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What is an FHA Mortgage Loan?

An FHA Mortgage loan is a loan that is insured by the Federal Housing Administration (FHA). FHA does not actually provide the loan; it insures the mortgage for the lender. Should the borrower on an FHA mortgage default the lender may receive payment from FHA for their losses. This insurance coverage reduces the lenders risk and makes them more able or likely to offer a borrower a loan. An FHA mortgage loan may be for the purchase of a home that the borrower plans to live in, or the refinance of a home they already live in. FHA Mortgage Loan

FHA Mortgage Loans are popular with first time buyers and those who do not have large amounts of money to put down on their home purchase since the required down payment can be as low as 3.5%. This makes it possible for many first time buyers to actually buy a home without saving a larger down payment which is typically required in a conventional loan. A borrower will need to document an income sufficient to support the repayment of the mortgage. Some of the documentation to support a borrower’s income often includes pay stubs, prior year W2 or 1099's, and copies of Federal 1040 tax forms. How much of a borrowers income may be used to purchase a new home is usually limited to ratios of 31/43. That means up to 31% of a borrowers gross wages may be used to repay the mortgage, and up to a total of 43% may be used to repay all debt including the mortgage, car loans, student loans, credit cards and other debts.

An FHA mortgage loan may be more forgiving credit wise than a conventional loan. Bankruptcies, foreclosures, short sales, collections, repossessions in the past do not mean a borrower cannot get an FHA mortgage loan. A borrower must prove that prior credit troubles are in the past if they have had troubles in the past.

There are no income limits in FHA mortgage loans, but there are maximum loan amounts. These vary by county, if you would like to look up the maximum loan amount in the area you would like a loan, check here.

FHA Mortgage LoanThe mortgage insurance on an FHA mortgage loan is comprised of two parts. There is an up-front payment, and a monthly payment. The up-front is called the UFMIP, the Up-Front Mortgage Insurance Premium. Almost every borrower finances this in their loan. The monthly payment is paid as a part of the monthly mortgage payment to the lender.

There has been a great deal of conversation recently about changes that FHA has either proposed or actually made:
- There is talk if increasing the down payment from 3.5% to 5%, just talk right now. 
- There is talk of reducing the maximum concession from a seller which is currently at 6% to 3% of the sales price, there is just talk about this change right now. 
- There is talk of an actual credit score minimum for maximum financing (putting down just the minimum down payment).  Currently there is no official minimum credit score by FHA for any FHA mortgage loan although it is a common practice among lenders to require a 620 credit score for any FHA loan.  No formal change yet.  The talk of a formal score requirement is a rumor here even though the industry practice is already in place.
- Troubled loans are now weighing on FHA's capital reserve fund, which has fallen to below its Congressional mandated minimum of 2 percent, from over 6 percent two years ago.  To replenish these funds on case numbers issued after April 5, 2010 the Up Front Mortgage Insurance will increase from 2.25% from 1.75%.  This is more than talk and is now policy. 
- There is talk of increasing the monthly mortgage insurance premiumas well, this is just talk right now.
- There is a temporary waiver in place for 1 year from 2/1/2010 on the waiting period for resale of homes owned by a seller for less than 90 days.  There are several requirements to this waiver, but this should help in moving recently renovated previously foreclosed homes.
- Last year FHA instituted some major changes it condo approvals basically eliminating all standing condo approvals and requiring a complex become re-approved and do so every 2 years.  There are 2 methods of obtaining condo approvals now, one where the lender approves the complex, and one where FHA approves the complex.  This change is in effect already, any talk about it is just grumbling from lenders about the lender condo approval process.

The Federal Housing Administration was created in 1934 and became a part of Department of Housing and Urban Development in 1965. FHA has insured over 34,000,000 loans since its inception and currently insures more than 4,800,000 loans. It has helped increase the home ownership rate in the United States of America from about 40% to almost 70%. It is a Federal program that does not cost the American taxpayer. All costs of the insurance are paid for by borrowers who obtain FHA mortgage loans.

This article is meant to talk in general terms and provide an overview of an FHA mortgage loan. Every borrower has their own situation, to discuss specifics of your situation please call or email.

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If you or someone you know is thinking of buying or selling property in Connecticut or is looking to refinance their home in Connecticut -Please give Jon Sigler, Mortgage Banker (NMLS#119288) a call at 860-306-8029. Be sure to check out Jon's website www.4fhaloan.com and his blog.

As quoted in the New York Times "A Little-Known Loan Program", and in the Hartford Courant "Moving In:Couple Combining Households Buys In Newington" and "Moving In... New Britain"

Connecticut Magazine 2013 Five Star Mortgage Professional Award Recipient

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This is not an offer or commitment to lend. Articles, information and commentary are offered for informational purposes only, and should not to be relied on as legal, tax or financial advice. Consumers should retain their own legal, tax and financial professionals for such advice.

18 commentsJon Sigler • March 17 2010 10:30PM

Comments

FHA is a great program for many buyers.  It is probably going to be changing soon from what I am hearing, so if everything else makes sense, it is a good time to buy before these changes go into effect.

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) over 4 years ago

They are one of the greatest tools used to sell homes but I think they will become a thing of the past soon enough.

Posted by Charles Stallions, 800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl. (Charles Stallions Real Estate Services ) over 4 years ago

Joan, FHA will be increasing the cost of the Up Front Mortgage Insurance premium in April from 1.75% to 2.25%.  Any other changes are currently speculation, but include a change to the monthly insurance premium, and a possible increase of the minimum down payment to 5%.  Even with those changes it is still an amazing program that helps countless home buyers achieve their dreams of home ownership.

