FHA loans are becoming popular again! It’s an institution that has been around for a long time -- since June 27, 1934. The Department of Housing & Urban Development folded the Federal Housing Administration (FHA) under its umbrella in 1965.
There are city funded programs and government program that will help you with the 3-3.5% down payment to allow qualified home buyers to literally come in only with just hundreds of dollars. These loan are insured by Private Mortgage Insurance (PMI) companies that have very stringent guidelines, therefore boarder line qualification might not be acceptable.
FHA will allow refinancing up to 85% to cash out and up to about 95% LTV for straight refinances. Streamline Refinancing is popular, no appraisal needed and much less documentation, only if your existing loan is an FHA loan too.
How FHA loans work
Now, FHA does not make loans or guarantee loans. It insures loans. The insurance removes or minimizes the default risk lenders face when buyers put down less than 20 percent. Without further approval from FHA, its approved lenders are authorized to:
- Take loan applications
- Process loan applications
- Underwrite and close the loan
For the year 2009 and for 2010 loan limits look like this:
For conventional mortgages (those which may be purchased from local lenders by national organizations such as Fannie Mae and Freddie Mac), the loan limits for owner-occupied properties are:
- One-unit properties: $417,000
- Two-unit properties: $533,850
- Three-unit properties: $645,300
- Four-unit properties: $801,950
- The conventional limit for second loans is $208,500.
Blemished credit history
If your credit is less than perfect, FHA might be the loan for you. You may qualify for an FHA loan even though you have had financial problems.
- FICO scores – 580 with DTI under 36% to a norm of 620-640 with a DTI of 41%.
- Bankruptcy - You can obtain an FHA loan two years from the date of your bankruptcy discharge, as long as you’ve maintained good credit since your debts were discharged.
- Foreclosure - If you keep your credit in excellent shape since a foreclosure, an FHA loan will be available to you two years from the final date of your foreclosure.
Competitive rates and terms
Today’s terms are pretty straightforward. In fact, in many markets the rates and terms are better than those for 80% / 20% piggyback loans.
- There is little or no adjustment to the interest rate for an FHA loan, as the rates vary within .125 percent of a conventional loan.
- Mortgage insurance is funded into the loan, meaning a premium of 1.00% is added to the loan balance instead of being paid out-of-pocket. In addition, a small portion for the mortgage insurance premium is added to the monthly payment, but it is far less than private mortgage insurance premiums.
- Borrowers can finance 96.5% of the purchase price and put down 3.5 percent. In some instances, when combined with other types of loans, the down payment can be zero. There are talks of allowing 100% financing thru FHA call for details.
- Allowable debt ratios are higher than the debt-ratio limits imposed for conventional loans. Typically they prefer a DTI of 41% but we have seen ratios go above 50% with major compensating factors.
Fewer required repairs
At one point, FHA repair demands were so excessive that sellers would discount the list price to buyers who would agree to obtain conventional loans over FHA loans. Today the requirements appear more reasonable.
- Defective roofs that leak still need to be replaced but an older roof does not necessitate replacement if it doesn’t leak.
- Windows that stick upon opening or have cracked panel do not require replacement. Crack windows will not be acceptable.
- Peeled paints that are obvious and severe will need to be painted over.
- Additions without permits will be sometimes required to be demolished prior to closing.
- Cracked flooring tiles, wood or laminates that are missing or damaged will need to be repaired.
- FHA appraisals do not take the place of a home inspection, never have. Buyers should still obtain a professional home inspection.
FHA loans are available to anybody but are used most often by first-time home buyers and low- to moderate-income buyers.
Loans are going to be hard to come by but make sure you are pre- qualified by an experienced agent who knows the new guidelines and rulings. Last thing you want is to be pre-qualified, put in an offer on a property then later on, find out that you will get declined for the actual loan.
Regardless of times now in real estate market, if you are buying to live in, as long as its within your means to survive and qualify, with the low prices in homes and mortgage rates, I don’t believe you will go wrong in the long haul.
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Call Ken Go, 1st Innovative Financing (562)697-7028 or write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it with your mortgage purchase or refinancing needs and get the best and most honest advice.
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