An FHA loan is a mortgage loan insured by the Federal Housing Administration. FHA is part of the U.S. Department of Housing and Urban Development (HUD). FHA insures loans made by banks, savings and loans, mortgage companies, credit unions and other approved institutions. FHA does not originate loans. Since 1934, FHA has offered mortgage insurance programs which help people purchase homes with a modest down payment. Title II, Section 203(b) is the most often used single family program. Under this program a borrower may obtain a ten, fifteen, twenty, twenty-five or thirty year loan to purchase an existing one- to four-family home in a rural or urban area.
In recent years, Fannie Mae and Freddie Mac have introduced low down-payment programs also--the Community Home Buyer program for example. Consequently, FHA loans are less popular than they once were. The loan limits for FHA loans vary geographically.
Mortgage Insurance: In 2000, in recognition of the continued strength and increase in the MMI Fund, FHA revised its Upfront Mortgage Insurance Premiums (UFMIP) policy for all loans closed on or after January 1, 2001. The new UFMIP is 1.50 percent and the borrower does not have to be a first-time homebuyer or to have received homeownership counseling. The refund schedule has also been shortened to a five year time period. The up-front MIP may be financed, and in addition, there is a monthly MIP payment which is calculated by multiplying the loan amount by .5 percent and dividing by twelve. Condominiums do not require up-front MIP--only monthly MIP.
In the past, some FHA borrowers needed to pay annual mortgage insurance premiums throughout the life of the mortgage. The new rule specifies hat annual mortgage insurance premiums will be automatically canceled for all loans closed on or after January 1, 2001 under the following conditions:
- For mortgages with terms of more than 15 years, the annual mortgage insurance premiums will be canceled when the loan-to-value ratio reaches 78 percent. The mortgagor has to pay the annual mortgage insurance premiums for at least five years.
- For mortgages with terms equal or less than 15 years and a loan-to-value ratio of 90 percent or greater, the annual mortgage insurance premiums will be canceled when the loan-to-value ratio reaches 78 percent, regardless of the length of time the mortgagor has paid the annual mortgage premiums.
- For mortgages with terms equal to or less than 15 years and a loan-to-value ratio of 89.9 percent and less, the annual mortgage insurance premiums will not be charged.
The annual MIP for 30 year loans is 0.5%. 15 year loans is 0.25%. 15 year loans less than 90% ltv, Zero.
Down Payment Gifts: One of the key benefits of an FHA program is that you do not have to use your own funds for the down payment. Under certain conditions, gifts are allowed if the donor is a relative, a close friend, an employer, or a humanitarian, welfare, or charitable organization. A gift letter, signed by the donor, is required stating the amount given and specifying that no repayment is expected, (See HUD Handbook 4000.2 REV-2)
Bridal Registry: The Bridal Registry Account allows couples who are getting married to open a bridal registry savings account with a participating Federal Housing Administration approved bank. Family and friends may deposit cash wedding gifts directly into the interest-bearing account.
FHA Streamline Refinance: FHA has made it very easy for borrowers to refinance their existing FHA loans. If your mortgage is currently FHA insured, your payments have not been late, you are not taking cash out, and you are reducing your payment--you may qualify for the FHA Streamline Refinance Program. An FHA Streamline Refinance typically does not require an appraisal
203(k) loan: FHA insures rehabilitation loans for owner-occupants, municipalities and non-profit housing providers to finance 1) rehabilitation of an existing property, 2) rehabilitation and refinancing of a property, and 3) the purchase and rehabilitation of a property.
Investors must have a 15 percent down payment and can purchase (or refinance) and rehabilitate properties for rental purposes or sell the property (and get their profit using the Escrow Commitment Procedure) to a qualified Homebuyer (who assumes the loan).
203(k) can be used with one- to four-family dwellings, condominiums and HUD homes that require a minimum of $5,000 in repairs. CO-OPS ARE NOT ELIGIBLE. Garden apartment style row housing can be converted with 203(k) to fee simple or condominium with the addition of firewalls every four units. 203(k) loans can be used to bring illegal dwellings into code compliance.
Mixed use residential property is acceptable provided the property has no greater than 25 percent for a one story building; 33 percent for a three story building; and 49 percent for a two story building of its floor area used for commercial (storefront) purposes. The rehabilitation funds can only be used for the residential functions of the dwelling and areas used to access the residential part of the property.
Reverse mortgages for seniors: Homeowners sixty-two and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes.
Homeowners can receive payments in a lump sum, on a monthly basis, or on an occasional basis similar to a line of credit. Under certain circumstances, homeowners may restructure their payment options.
Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. The reverse mortgage is repaid in one payment, after the death of the borrower, or when the borrower no longer occupies the property as a principal residence. Upon sale of the home, any remaining equity goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lending institution the amount of the shortfall.
The maximum amount of the reverse mortgage is determined by multiplying the maximum claim amount by the factor corresponding to the age of the youngest borrower and the expected rate. It is beyond the scope of this document to present the factorial tables required to calculate your particular maximum loan amount.
Home Improvement FHA Title 1 loans: Under Title I, FHA insures loans obtained for repairs, alterations, and improvements to existing structures, and for the building of small new structures for nonresidential use. The property can be non-residential, multi-family, or single-family. Interest rates on these loans are set by HUD-approved lenders.
For answers to your FHA questions, call 1-800-CALLFHA.
FHA loan programs are particularly beneficial to those buyers with less available cash. The rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans.
Some of the other benefits of FHA financing:
- Only a 3 percent down payment is required.
- Closing costs can be financed.
- Lower monthly mortgage insurance premiums and, under certain conditions, automatic cancellation of the premium.
- More flexible underwriting criteria than conventional loans
- FHA limits the amount lenders can charge for some closing cost fees (e.g. the origination fee can be no more than 1% of mortgage).
- Loans are assumable to qualified buyers.
VA guaranteed loans are made by lenders and guaranteed by the U.S. Department of Veteran Affairs (VA) to eligible veterans for the purchase of a home. The guaranty means the lender is protected against loss if you fail to repay the loan. In most cases, no down payment is required on a VA guaranteed loan and the borrower usually receives a lower interest rate than is ordinarily available with other loans.
Other benefits of a VA loan include:
- Negotiable interest rates.
- Closing costs are comparable and sometimes lower - than other financing types.
- No private mortgage insurance requirement.
- Right to prepay loan without penalties
- The Mortgage can be taken over (or assumed) by the buyer when a home is sold.
- Counseling and assistance available to veteran borrowers having financial difficulty or facing default on their loan.
Although mortgage insurance is not required, the VA charges a funding fee to issue a guarantee to a lender against borrower default on a mortgage. The fee may be paid in cash by the buyer or seller, or it may be financed in the loan amount.
A VA loan can be used to buy a home, build a home and even improve a home with energy-saving features such as solar or heating/cooling systems, water heaters, insulation, weather-stripping/caulking, storm windows/doors or other energy efficient improvements approved by the lender and VA.
Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program. A Certificate of Eligibility from the VA must be presented to the lender to qualify for the loan.