FHA Loan Kit from OurBroker ®
Peter G. Miller
It all started in the 1930s when the government began insuring home mortgages. This was a big deal because it meant that homes could be purchased with little down and with loans that lasted more than five years -- the norm at the time.
Since the program began in 1934 the government has insured more than 37 million mortgages under Federal Housing Administration (FHA). Today you can get 30-year and 15-year loans insured under the FHA program. These loans can be fixed-rate or adjustable. In addition, the FHA also insures reverse mortgages.
The FHA does not insure all loans. Instead it only insures mortgages which meet its standards. If it's an FHA mortgage you can be certain that the loan features little down (3.5 percent plus closing costs), forbids prepayment penalties and does not contain those infamous "gotcha" clauses found in toxic mortgages. At present, changes to downpayment requirements are being contemplated by HUD, the administrator of the FHA program.
FHA interest rates are established in the marketplace and not by federal regulation. The government guarantees the loan's repayment to a lender, an incentive that greatly benefits borrowers because lenders will finance a home with little down if a borrower is backed by FHA insurance.
To obtain an FHA-insured loan under what is generally known as the FHA 203(b) program, one must pay FHA insurance. At this time, the upfront insurance fee is equal to 1.75 percent of the amount borrowed PLUS an annual fee equal to .55 percent of the loan amount. As with downpayment requirements, increases in insurance premiums (possibly both annual and up-front) are under consideration at this time.
In other words, if you borrow $150,000 there's an upfront FHA mortgage insurance premium (known as an MIP) of $2,625. This fee can be financed with the mortgage, meaning you do not have to pay it in cash at closing. Instead, the upfront MIP is added to the loan amount.
In addition to the upfront MIP there's also an annual MIP equal to .55 percent of the remaining mortgage balance. If you owe $150,000 then the monthly fee will be equal to $150,000 x .55 divided by 12 or $68.75. Since the loan balance falls a little with each mortgage payment, so does the monthly MIP cost.
Canceling FHA Mortgage Insurance
Generally the FHA MIP is automatically canceled after 15 years if the loan-to-value (LTV) ratio of the mortgage falls to 78 percent of the original debt. The MIP cannot be canceled in less than five years.
FHA Loan Limits
Historically the amount you can borrow with FHA financing has been less than the amount available with a conventional loan. At the end of 2008, however, the system was changed. Now there are at least three sets of FHA loan limits -- a basic loan limit, a loan limit for "high cost" areas in the continental U.S. and a third loan limit for properties in Alaska, Hawaii, Guam and the Virgin Islands.
There are different FHA loan limits for single-family, duplex, triplex or four-unit properties. The loan limit increases with the number of units.
Under the FHA program you can buy a property with up to four units, but you MUST live in one of the units to qualify for financing. Pure investment financing under the FHA program is currently prohibited.
To make matters more complicated the FHA loan limit can differ even within a state. This happens because the limit is based on the county where you live. Also, the FHA loan limits can change, typically at the end of the year.
The FHA insures most reverse mortgages originated in the US. Because the reverse mortgage program has had recent losses, borrowers should see if the program is available and how much cash can be raised from financing your home. Be certain to get independent advice from an attorney who specializes in "elder law" or a fee-only financial adviser BEFORE signing up for any reverse mortgage program.
Be aware that the FHA reverse loan limit is different than the limit for properties under the 203(b) program.
Buy & Repair Loans
In addition to the 203(b) program, the FHA also has a 203(k) plan for residential purchasers (but not for investors). Under 203(k) you can get financing to buy a home and to also make repairs and improvements. This program has a number of standards and requirements which differ from the 203(b) plan so speak with lenders for specifics.
How Much Can You Borrow?
Lenders qualify borrowers in part on the basis of their income. In general terms, under the FHA program no more than 31 percent of your gross (pre-tax) monthly income can be used for housing costs such as mortgage principal, mortgage interest, property taxes and property insurance (PITI). As much as 43 percent of your income can be used for PITI plus recurring bills such as credit card payments, auto loans, etc. These numbers are sometimes expressed as 31/43.
Let's imagine that you have two household members with a combined income of $90,000 annually or $7,500 per month before taxes. Under general FHA rules, the buyers would be allowed to spend as much as $2,325 on housing costs (PITI) and as much as $3,225 for all regular monthly debt.
Higher ratios are available with energy efficient FHA loans (33/45) and under the government's HAMP mortgage modification program (31/55).
Most residential borrowers will be insured under what's known as the FHA 203(b) plan. Every FHA 203(b) loan has the same terms (length, no prepayment penalty, etc.) as every other FHA 203(b) loan. What may not be the same is the cost: Different lenders can and will change different combinations of interest and points so it pays to shop around and compare rates. One of the best ways to compare loan offers is to ask lenders to provide a quote with "par" interest -- the rate with zero points.
How To Apply
In recent years the loan application process has been greatly simplified, however proper information from borrowers is still required. The FHA -- to its credit -- demands fully-documented loan applications. This may sound intimidating, however it's not a big deal. Just take these steps:
- At least three months BEFORE you finance or refinance real estate get a copy of your credit report. The reason to do this is to check and see if there's any information on your credit report which is factually incorrect or out-of-date (most negative items can stay on a credit report for seven years, 10 years for a bankruptcy). You can get a free credit report with no strings attached by going to AnnualCreditReport.com.
- Get your paperwork in order. Have in hand your last three pay stubs, your last three tax returns, and statements for all savings and checking account, mutual funds, retirement accounts, credit cards, student loans, car loans, etc. Make a file and stick the paperwork in it. You want to show ALL income and you must show ALL debts. When in doubt add it to the file.
- Ask some questions: Do you expect to receive "bonus" income now or in the future? Do you expect to receive "overtime" income now or in the future Will "other" income in addition to your salary continue at current levels? If you own your home and use it as a prime residence, what's the estimated fair market value? What's the value of all financing now secured by your current home if you're refinancing?
Because it's tough to sell home these days in many markets, some owners are willing to pay some or even all buyer closing costs. FHA rules allow so-called "seller contributions" of as much as 3 percent to 6 percent of the purchase price to help offset closing costs, depending on the amount you put down. A seller contribution may be used to offset various closing costs however you must always provide your downpayment in cash. Speak with your real estate broker and FHA lender for specifics.
Gifts are allowed under the FHA program and gifts may be used to cover some or all of the downpayment. A "gift letter" from the donor will be required. This is a letter which says the money given is really a gift and that no repayment or interest will be sought. Speak with lenders for specifics.
___ You do NOT need a co-borrower to apply for a mortgage. However, the additional income represented by a co-borrower may allow you to obtain a bigger mortgage.
___ If you own rental property, lenders will generally add back the depreciation deducted each year on "improvements" such as a house, but not stoves, clothes washers, etc.
___ You are NOT required to disclose the receipt of alimony, child support payments or separate maintenance to a lender. However, disclosure of the additional income represented by such payments may allow you to borrow a larger amount.
___ In addition to the minimum down payment, you may and are likely to have other closing costs as well. Such additional costs can include prepaid expenses, points, mortgage insurance premiums paid in cash, non-realty expenses, taxes, title insurance, transfer fees, settlement charges and miscellaneous costs. Always obtain a Good Faith Estimate from any lender who offers you financing. This government-mandated form outlines the loan-related costs you will be required to pay at closing.
Peter G. Miller is a nationally-syndicated columnist who appears in more than 100 newspapers. If you need objective information regarding real estate buying, selling or foreclosures, stop by Mr. Miller's website, OurBroker.com, one of the most comprehensive consumer sites online.
Copyright 2009 Peter G. Miller. All rights reserved.