 The Department of Housing and Urban Development
(HUD) operates the Federal Housing Administration (FHA), which has the primary
responsibility for administering the government home loan insurance program. This program
allows a first time home buyer who might otherwise not qualify for a home loan to obtain
one because the risk is removed from the lender by FHA who insures the loan for the
lender.
The most popular FHA home loan program for a first time home buyer is by far is the
203(b). This is your standard fixed rate loan for 1-4 family owner occupied houses and
only requires a minimum of 3.5% from the borrower. This loan also permits 100% of their
money needed to close to be a gift from a relative, non-profit organization, or government
agency.
The main advantage to a FHA home loan is that the credit criteria for a first time
borrower are not as strict as Conventional Loans sold to Fannie Mae (FNMA) or Freddie Mac
(FHLMC). Someone who may have had a few credit problems or no traditional credit should
not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a
person to take over the mortgage without the additional cost of obtaining a new loan. In
addition, the seller or lender must pay for part of the "traditional" closing
costs (called non-allowable costs) while a borrower's allowable costs can partially be
wrapped into the loan. The monthly mortgage insurance premium is cheaper for an FHA loan
verses a conventional loan with 3.5% down. Finally, FHA loans may require less income to
qualify as they will exceed the Conventional debt ratios of 28/36% as their standard is
29/41%.
Many people make the mistake and assume that FHA loans are only available for first time
home buyers. This is not true. FHA loans are available to anyone, whether your first or
fifth home and can be used to purchase a home or refinance a home. If refinancing a home
the current loan DOES NOT have to be an FHA loan.
The greatest disadvantage of FHA home loans is that FHA limits the loan size that a
borrower can borrower. Please see the link for FHA Loan Limits in your area. Others may
try and convince you that the FHA upfront mortgage insurance premium (MIP) is a
disadvantage. However this amount makes just a very small increase in the borrower's month
payment and is partially refundable in certain cases.
FHA vs Conventional
While many people deciding on a loan product rely exclusively on their lenders
recommendation, you should understand the basic difference between an FHA loan and a
Conventional Loan. The term Conventional Loan includes all loans under the current FNMA
and FHLMC lending limits. Some of these may be called Conforming, A paper, subprime, Alt
A, A Minus, BC (bad credit) and other industry names.
Most people that have heard of FHA loans tend to associate them with purchase money
transactions. While purchases are the most common use, FHA loans are also available for
rate and term refinance loans as well as Cash Out refinances.
The main advantage of a FHA vs conventional loan is that the credit qualifying criteria
for a borrower are not as strict as conventional loan financing and the down payment or
Equity requirements are less. In comparing a purchase money FHA loan against a Conforming
or A paper loan, the FHA loan will generally have the least amount of money required to
close and the lower payment. FHA loans will allow the borrower who has had a few
"credit problems" or those without a credit history to buy a home. An FHA
Underwriter will require a reasonable explanation of these derogatories, but will approach
a person's credit history with common sense credit underwriting. Most notably, borrowers
with extenuating circumstances surrounding a bankruptcy that was discharged 2 years ago
can be approved for maximum financing. Conventional A Paper financing, on the other hand,
would require 4 years to have passed to be eligible for consideration and relies heavily
upon credit scoring. If your score is below the minimum standard, you will not qualify or
you will be place in a higher rate Subprime, Alt A or A minus loan product.
If a borrower does have past credit issues an FHA loan may be significantly cheaper than
an alternative loan such as subprime, ALT A, or A minus These other programs generally
have higher interested rate of require a larger down payment or Equity position. Many of
these alternative loan products have Pre Payment penalties where as FHA loan do not have
such penalties. In fact FHA loans can be easily refinanced under the Streamline program.
Another advantage of a FHA vs conventional loan is that FHA is one of the few home
mortgage programs that allow a borrower to have their down payment gifted from a family
member, a governmental agency, or non-profit organization. This allows home buyers without
the necessary money to buy a home today.
Even though FHA charges an annual renewal mortgage insurance premium of 0.5% of the loan
amount, this fee is generally half that charged by low down payment Conforming A Paper
conventional mortgages (which range from 0.55% up to .96% per year). For a $100,000
mortgage, FHA would charge approximately $41.67 per month and a typical low down (3%)
conventional mortgage with a renewal premium of 0.78% would charge $65.00 per month.
That's a $280 savings per year.
