Jean Wawrzyniak-Fry Realtor® (480) 721-1195

FHA Loans

FHA Loans–

FHA Home Loan sare mortgages insured by the Federal Housing Administration that feature lower underwriting standards and rates than conventional loans, along with lower minimum down payments of 3.5%. Additionally, FHA borrowers are required to pay for mortgage insurance (MIP) to protect the lender in the event of a default.

The main feature of the FHA-backed mortgage was its Mortgage Insurance Premium (MIP) program, a self-sufficient insurance fund through which the FHA could insure the nation’s lenders against “bad loans”.

In order for a bank to get the FHA’s insurance on its loans, it was required to verify that its loans met the FHA’s minimum qualification standards.

These rules came to be known as the FHA mortgage guidelines.

What Are FHA Mortgage Advantages?

Home buyers today don’t often buy homes with 20% down.

Low- and no-downpayment mortgages remain popular with first-time buyers and repeat buyers alike; and one of the most popular low-downpayment mortgage program is the FHA loan via the Federal Housing Administration.

The program’s popularity, in part, is because buyers can make downpayments of just 3.5 percent via the FHA. But, there are other reasons why FHA loans are in demand, too.

In addition to loose underwriting standards, FHA mortgage rates can be lower than comparable conventional rates; and FHA loans can be assumed by a home’s subsequent buyer. Check with a lender.

Just because you’ve filed for bankruptcy or suffered a foreclosure in the past few years doesn’t mean you’re excluded from qualifying for an FHA loan. As long as you meet other requirements that satisfy the FHA, such as re-establishment of good credit, solid payment history, etc., you can still qualify.

The FHA usually requires two lines of credit for qualifying applicants. If you don’t have a sufficient credit history, you can try to qualify through a substitute form.

Credit–FICO Score

Of all the available loan types in today’s U.S. market, FHA loans are among the most forgiving with respect to credit standards.

The FHA does not require “perfect credit” and even instructs its approved lenders to look beyond isolated “credit events” and to consider a borrower’s complete credit history — regardless of credit score. Even borrowers with a recent foreclosure, short sale, deed-in-lieu or bankruptcy can be eligible for FHA financing.

Mandatory 3-year waiting periods do not exist with an FHA loan.

For those interested in applying for an FHA loan, applicants are now required to have a minimum FICO score of 580 to qualify for the low down payment advantage, which is currently at around 3.5 percent.

If your credit score is below 580, however, you aren’t necessarily excluded from FHA loan eligibility. Applicants with lower credit scores will have to put down a 10 percent down payment if they want to qualify for a loan.

Income

Above and beyond credit, approvals will be issued to applicants who can provide proof of earnings which may involve some or all of the following documentation. Income verification is required to establish required Debt to Income percentages.

  • 30 day’s pay stubs
  • 2 year’s W2s
  • 2 year’s tax returns if self-employed
  • An offer letter, if not yet started
  • Proof of education for new graduates

Most lenders require a two-year documentation to show a consistent earnings stream,. Maintenance, also termed alimony, can also be counted if documented in a divorce decree, along with the recurring method of payment such as automatic deposit. Seasonal income is also accepted, again with proof in a tax return.

Property

FHA appraisals are stricter than appraisals for conventional loans.

If you use an FHA loan to buy a house, the property will have to be appraised and inspected by a HUD-approved home appraiser. This individual will determine the current market value of the property, and will also inspect it to ensure it meets HUD’s minimum property standards.

So the primary difference between FHA and regular appraisals is the level of inspection that is required by HUD. If the HUD-approved appraiser flags certain issues — such as peeling paint, loose handrails, or other safety issues — those issues must be corrected before the loan will be funded. In other words, the transaction will be put on “hold” until the discrepancies are resolved. That is not the case with a regular appraisal used for a conventional home loan.

