FHA LOANS
Background:
The National Housing Act of 1934 created the Federal Housing Administration to insure mortgages made by lenders and to provide a stimulus to a very slow housing industry. FHA collects premiums to pay lenders 100% of the loan balance in case of defaults. Because the government insures these loans and protects the lender from loss, lenders are encouraged to make long term mortgages with high loan-to-value ratios and higher debt ratios, thus providing mortgages for many individuals who may have been excluded from obtaining standard conventional financing. The Housing and Urban Development Act of 1965 was established to oversee programs that provide federally funded housing assistance. HUD oversees FHA.
Why consider FHA financing when buying a home?
There are many reasons for homebuyers to investigate an FHA home purchase. For First time homebuyers it is easier to qualify for an FHA home mortgage. Since the typical first-time FHA home loan applicant is young and in the early phases of their careers, chances are they still have student loans and other debt to content with; an FHA home mortgage often costs less and is more forgiving of youthful indiscretions with credit and payments.
FHA loans also do not require a big down payment. For first-time homebuyers this can be a real plus since the typical borrower in the early stages of a new career often does not have a lot of money set aside for purchasing a home. The FHA mortgage requires a low 3 ½ % down payment, and that money can come from a variety of sources including a gift, company bonus, or a HUD down payment assistance grant.
For first time buyers, closing costs are another issue that can be a financial drain; closing costs for a typical FHA home loans are around 2% to 3% of the purchase price and can be paid by the Seller.
FHA home mortgages are not limited to first-time homebuyers. FHA refinance loans can help people get out of high debt situations. There are several reasons to get into an FHA home loan for refinancing including fixed rate mortgages with predictable mortgage payments and lower interest rates for those who qualify.
The FHA also allows for cash-out refinancing for those who need money for things such as college or major home improvements. An FHA cash-out refinancing mortgage may offer lower interest rates than traditional home equity financing loans.
FHA mortgage loans should take up no more than 29% of your monthly income, and your Licenses Mortgage Professional will ask for verification of your income to make the calculation. FHA home loans have specific requirements for income, debt-to-income ratios, maximum loan amounts and other details; each type of FHA loan is unique and must be applied for individually.
FHA LOAN TYPES:
- Fixed Rate – 10, 15, 20, 25 or 30-year amortization
- Adjustable Rate – 30-year amortization, 1 year, 3/1, 5/1, 7/1, and 10/1 ARMs.
- Temporary Buy downs – Allowed on a fixed rate loan with a maximum reduction of 2%, but uses the start rate for qualification.
FHA LOAN TRANSACTIONS:
- Purchase of 1-4 unit Owner Occupied property
- No-Cash-Out Refinance
- Cash-Out Refinance
- Streamline Refinance with an Appraisal
- Streamline Refinance without an Appraisal
- Credit qualifying streamline refinance
FHA Mortgage Insurance:
To cover the cost of the insurance, FHA charges both an up-front and monthly Mortgage Insurance Premium. Effective April 18, 2011:
“Up-Front MIP” of 1% of the loan amount on all loans
On 15 year loans:
- with down payments of less than 5% the monthly MIP is 1.15%
- with down payments of 5%% or more the monthly MIP is 1.10%
On 30 year loans:
- with down payments of less than 10% the monthly MIP is .50%
- with down payments of 10% or more the monthly MIP is .25%
For example, if you make a 3 ½% down payment and have a $100,000 30-year loan your monthly MIP will be $100,000 * .0115 / 12 = $95.83
By making a 10% down payment and having a $100,000 15-year loan your monthly MIP will be $100,000 * .0025 / 12 = $20.83
The only way to eliminate the monthly MIP is to reduce the loan balance to 78% of the ORIGINAL purchase price of the home AND have been paying the loan on time for at least 5 years.
Refinancing an existing FHA loan to a new FHA loan within the first 3 years will generate a partial refund of the unused portion of the Up-Front MIP (applied to the new Up-Front MIP) on a declining scale basis.
The Current MAXIMUM Purchase price in Arizona: $316,250