Here are the most commonly asked questions about loans that are backed by the Federal Housing Administration (FHA).
What are Federal Housing Administration Home Loans?
They are mortgages that best enable borrowers with a steady income who lack 20-percent down payments. These may be first-time buyers, early-career borrowers, people trying to conserve cash, or those with adverse credit history.
Do I get a loan directly from FHA?
No. The FHA guarantees the loan but doesn’t lend the money. An FHA-approved lender approves and funds the loan, and the FHA guarantees the loan for the lender.
Do FHA loans benefit borrowers or lenders?
The answer is both. If a short-term hardship causes the borrower to miss a payment, the FHA can help. If the borrower goes into foreclosure, the FHA can cover lender losses. Because of this reduced risk to lenders, they can offer attractive FHA rates and down payments.
How can the FHA guarantee these loans?
Here’s how it works: All FHA borrowers pay Mortgage Insurance Premiums (MIP). As of January 2015, FHA loans have a 1.75-percent upfront MIP and a monthly payment of 0.45 percent to 1.05 percent. The month percentages are dependent on loan amount, down payment, and whether the loan term is greater than or less than 15 years. The purpose of the FHA’s MIP fund is to assist borrowers and lenders.
Are MIP fees permanent?
This depends on the down payment, loan amount, whether the loan term is greater or less than 15 years, and the start date of your loan.
If enough equity is gained in the home, an owner can refinance into a non-FHA mortgage in order to eliminate the monthly MIP. The upfront MIP can be financed, paid in cash, or covered by a seller credit. If you refinance into a new FHA loan within 36 months, the upfront MIP can be refunded on a prorated basis.
What kinds of FHA loans are available?
Typically, the most common FHA terms are 15-year and 30-year fixed, but adjustable rate options are also available. FHA loans have no prepayment penalties and are assumable by a qualified future buyer.
How do FHA rates compare to conventional rates?
FHA rates are the same and often lower than Conventional Conforming loan rates. Lenders can do rate comparisons based on the buyer’s profile.
Can I buy an investment property or second home with an FHA loan?
No. FHA loans are only for owner-occupied property. The owner must move into the property within 60 days of closing and must occupy the property for at least one year. After that, how the property is used can be changed.
What are the basic qualifying rules for FHA loans?
A buyer may have a credit score as low as 580 and should not have a total monthly housing obligation (mortgage payment, taxes, HOA/insurance, mortgage insurance) more than 43 percent of income. Lenders can advise on flexibility of the “debt-to-income” ratio.
Do I need money left over after I close?
FHA loans have no reserve requirement. However, it is wise to consider your reserves in relation to monthly obligations and income.
Are gift funds allowed?
Yes. Monetary gifts and co-signers are allowed; the co-signer is not required to live in the property. The buyer’s profile is combined with the co-signer’s to determine qualification. The full loan amount and payment will be indicated on the co-signer’s credit report.
Are seller credits allowed?
Yes. A seller may credit up to 6 percent of the sale price toward cash-to-close. This may include but not exceed closing costs, prepaid items, and mortgage insurance.
Are there special FHA qualifications for single-family homes?
Single-family home FHA loan approvals are similar to conventional loans. If the appraisal or purchase contract requires pest work or deferred maintenance, all work must be done before funding.
Are there special FHA qualifications for condos?
Yes. Before a unit in a condo project is eligible for FHA funding, the project must be approved by the lender or by HUD (FHA’s regulator). The condo project’s legal documentation, budget, unit mix (residential versus commercial), occupancy mix (owner-occupied versus rental ratio), and other factors will be reviewed. Check with your lender if a particular project is approved; if not, the process can take weeks.
What should I do if I want an FHA loan?
Before looking at properties, talk with a lender about FHA loans. Before signing an offer on a specific property, ask the lender to check on its FHA eligibility. Be sure that your Realtor and lender know if you’re seeking seller credits before you sign a contract.
If you’re considering buying a home and have more questions about FHA loans or other loan options, contact our preferred mortgage lender today!