A FHA appraisal sticks with the property for 6 months.
A FHA Appraiser may require–
termite remediation
Ensure all appliances are operational
Check water heater functionality
A roof that needs to be replaced within 2 years must be reported
Flooring is required if missing of severely soiled
Swimming pool must be filled with water
Missing handrails at stairs
Cracked window glass

Mortgage Insurance–MPI (Mortgage Insurance Premium)

The biggest downside of FHA loans has long been the costs associated with the upfront and annual mortgage insurance premiums.

FHA loans require an upfront “funding fee” for its Mortgage insurnce.   This means your ‘closing costs’ (the upfront costs at close of escrow) will be lower with a conventional loan.

The upfront mortgage insurance premium is 1.75 percent of the loan amount. That’s $3,500 on a $200,000 mortgage loan. That cost is added to the principal balance of your loan. So your loan amount is actually $203,500.

High PMI rates for lower credit scores prompt many buyers to use an FHA loan. Unlike conventional loans, FHA loans do not charge higher mortgage insurance rates, even for applicants with very low scores.

FHA loans are a powerful home buying tool, but can come with high upfront and monthly mortgage insurance fees that are payable for the life of the loan — up to 30 years. The only way to cancel FHA mortgage insurance is to refinance out of the FHA loan. This can incur additional costs.

Debt-to-Income Ratio

Simply put, a borrower’s DTI ratio measures the borrower’s monthly debt against his or her gross monthly income. It’s expected and common to have some debt.

There are actually two numbers used for FHA qualification:

  • The “front-end” ratio looks at housing-related debts only (monthly mortgage payments, property taxes, etc.).
  • The “back-end” number takes all recurring monthly debts into account. This can include the mortgage payment, credit cards, car loans, etc.

The math is fairly simply. You can calculate your DTI ratio by dividing your total monthly debts by your gross (pre-tax) monthly income. For example, if my recurring monthly debts total $2,000, and my gross monthly income is $6,000, I have a DTI ratio of 33% (2,000 ÷ 6,000 = 0.33, or 33%).

According to official FHA guidelines, borrowers are limited to having debt ratios of 31% on the front end, and 43% on the back end.  Check for current percentages.

Closing Costs

Closing costs will involve fees such as a lender’s  origination fee plus vendor fees like the appraisal, title insurance, and credit reporting fees.  There will be prorations on property taxes and HOA.  There are also pre payment for property tax,  home  owners insurance and  HOA .

Sometimes, a lender or seller will pay all or some of these expenses depending on the strength of the market and desire to close the transaction.

FHA loans allow sellers to pay up to 6 percent of the loan amount to cover buyers’ closing costs.  In conventional loans, sellers can only pay up to 3 percent.

Downpayment

For today’s home buyers, there are only a few mortgage options which allow for downpayments of five percent or less. The FHA is one of them.

With an FHA mortgage, you can make a downpayment as small as 3.5%.

The FHA is aggressive with respect to gifts for downpayment. Very few loans programs will allow your entire downpayment for a home to come from a gift. The FHA will.

Via the FHA, your entire 3.5% downpayment can be a gift from parents or another relative, an employer, an approved charitable group, or a government homebuyer program. If you’re using a downpayment gift, though, you’ll need to follow the process.

If your credit score is below the minimum threshold of 620 you are responsible for paying at least 3.5% of the down payment yourself.

Regardless of whether you’re getting a conventional, FHA or VA loan, a down payment gift is only acceptable when the house you’re purchasing will be your primary residence or second home.

The FHA Doesn’t Require A SSN

Not every home buyer will have a valid social security number and, according to the FHA, that’s okay. FHA guidelines permits loans to employees of the World Bank and foreign embassies, for example.

FHA Loans Are Assumable

A little-known FHA benefit is that the agency will allow a home buyer to “assume” the existing FHA mortgage on home being purchased.

The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller’s loan.

5 years from now, for example, a buyer of an FHA-insured home can “inherit” a seller’s sub-4 percent mortgage rate.