The FHA Mortgage Loan: An Introduction
HUD guarantees “eligible” loan applicants the ability to obtain mortgages with little or no money down. FHA loans can be fully assumable. Loan limits apply depending upon where the property is located in Florida. FHA loans feature low down payments and flexible guidelines to make it easier to qualify! FHA loans are popular with first time home buyers but they can be equally attractive to move-up buyers and homeowners looking for a home improvement loan. With an FHA loan you can borrow up to 96.5% of the purchase price of the home. Please keep in mind that the loan will be based on the purchase price or the appraised value, whatever is the lesser amount.
FHA stands for the Federal Housing Administration. FHA was created in 1934 to help Americans realize the dream of Homeownership. FHA was absorbed into HUD in the 1960s and is now known as HUD-FHA.
The advantages of a HUD-FHA insured mortgage product to a homebuyer are many fold. A homebuyer may apply for a HUD-FHA insured mortgage and purchase a home with little or no out of pocket expense! FHA mortgage insurance permits lenders to make mortgages for first time homebuyers without risk.
There are no income limits with an HUD-FHA insured mortgage, so most anyone can qualify as long as they have a reasonable acceptable credit history and can afford the monthly mortgage payments.
You can also combine FHA mortgage programs with many first time homebuyer grants or down payment assistance programs offered by other agencies.
The main advantage to a FHA home loan is that the credit criteria for a borrower are not as strict as FNMA or FHLMC. Someone who may have had a few minor credit problems 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 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. 100% of the down payment and closing costs can be family gift funds.
Here are other advantages associated with an FHA loan:
- Low Down Payment of 3 1/2% only (96.5% Financing)
- Up to 85% Cash-Out Refinance
- FHA Co-Signer is acceptable
- Credit Score Minimum: 620
- FHA Streamline Refinance (No appraisal required)
- FHA 203-K Rehab Program
- NO Maximum Income Limits
- Gift Funds: Allowed for the entire 3 1/2% down payment
- Gift Funds: Closing Costs & Prepaids
- 6% Seller Contributions (closing costs)
- NO Cash Reserves Required
- Non-Occupant “Co-Borrower” (income used to qualify)
- 3 Non Traditional Tradelines for credit history (utilities, phone, etc.)
- Gap in Employment OK
- Permanent Resident Alien OK
- Judgements must be paid or have 12 months of arranged payment history
- NO pre-payment penalty
- Fully assumable mortgage
- FHA Secure
FHA Streamline Refinancing
FHA has permitted streamline refinances on insured mortgages since the early 1980’s. The “streamline” refers only to the amount of documentation and underwriting that needs to be performed by the lender, and does not mean that there are no costs involved in the transaction. The basic requirements of a streamline refinance are:
- The mortgage to be refinanced must already be FHA insured.
- The mortgage to be refinanced should be current (not delinquent).
- The refinance is to result in a lowering of the borrower’s monthly principal and interest payments.
- No cash may be taken out on mortgages refinanced using the streamline refinance process.
Lenders may offer streamline refinances in several ways. Some lenders offer “no cost” refinances (actually, no out-of-pocket expenses to the borrower) by charging a higher rate of interest on the newloan than if the borrower financed or paid the closing costs in cash. From this premium, the lender pays any closing costs that are incurred on the transaction.
Lenders may offer streamline refinances and include the closing costs into the new mortgage amount. This can only be done if there is sufficient equity in the property, as determined by an appraisal. Streamline refinances can also be done without appraisals, but the new loan amount cannot exceed the original loan amount. Investment properties (properties in which the borrower does not reside in as his or her principal residence) may only be refinanced without an appraisal.
Mortgage Insurance Premium (MIP) (Tax Deductible)
Mortgage insurance is “tax deductible”. In order to cover some of the costs incurred by HUD for FHA loans, HUD must assess the upfront and monthly mortgage insurance to the home buyer. This upfront fee is 1.75%, which can be brought to closing or rolled into the loan, and the borrower will have to pay 0.5% annually in mortgage insurance premiums. However, if you are buying a condominium, you do not have to pay the upfront mortgage insurance premium.
