FHA has become the loan of choice. A high percentage of new purchase loans are being issued by FHA lenders.  The main reasons being they allow a lower fico score than conventional loans and the down payment is only 3.5%.  + The seller can contribute up to 5% towards closing costs.

On the other hand it is causing a new problem.  The deliquency ratio of FHA loans has increased causing many people to believe this may be considered the new “sub prime”. By not requiring buyers to put down sizable amounts to purchase their home it brings into question the viability of the borrower.  Perhaps this is why we are seeing minimum fico score requirements on the rise.

Learn How to Purchase a Home with Zero or Very Low Down Payment.

Currently there are several home loan programs available for 1st time home buyers and move up buyer to purchase with zero or low down payment and market interest rates.

These loans do not have pre-payment penalties so common in the sub-prime era. In fact, the FHA insured loan is now the most popular loan being used for home purchases.

FHA Loans – 3.5% Down Payment and seller can credit up to 6% of the purchase  price towards recurring and non-recurring closing costs.

VA Loans – Zero Down Payment.  Seller can contribute towards closing costs

USDA – 102% loan, seller can contribute towards closing costs.  Cash toward repairs if home is appraised higher than purchase price.  Many areas qualify.    Call for details.  For example: Battle Ground and Ridgefield cities are in the eligible area.

To get your FHA loan application off to the right start you will need to following documentation.  This will help your lender expedite the loan approval process.

FHA purchase loans:

Employment:

Most recent 2 years tax returns with all schedules

Most recent 2 years w-2’s, 1099’s and other

Most recent paystubs for past 30 days

Self-Employed – 3 Years tax returns with all schedules & YTD P&L

Savings:

Most recent 3 months bank statements – all pages

Most recent statements of: 401K, stocks, bonds, mutual funds, money market accounts, etc…

Credit:

Most recent statement of bills including monthly payment amount and current balance

If renting: copy of lease agreement or name and phone number of landlord or rental agency and copy of cancelled checks front and back side.

If No Credit Established:  Copy of montly bills and evidence of payments over 12 months.  Utility bills, phone bills, etc…

If prior or current Bankrupty:  Complete bankruptcy filing including discharge papers.

If Co-Signing for a car or other type of consumer loan:  copy of checks front and back showing you did not make the payments.

Personal Information:

Copy of Drivers License

Copy of Social Security Card

If applies: copy of divorce decree, palimony or alimony papers

If applies: copy of green card or work permit

If applies: if you own another home – see next section

Refinancing or Own Rental Home(s)

Copy of note and deed of trust

Copy of payment coupon

Copy of Hazard Insurance Policy

Copy of Propery Tax Bill

Rental agreements if the property is a multi unit building

UFMIP - Upfront Mortgage Insurance Premium is the insurance used to protect the lenders in the event of a mortgage default.   It is important to know how to calculate the UFMIP to arrive at your final loan amount and total monthly payment.  Learn how to calculate the maximum mortgage amount.

FHA Refinance Loans – Max Loan to Value (LTV) and UFMIP

Rate and Term Refinance – 97.75% Max LTV + 1.75% UFMIP

FHA to FHA Streamline with Appraisal – 97.75 Max LTV + 1.50% UFMIP

FHA to FHA Streamline without Appraisal – Lower of 2 calculations + 1.5% UFMIP

Cash out Refinances – 95% and 85% – 1.75% UFMIP

All cash out refinance transactions over 85% LTV will require a second appraisal.

Monthly MIP for Purchase loans, Full qualifying refinance loans and streamline refinances is as follows:

30 Year Mortgage

LTV < 95% = 50 Basis Points
LTV > 95% = 55 Basis Points

15 Year Mortgage

LTV < 95% = None
LTV > 95% = 25 Basis Points

FHA rules for Co-Borrowers and Co-Signers are important to understand before when pre-qualifying a borrower for an FHA mortgage.

(see 4155-1 for complete explanation and rules)

Borrowers, Co-Borrowers and Co-Signers. Borrowers and Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower’s income, assets, liabilities, and credit history are considered in determining creditworthiness.

Co-signers do not hold ownership interest in a property, but are liable for repaying the obligation and must sign all documents with the exception of the security instruments. The co-signer’s income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the co-signer must complete and sign the loan application.

Principal Residences

An FHA Insured mortgage is intended for owner occupied dwellings.   In other words, there is at least one borrower who intends to occupy the residence for the greater part of 1 year.  The borrower must occupy the residence within 60 days after signing the security instrument with continued occupancy for at least 1 year.

To prevent investors from circumventing the FHA insured mortgage program a borrower may only have one fha insured mortgage at a time.  There are exceptions to this rule, however.

