What you need to know about FHA loans and why they are GOOD for Buyers…

What is the Federal Housing Administration?

The Federal Housing Administration, generally known as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family, multifamily, manufactured homes and hospitals. It is the largest insurer of mortgages in the world; insuring over 34 million properties since its inception in 1934.

What is FHA Mortgage Insurance?

FHA mortgage insurance protects lenders against loss if the homeowner defaults on their mortgage loan. The lenders bear less risk because FHA will pay the lender if a homeowner defaults on their loan. Loans must meet certain requirements established by FHA to qualify for insurance.

Why does FHA Mortgage Insurance exist?

Unlike conventional loans, FHA-insured loans require small down payments. There is more flexibility in an FHA loan than conventional loans in calculating household income and payment ratios. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property-whichever is longer.

How is FHA funded?

FHA operates entirely from self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.

What this means to you…

Effective March 6, 2008, HUD will offer temporary FHA loan limits and the Economic Stimulus Act of 2008 permits FHA to insure loans on amounts up to 125 percent of the area median house price.

The new FHA loan limits in Orange and Seminole Counties are $353,750. Some of the other features of FHA loans are:

ü 96.5% Loan To Value Maximum – which means you can borrow all but 3.5% of the purchase price of a home…and in many cases with non-profit, gifting and seller contributions, you can own the home with little to no money down.

ü Mortgage Insurance at a rate of 2.25% of the sale price for 5 years is required– (this is how they make money)

ü 45% Debt-To-Income is as high as you can have. Simply put, your house payment and all of your other debt payments (car loans, credit card debts, etc) cannot be more than 45% of your monthly income.

ü No specific credit score is required…Rather, you must have acceptable payment history. Although your credit score is usually a good indication of your payment history, there is an independent review of credit blemishes such as unpaid medical bills, repossessions and bankruptcy.

ü FHA loans are assumable for qualified buyers

ü Non-Occupying Co-Borrowers are Allowed (co-signers) THIS IS A HUGE win for Buyers who would like to help their family members to buy a property…think of this, a couple has a student going to college. The student needs somewhere to live…the parents can co-sign a mortgage with them and the home is not treated as an “investment” purchase…which means the student can build their own credit AND the parents get a lower interest rate!! A win-win!!

ü Traditionally Underwritten-Which means that a person, rather than a computer, approves or denies a file based on the overall situation. This allows for more flexibility and acceptance of some financial mishaps by providing “explanation” letters to the file reviewer (the “underwriter”)

ü If the house needs repairs required by the Appraiser, they can now be added to the mortgage amount

ü Deferred Student Loans can be taken from Debt-To-Income calculation

ü The FHA has eliminated paperwork and has made its appraisal more similar to conventional appraisals

ü FHA no longer mandates automatic inspections for termite, well, flat roof, or septic – only IF something comes up on the appraisal that affects the health and safety of the occupants or the security and the soundness of the property

ü Mortgage Amount can be increased for required repairs (if appraised value allows)

For more information on FHA Loans and how to apply for one, please feel free to contact one or all of the lenders below: 

Email: msmalley@waterstonemortgage.com