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 permanent?
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 property.
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 your profile.
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 “debt-to-income” ratio.
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 allowed?
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 allowed?
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 credits allowed?
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 agent.
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.
