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 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.
The 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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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, 2014, 2015 Five Star Mortgage Professional Award Recipient