Charles, no doubt FHA will lose some of its "favor" as conventional mortgage insurance programs return with high loan to value offerings.

Posted by Jon Sigler, Connecticut FHA VA USDA Mortgage (Embrace Home Loans, NMLS#119288) over 4 years ago

Jon - Amazing how many people are using FHA loans.  These were designed for people with little to no credit and moderate to low income.  Now I have six figure wage earners seeking loans insured by FHA.

Posted by Nevin Williams, Raleigh Mortgage Pro (Sierra Pacific Mortgage Raleigh) over 4 years ago

Nevin, agreed.  FHA Loans have really become mainstream.  It is a great thing.

Posted by Jon Sigler, Connecticut FHA VA USDA Mortgage (Embrace Home Loans, NMLS#119288) over 4 years ago

Jon:

ALthough I think most of us "know" what an FHA loan is already, I think there were a lot of details that you provided that are worthwhile new information. Thanks,

Posted by Agent Aaron Vaughn, REALTOR® Listing Specialist, The $500 Million Marketing Advantage (Capitol Home Team | Austin TX) over 4 years ago

Jon, Thanks for the detailed explanation of a FHA loan. It's a great program that keeps lots of people in the home buying market that would not otherwise qualify.

Posted by James J. Weber (Davis R. Chant Realtors) over 4 years ago

Jon, great informative blog.  I think FHA might be the last man standing before long.  It looks like the alternatives are going by the wayside.

Posted by Damon Gettier, Broker/Owner ABRM, GRI, CDPE (Damon Gettier & Associates, REALTORS- Roanoke Va Short Sale Expert) over 4 years ago

Hey Jon! Great information here.  I am glad that FHA decided to raise the upfront mortgage insurance rather than the monthly mortgage insurance. This is of great benefit to buyers in helping to keep the monthly payment down.

Posted by Eric Boucher, The FHA/VA Condo Project Approval Guy (ReadySetLoan Condo Team LLC) over 4 years ago

I really appreciate the blog you posted. This was very informative information and easy to read! Thanks so much for posting.

Posted by Kendra Dempsey (RE/MAX Rewards) over 4 years ago

Kendra, Thanks for the reblog!

Eric, not sure if they are going to raise the monthly premium that has not been determined yet.  Certainly if that is raised it will further reduce a potential buyers purchase ability.

Damon, FHA has been a "Steady Eddy", and it has been hit like everyone with losses, that is the reason for the increase in the raising of the UFMIP and the potential increase in monthly MIP.  Both are to raise the funds for the FHA insurance fund.

James, FHA has performed very well at what it was designed for, to increase home ownership by making mortgage funds available.

Aaron, I hope that these many changes FHA is making will improve the program and insure it is here for years to come.

Posted by Jon Sigler, Connecticut FHA VA USDA Mortgage (Embrace Home Loans, NMLS#119288) over 4 years ago

Jon, correct me if I'm wrong, but aren't all FHA loans assumable? Assumable loans are a must right now. When the owners sell in 5 to 10 years, and the rates are much higher, assumable loans will make the properties much more marketable.

Posted by Anonymous over 4 years ago

Hi Jon -- I have had a few buyers last year and one this year use FHA and it's a good lifeline in this struggling housing market.  FHA also seems to be gaining market share, not surprisingly.

Posted by Chris Olsen, Broker Owner Cleveland Ohio Real Estate (Olsen Ziegler Realty) over 4 years ago

It's funny how I still get people thinking that FHA loans are for people with bad credit or that can't afford a home.  But I guess it's our job to educate them.  Have a great day!

Posted by Mike Wilbur (Guild Mortgage Company and Oregon Homes For Heroes) over 4 years ago

FHA seems to be THE loan right now -- thanks for the great post and explanation.

Posted by Pam Turner, REALTOR®, e-PRO®, SFR (Century 21 Belk Realtors Dalton GA) over 4 years ago

Thanks for the simplified explanation of FHA loans, Jon.  I THINK I know the basics about FHA, but then, so much information is out there on so many real estate subjects, that sometimes I don't know what I don't know. :)

It is a great program, and I hope it continues for a long time.

Sarah

Posted by Sarah & John Rummage, BPOR, ePro, Realtor (Benchmark Realty LLC, Brentwood, Nashville TN 615.516.5233) over 4 years ago

To the commenter who didn't leave a name:  FHA loans obtained after December 1, 1986 require the approval of the buyer by the lender servicing the loan.  Which is very similar to that of obtaining a new loan.  Since they require approval, I'd answer the question that they "might" be assumable.  FHA has published a page with some FAQ's on assumptions here.   Sure as interest rates rise, a loan with a lower interest rate can certainly become a selling point for a seller.

Chris, FHA Mortgage Loans have gone from a 4.12% share to a 21.72% share over the past 4 years of purchase loans according to this report on HUD's web site.

Mike, It is amazing the number of people who think there is a negative stigma to an FHA loan.  Almost like a billboard will be in their front yard, HEY WE HAVE AN FHA LOAN.  They are great loans, they do not deserve that rap.

Pam, FHA loans sure are THE loan right now.

Sarah, It is hard enough to know one side of the business with what we do, especially with all the changes going on.  To know some good basics and have quality professional partners is the key to our success.

Posted by Jon Sigler, Connecticut FHA VA USDA Mortgage (Embrace Home Loans, NMLS#119288) over 4 years ago

Hello Jon,

What a terrific and informative post about FHA Financing.  Thank you for your excellent article!

Rita

 

Posted by Rita Minion (O'Brien Realty) over 4 years ago

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