Exceptions Include: (see 4155-1 for full guidelines)

• Relocations
• Increase in Family Size
• Vacating a Jointly Owned Property
• Non-Occupying Co-Borrowers

Secondary Residences - See 4155-1

Investment Properties – See 4155-1

Non Profit Organizations and State and Local Agencies – See 4155-1

FHA Debt to Income Ratios  are used in determining if a borrower has adequate income to make the monthly mortgage payment.    The debt to income ratio is not the final or only determining factor in obtaining an approval for an FHA insured loan.

The 1st ratio is the mortgage payment divided by effective monthly income.

Take the total of the monthly principal, interest, taxes and insurance + ufmip and divide that total sum by the monthly income and that will give you the first ratio which is a maximum of 29% to qualify.

The 2nd ratio is the mortgage payment + all recurring and installment consumer debt, such as: car loans, credit card payments, student loans  and so forth.  Add up the total sum of all payments plus the PITI of the new mortgage and divide by the monthly income and that ratio should not exceed 41%.

On a case by case basis the lender may approve higher ratios but this will usually be a result of significant compensating factors.

FHA Purchase Loans and FHA Refinance Loans have new loan to value (LTV) requirements that lenders, real estate agents and borrowers need to become familiar with as they become effective on Jan 1st, 2009.

FHA Purchase Loans

The HERA – Housing and Economic Recovery Act of 2008 revised the down payment requirements for FHA purchase loans.

1) Requires 3.5 percent down payment based on the appraised value of the property.

2) Eliminate the prior method of calculating down payment which included the combination of the property value and the closing costs average to the area where the proeperty is located.

As of Oct. 1st 2008 thru September 30th 2009 FHA purchase loans will require an upfront mortgage insurance premium (ufmip) of 1.75% which is added to the loan amount.

3) Limit the total fha insured mortgage to 100% of the appraised value of the property and include the (ufmip) upfront mortgage insurance premium within that limit.

Closing costs are not longer part of the calculation of determining the maximum mortgage amount. Thus, for purchase money mortgages the maximum LTV is 96.5 percent since the borrowers down payment is 3.5% based on the lessor of the appraised value of the property of the adjusted sales price less any required adjustments.

Sellers may credit up to 6% of the value of the sales price towards closing costs. Any amount over 6% must be subtracted from the sales price or value whichever is less before calculating the maximum mortgage amount.

The risk based pricing model has been done away with.

FHA Refinance Loans

Rate and Term Refinance – 97.75% Max LTV + 1.75% UFMIP

FHA to FHA Streamline with Appraisal – 97.75 Max LTV + 1.50% UFMIP

FHA to FHA Streamline without Appraisal – Lower of 2 calculations + 1.5% UFMIP

Cash out Refinances – 95% and 85% – 1.75% UFMIP

All cash out refinance transactions over 85% LTV will require a second appraisal.

Monthly MIP for Purchase loans, Full qualifying refinance loans and streamline refinances is as follows:

30 Year Mortgage

LTV < 95% = 50 Basis Points
LTV > 95% = 55 Basis Points

15 Year Mortgage

LTV < 95% = None
LTV > 95% = 25 Basis Points

FHA has what are called:  Allowable Closing Costs and Non-Allowable Closing Costs.

In the past before January 27th, 2006 there was a big difference as to which closing costs a borrower could not pay.   But, that has changed to make the program more in line with conventional mortgages.

Most fees that a borrower would see on a Good Faith Estimate can now be charged to the borrower accept for the Tax Service Fee which is still considered a non-allowable closing cost.   Therefore it would be typical for a borrower to pay for title insurance, escrow fees, processing fee, 1% loan origination, recording fee, notary, underwriting, doc prep, courier fees, pre-paid insurance and taxes and perhaps other misc. fees standard to the local area of the property.

Keep in mind that the seller is allowed to credit up to 6% of the purchase price towards closing costs which can certainly reduce the amount of funds the borrower would need to bring to closing.

What is an FHA Mortgage Loan?

HUD (Department of Housing and Urban Development) which was formed in 1965 operates the Federal Housing Administration which administers the Govenment Home Loan Mortgage Insurance Program.    This program insures the lender against default by a borrower whose home loan is insured by the FHA.  Hud and FHA do not make the loans – FHA only insures the loans.

FHA issues insurance for several types of loan programs.   FHA 203b is used for 1-4 units residential purchases and only requires 3.5% down payment which can be gifted from relatives, a government agency or non-profit organization.  The seller can contribute up to 6% towards closing costs.   The FHA 203b is also used for cash out refinances, rate & term refinances and streamline refinances.

FHA 203k is used for rehabilitation of 1-4 unit properties.

FHA 234c is used a condiminium loan

FHA 251 is an adjustable rate mortgage

Energy Efficient Morgage Program

Reverse Mortgages for Seniors

FHA Hybrid adjustable rate loans

FHA 2-1 Buydown