The FHA Mortgage Loan: Florida FHA Credit
FHA requires a borrower to demonstrate a good repayment history of all debts. This history serves as the most useful guide in determining a borrower’s willingness to repay credit obligations and serves as a model in predicting his/her future actions.
MINIMUM CREDIT SCORE = 620
A borrower who has made payments on previous or current credit obligations (such as a credit card, student loan, etc.) in a timely manner represent a reduced risk to HUD. Conversely, if the credit history, despite sufficient income to support these debts, continuously reflects slow or often late payments, judgments and delinquent credit accounts, strong offsetting factors will be necessary to approve the loan.
When analyzing a borrower’s credit report, it is important to focus upon the general pattern of credit behavior rather than isolated occurrences of late payments. Often times, people will experience a period of financial difficulty in the past and does not necessarily translate into an unacceptable risk. Reasonable explanations of the credit derogatory and evidence of offsetting factors (such as a new job or promotion with greater stability and pay, for example) will be necessary. All derogatory credit information must be explained, in writing, by the borrower.
The following is a brief synopsis of the credit underwriting guidelines for FHA home loans:
Lack of credit history: If a borrower does not have a minimum of 3 trade lines on their credit report, alternative forms of credit may be used. This would include items such as auto insurance payment history, utility bills, etc.
Included credit obligations: Any installment loan (e.g. student loans, car loans, etc.) with less than 10 months remaining does not need to be included when qualifying for a FHA home loan. However, consideration is given to a large debt of over $100 a month, regardless of the number of months remaining. Furthermore, payments on auto leases with less than 10 months must be included in the qualifying ratios. The minimum payment on all revolving accounts (i.e. credit cards) is also factored in. If the borrower has an open revolving account without a balance, $10 per open account should be included when qualifying. Any loan where the borrower has co-signed for another party is included with their debts unless the borrower can prove that the the other party has made the payments on their own for a minimum of 12 months.
Chapter 7 Bankruptcy: FHA requires a minimum of 2 years since the discharge of the bankruptcy. An explanation of the bankruptcy will be required. Furthermore, the borrower should have re-established credit (i.e. secured credit card) with no late payments.
Chapter 13 Bankruptcy: FHA will consider a borrower still paying on a Chapter 13 bankruptcy if the payments to the court have been made for a minimum of 1 year in a satisfactory manner (as verified with the courts) and with the approval of the court trustee.
Federal Debts: A borrower is not eligible for a FHA loan if he/she is delinquent or in default on any federal debt (such as a HUD or VA mortgage, student loans, SBA loans or a tax lien against his/her property). Borrowers can become eligible by bringing any delinquent accounts current, making satisfactory repayment arrangements with the creditor (generally a 3 month history will be required), or paying the account in full.
Judgments: Judgments must be paid or have 12 months of arranged payment history
Collection Accounts: Collections do not need to be paid (LOX) needed
Foreclosure: A borrower who has had a property foreclosed upon, or who has given a deed-in-lieu of foreclosure within the previous 3 years, is generally not eligible for a FHA home loan. However, if it was the result of extenuating circumstances beyond the borrower’s control (such as the death of a spouse, loss of employment, or serious long-term illness, etc.) and the borrower has since re-established good credit, an exception may be granted. However, extenuating circumstances do not include the inability to sell a house when transferring from one area to another.
Non-purchasing Spouse: If a married borrower is purchasing a property by himself/herself, the credit obligations of the spouse must be included with the application and will be factored in with the borrower’s credit obligations and used to determine the financial capacity of the borrower. Furthermore, the non-purchasing spouse may be required to sign a security instrument or documentation relinquishing all rights to the property.