However, conventional financing does not require an upfront mortgage insurance premium
when a borrower closes on the loan. With FHA financing, that fee for a 30 year loan is
1.50% of the loan amount that the borrower can wrap into the mortgage. On a $100,000 for
30 years at 8%, that's an additional $11.01 that the borrower must pay each month. That's
almost an additional $132 the borrower must pay each year (fortunately the interest a
borrower pays on his or her mortgage on a primary residence is tax deductible).
One drawback to FHA loans is that the loan limits set for FHA loans are typically less
than the loan limits for conventional financing in most parts of the country. If a
borrower is looking for a mortgage that exceeds the FHA loan limits for the area, the
borrower would have to put additional money down on the property or finance under a
conventional mortgage. Under the 2008 stimulus package FHA loan limits have been raised in
many areas and FHA offer FHA Jumbo Loans.
Whats needed to apply for an FHA Loan?
Generally, you will be asked for documentation to support your income, liabilities, and
funds to close. This documentation will establish your credibility as a borrower, your
ability to repay the FHA home loans and your willingness to repay the loan.
The following is a list of documents that most likely will be required by the lender to
process your FHA mortgage when a
Purchase Money Transaction as required by HUD:
One full month's worth of paystubs showing Year to Date earnings
Last 2 years W-2's (salaried income) • For Self Employed Borrowers;
Last 2 years tax returns with all schedules (commission, dividend, rental income)
Copies of social security, pension, and/or retirement award letters (if
applicable)
Last two months bank statement for all accounts with all pages
Current statements for all investment accounts with all pages
Written explanation for any credit derogatories
Copy of Bankruptcy and discharge paperwork (if applicable)
Divorce decree and any settlement paperwork (if applicable)
Copy of
your Drivers License and Social Security Cards.
Name, Address and phone number of your Landlord for the past 12 months.
Copy of your Sales Contract with Listing and Selling Agent phone Numbers
Clear Termite Report
Well and Septic Certifications (if applicable) For Regular Refinances including
Non FHA loans to FHA loans, Cash Out Loans and certain other transactions:
One full month's worth of paystubs showing Year to Date earnings
Last 2 years W-2's (salaried income)
For Self Employed Borrowers; Last 2 years tax returns with all schedules
(commission, dividend, rental income)
Copies of social security, pension, and/or retirement award letters (if
applicable)
For Regular Refinances including Non FHA loans to FHA loans, Cash Out
Loans and certain other transactions:
One full month's worth of paystubs showing Year to Date earnings
Last 2 years W-2's (salaried income)
For Self Employed Borrowers; Last 2 years tax returns with all schedules
(commission, dividend, rental income)
Copies of social security, pension, and/or retirement award letters (if
applicable)
Last two months bank statement for all accounts with all pages
Current statements for all investment accounts with all pages
Written explanation for any credit derogatories
Copy of Bankruptcy and discharge paperwork (if
applicable)
Divorce decree and any settlement paperwork (if applicable)
Copy of your Drivers License and Social Security Cards.
Copy of you current Mortgage coupons or statements
Clear Termite Report
Copy of your Homeowners insurance
Copy of your Survey (only applies in survey states)
For FHA Streamline Refinances the following documentation may be required:
Copy of your current Note
Copy of the First Two pages of your mortgage or Deed of Trust
Copy of your Drivers License and Social Security Card
Copy of your Homeowners insurance
Copy of your Survey (only applies in survey states)
Copy of you current Mortgage coupons or statements
Once receiving your documentation most lenders will handle acquiring other documentation
such as title reports, credit reports and appraisals if required. It is not uncommon for
the lender to have the borrower pay for the cost of the credit report and appraisal.
Closing Costs for FHA
When purchasing a home, you will generally have some closing costs in addition to any down
payment. FHA closing costs that may be charged to the buyer are considered
"allowable" FHA closing cost per HUD. These are buyer costs that are customary
and necessary to close the mortgage. This is a major change from the past which limited
what fees the borrower was allowed to pay. This change was made to bring FHA loans in line
with other traditional loans and make the program more attractive and usable. FHA will not
allow "mark-ups," i.e., charging a fee to the mortgagor for an amount greater
than that charged the mortgagee by the service provider; only the actual cost for the
service maybe charged the mortgagor. You should consult your lender and request a copy of
the Good Faith Estimate for charges on your transaction. One thing to keep in mind is that
the seller of a property may pay up to 6% of the purchase price for buyer closing costs.
This can help reduce the buyer amount needed to close.
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