Dear Kari,
My brother and his wife just bought a house with a loan called an FHA and they are bragging about how smart their loan choice was.
My wife and I are a little ways away from purchasing. We are working on saving up our down payment, but we are intrigued about FHA loans.
Can you shed some light on this for us?
Answer:
FHA stands for Federal Housing Administration, and it was established in the 1930s as an insurance agency within the Department of Housing and Urban Development (HUD).
The Federal Housing Administration insures mortgage loans against default, which reduces the lenders’ risk.
The goal is to promote homeownership among the underserved, such as first-time homebuyers with limited down payment funds.
However, FHA may also be a suitable option for many other borrowers. A mortgage professional can offer guidance in choosing the correct loan product for your needs.
The FHA offers a Consumer Credit Counseling program for anyone who believes they may have credit issues in obtaining a loan.
Their credit counselors can address issues and help with understanding income-to-debt ratios. You can contact an FHA lender to get started or search for an FHA lender near you.
Often, FHA loans make it easier for some people to qualify since they have more flexible underwriting guidelines than conventional (non-FHA) loans.
For example, gift funds from a family member may be used for down payment. The home seller can make contributions to the buyer’s closing costs. Non-occupying co-borrowers may be used to help buyers qualify. Interest rates are competitive, even for those with lower credit scores. Cash reserves may not be required.
It’s important to know that lenders sometimes add requirements beyond what FHA requires (called overlays) that are more stringent.
Federal Housing Administration loan options include 15-, 20- and 30-year fixed rate as well as adjustable rate and all are eligible for refinance.
Purchase loans are assumable so buyers whose credit scores qualify them for an FHA loan may be able to take over the FHA loan on a property they wish to buy.
There are some nuances to these loans that are important to know.
The minimum credit score required is 620. Minimum buyer cash investment is 3.5 percent of the sales price. Investment and second homes are not eligible.
There are maximum loan amount limits set by region. For Sacramento County, the limit for a single family home is currently $580,000.
An Upfront Mortgage Insurance Premium (UFMIP) of 2.25 percent of the loan amount is required on every loan. This can be financed into the loan amount, however.
A mortgage insurance premium is also included with each monthly payment. When there is 22 percent equity in the home, the borrowers can request FHA to remove the monthly mortgage insurance.
Borrowers who were in default on their mortgage at the time of a short sale (or pre-foreclosure sale) are usually not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.
Three years is usually the wait period for those with a foreclosure.
For married couples, the debts of the other spouse are included in loan qualification even if that spouse is not on the loan application.
Any Chapter 7 bankruptcies must have been discharged for at least two years and good credit must have been reestablished.
Borrowers with Chapter 13 bankruptcies must show one year of satisfactory and on-time payment performance and have written permission from the court to enter into a mortgage.
One frequent question is whether or not alimony and child support can be considered income for FHA loan qualification.
These can be considered income as long as the borrower can prove that the payments are likely to be received consistently for the first three years of the mortgage.
Contact your local Realtor for good lender recommendations. Then start asking questions and find out as much as you can about home financing.
Kari McCoy has been a Realtor for 25 years and owns the Kari McCoy Group, Residential Real Estate, at Coldwell Banker.
