February 22nd, 2016 3:46 PM by NE TEXAS REALTY GROUP
17 Frequently Asked Questions on FHA Loans
Below are answers to the most common
questions about home loans backed by the Federal Housing Administration, also
referred to as FHA Loans.
1. What are Federal
Housing Administration Home Loans?
They are mortgages best suited for
borrowers with steady income, but without 20-percent down payments, including
first-time buyers, those trying to conserve cash, early-career borrowers, or
those with adverse credit history.
2. Do I get my loan
directly from FHA?
No. The FHA guarantees your loan but
doesn’t lend money. An FHA-approved lender approves and funds your loan, and
the FHA guarantees the loan for the lender.
3. Do FHA loans
benefit lenders or borrowers?
Both. If you miss payments due to
short-term hardship, the FHA can help (ask your FHA lender how). If you eventually go into
foreclosure, the FHA can cover lender losses. Because of this reduced risk,
lenders can offer very attractive FHA rates and down payments.
4. What’s the
catch? How can the FHA guarantee these loans?
All FHA borrowers pay Mortgage
Insurance Premiums (MIP). Currently (as of January 2015), FHA loans have 1.75-percent upfront MIP and
0.45-percent to 1.05-percent monthly mortgage insurance. The monthly
percentages change based on loan amount, down payment, and whether your loan
term is greater than or less than 15 years. The FHA’s MIP fund is used to help
borrowers and lenders.
5. Are MIP fees
The duration of monthly MIP varies
depending on loan amount, down payment, loan term greater than or less than 15
years, and when you put your loan in place.
You can also eliminate monthly MIP if
you gain enough equity in your home to eventually refinance into a non-FHA
mortgage (ask your lender for details). The upfront MIP can be financed, paid in cash, or
covered by a seller credit. It can be refunded on a prorated basis if you
refinance into a new FHA loan within 36 months.
6. What kinds of
FHA loans are available?
The most common FHA terms are 30-year
and 15-year fixed, but there are also adjustable rate options. These loans have
no prepayment penalties and are assumable by any qualified future buyer of the
7. How do FHA rates
compare to conventional rates?
FHA rates are the same and often
lower than Conventional Conforming loans. Your lender can do rate comparisons based on
8. Can I buy an
investment property or second home with an FHA loan?
No. FHA loans are for owner-occupied
property only. You must move into the property within 60 days of closing a
purchase, and must occupy the property for at least one year. After that, you
can change how you use the property.
9. What are the
basic qualifying rules for FHA loans?
You can have a credit score as low
as 580. Your total monthly housing obligation (mortgage payment, taxes,
HOA/insurance, mortgage insurance) plus all other debt (credit cards, student
loans, car loans, etc.) shouldn’t be more than 43 percent of your income, but
your lender can advise on any flexibility they might have on this
10. Do I need money
left over after I close?
There are no reserve requirements for
FHA loans, though you should strongly consider your reserves in relation to
your monthly obligation and income.
11. Are gift funds
Yes. Gift funds for some or all of
cash-to-close are allowed from family members or — in select cases — friends
that can be proven as long-term relationships. The gift donor will be subject
to federal gift tax rules.
12. Are co-signers
Yes. Co-signers are also allowed, and
the co-signer doesn’t have to live in the property. Your profile is combined
with their profile to qualify. The full loan amount and payment will show up on
the co-signer’s credit report.
13. Are seller
Yes. A seller can credit up to 6
percent of the sale price toward cash-to-close (which includes but cannot
exceed: closing costs, prepaid items, and mortgage insurance).
14. Are there
special FHA qualifications for single family homes?
Not really. Single family home
approvals for FHA loans are similar to conventional loans. If the purchase
contract or appraisal calls for pest work or deferred maintenance, this work
will need to be cured prior to the loan funding.
15. Are there
special FHA qualifications for condos?
Yes. A condo project must be approved
by your lender or by HUD (FHA’s regulator) prior to any unit in the condo
project being eligible for FHA financing. They review all the condo legal
documentation, budget, unit mix (residential versus commercial), occupancy mix
(owner-occupied versus rental ratio), and a number of other factors. Ask your
lender if a condo project you like is approved already. If not, these approvals
can take weeks, so plan accordingly with your lender and your real estate
16. Are FHA loans
relevant for higher-priced markets?
Yes. The national FHA loan limit is
$417,000, but limits go up to $625,500 in high-priced markets. With a
3.5-percent down payment in an FHA-designated high-priced market, you could buy
a home priced up to $648,000. And you could get up to a $695,000 price with a
10-percent down payment. It’s easy to look up FHA loan limits for your area.
17. What should I
do if I want an FHA loan?
You should find a lender to talk to about FHA loans before
looking at properties. Before you write an offer on any specific property, ask
your lender to review the property for FHA eligibility. Also make sure your
real estate agent and lender know if you’re seeking seller credits before you
write your contract.