Even though conventional loans may have higher interest rates, their monthly payments may still be lower

 

Do FHA loans have income limits?

There are no minimum or maximum income requirements for FHA home loans Rules do not say that it’s possible to earn too much to qualify for an FHA loan. Regarding minimums, regulations focus more on the borrower’s ability to afford the mortgage loan.

 

When did the FHA make monthly mortgage insurance payment a permanent requirement?

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For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP, which is the time at which you will pay for FHA Mortgage Insurance Premiums on your FHA loan. They are as follows:

 

Term LTV% Previous New
≤ 15 years ≤ 78% no annual MIP 11 years
≤ 15 years 78.01% to 90% cancelled at 78% LTV 11 years
≤ 15 years > 90% loan term loan term
> 15 years ≤ 78% 5 years 11 years
> 15 years 78.01% to 90% cancelled at 78% LTV and 5 years 11 years
> 15 years > 90% cancelled at 78% LTV and 5 years loan term

 

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Heirloom Home : NMLS 1403204, BRE 02009074, CA Dept Insurance 0L88065 Aumplex Corporation NMLS: 1829222.

 How does the FHA (203H) Disaster Loan 100% Financing Program work?

The borrower is eligible for 100% financing and is not required to provide any down payment. The borrower does pay closing costs and prepaid expenses in cash or through premium pricing or by the seller, subject to a 6% limitation on seller concessions.

  • FHA mortgage insurance in advance may be financed. Annual and monthly mortgage insurance is the same as for the 203(b).
  • Fixed rate terms of 30, 20 and 15 years are available.
  • Qualifying properties include one-unit single-family properties, planned unit developments (PUD) and FHA approved Condominiums are allowed to be financed with the FHA 203H Disaster Loan Program.
  • The new property is not required to be located in the area where the destroyed home was originally located. The new property can be located in any state. This means that if your house was destroyed in the Sonoma Fires, you can use this loan to purchase a house in anywhere else within the country.

Who is eligible?

Anyone whose home (owned or rented) has been destroyed or severely damaged in a Presidentially-Declared Major Disaster Area (“PDMDA”) and destroyed or damaged to such an extent that the residents could no longer be lived in is eligible to apply for mortgage insurance under this program.

 

What are the requirements of FHA 203(H) loanprogram?

  • Inspection from the Department of Housing and Urban Development (HUD) of the previous/current primary residence is required and the property must meet HUD’s Minimum Property Standards and Requirements.
  • The FHA Case number must be assigned within one year of the date that the PDMDA is declared.
  • HUD defines the date of the PDMDA as the date that the President signs the declaration.
  • If the President signs an extension, which will also be assigned by FEMA, then the eligibility period for a 203(h) is also extended.
  • The minimum credit score of the borrower to apply for mortgage insurance under this program is 600.
  • The Borrower must have had satisfactory credit prior to the disaster, including but not limited to a 0x30 housing payment history in the previous 12 months and no more than 2×30 late for the preceding 12 months.

What are the underwriting of 203(H) program?

Credit

For Borrower’s with derogatory credit, the FHA permits lenders to consider the Borrower a satisfactory credit risk if the credit report indicates the following:

  • Borrower must have had satisfactory credit prior to the disaster, including but not limited to the Borrower has made all housing payments on time for the previous 12 months and has no more than two 30-day late mortgage payments in the previous 24 months.
  • Any derogatory credit subsequent to the date of the disaster is related to the effects of the disaster.

Debt to Income (DTI)

  • Automated Underwriting System (AUS) Approve/Accept: Maximum DTI determined by AUS
  • Please see chart below to understand Manual Underwriting of AUS Refer or Manual Downgrade
Manual Underwriting Maximum Qualifying Ratios
Lowest Minimum Decision Credit Score Maximum Qualifying Ratios(%) Acceptable HUD Compensating Factors
No Credit Scores/ Non Credit-Traditional only Not Eligible All borrowers have at least one valid credit score
600 and above 31/43 No compensating factors required
600 and above 37/47 One of the following comp factors.
•Verified and Documented Cash Reserves.
•Minimal Increase in Housing payment.
•Residual Income.
600 and above 40/40 Must Meet HUD’s No Discretionary Debt comp factor.
For borrowers meeting this criterion no other compensating factors are required
600 and above 40/50 Two of the following comp factors.
•Verified and Documented Cash Reserves.
•Minimal Increase in Housing Payment.
•Significant Additional Income Not Reflected in Effective Income.
•Residual Income.

Employment and Income

  • FHA will accept W-2s and tax returns from the Internal Revenue Service (IRS) to confirm prior employment and income If prior employment cannot be verified because records were destroyed by the disaster, and the Borrower is in the same/similar field
  • The Mortgagee may also include short-term employment obtained following the disaster in the calculation of Effective Income

 

Heirloom Home : NMLS 1403204, BRE 02009074, CA Dept Insurance 0L88065 Aumplex Corporation NMLS: 1829222.