* Updated July 2011
With the credit crunch and constricting mortgage availability, FHA loans have recently become more appealing to buyers. Loan officers at Wells Fargo and Response Mortgage have told me they’ve seen a significant increase in FHA backed loan applications over the last few months. FHA is not a lender so they do not actually provide the funds. Rather, FHA insures loans that meet specific criteria, which is usually a bit more lenient than for conventional loans. As a result, FHA provides homeownership opportunities for people who may not otherwise qualify under conventional guidelines.
Here’s an overview of FHA benefits and requirements. The following is only a summary about the program and should not be considered exhaustive. Although, this provides a good starting point for buyers, for more concise information regarding FHA, please consult your loan officer.
Benefits of FHA loans:
- A minimum investment of 3.5%. This can include a combination of borrower paid down payment and closing costs, or gift funds. Most conventional loans today require 5% down or greater, not including closing costs. Some costs are excluded such as discount points, prepaid items, seller paid closing costs, etc.
- Lower minimum FICO requirement, making loans available to those who don’t have high enough FICO scores for a conventional loan. For the 3.5% down payment option, a borrower will need at least a 580 FICO score. For borrowers with a FICO score under 580, a 10% down payment will be required. Many lenders, however, require at least a 620 FICO score.
- More lenient qualifying ratios of 31% front-end (gross income / PITI) and 43% back-end (gross income / PITI + other monthly liabilities). The conventional loan qualifying ratios are 28% and 36%, respectively. FHA allows buyers to use a higher percentage of their income towards housing costs.
- People with bankruptcies may qualify. For Chapter 7, borrowers may be eligible two years from the discharge date. For Chapter 13, borrowers may be eligible while in repayment status.
- Allow for seller concessions and contributions up to 3% of the sales price. This is above and beyond the buyer’s 3.5% contribution. Examples of seller constributions include closing costs, prepaid expenses, discount points and interest rate buy-downs.
- Cash reserves are not required, except for 3 or 4-unit properties.
- Gift funds are acceptable. All funds can come through via a gift; the gifter must be someone close to the buyer such as family, significant other or friends with a justification letter.
- Loans are assumable, provided the prospective buyer qualifies.
- There is no pre-payment penalty.
Specific to FHA:
FHA loans are subject to a maximum amount depending on location. For King, Pierce and Snohomish Counties, the maximum loan amount is $567,500 through September 30, 2011 (as part of the housing stimulus bill). Thereafter, the maximum loan amount will decrease to $506,000.
FHA requires two types of mortgage insurance premiums (MIP) – up-front and annual. The up-front MIP is 1.00% of the base loan amount and can be added to the total loan amount or paid in cash at closing. The annual MIP is termed annual but paid monthly. On a 30-year fixed the premium is 1.15% of the base loan amount, which is applicable for a minimum of 5 years and cancelable when LTV reaches 78%. Two important notes regarding the annual MIP: 1) even if the LTV drops below 78% the buyer must wait 5 years before they can cancel the MIP, and 2) it cannot be canceled for condos.
One loan limitation. FHA only insure loans for principal residences, so buyers are limited to one FHA loan at a time. There are exceptions for relocation, increased family size, divorce and if the borrower is a non-occupant co-borrower.
Who is eligible for FHA?
- U.S. citizens
- Permanent resident aliens
- Non-permanent resident aliens – must have an SSN and hold a valid visa or is eligible to work in the US as evidenced by an EAD issued by the U.S. Customs and Immigration Service. Acceptable visas include H1, L-1, E-1, TN, A Series and G Series.
FHA is not available to non-citizens who do not have lawful residence in the U.S. or individuals with diplomatic immunity.
As a result of Congressional reform actions this year, several enhancements were made to the FHA program. The FHA appraisal requirements were relaxed, the required $150 seller fee is no longer necessary and processing and underwriting were streamlined and standardized. Other changes include the expanded qualifying ratios, the increase in borrower investment 3.5% and a change in the up-front MIP percentage.
FHA and Condos:
For condominium purchases the condominium development must be approved by HUD in order to be eligible for FHA loans. To view a list of approved condos, click here. In Seattle, there are currently 325 condominiums that are HUD approved, though the list may not be up-to-date. Search for FHA approved Seattle condos.
Fortunately, developers are paying heed. New developments and conversion projects have applied for HUD approval from the onset.
Given the ever constricting conventional mortgage loan availability, FHA is becoming an appealing option for many buyers, particularly here in the Northwest. For more information or questions about FHA, we recommend buyers speak to a mortgage loan officer who has experience with FHA loans. Or, contact us and we’ll put you in touch with our FHA loan specialists.
Here’s a few recent FHA resources from the ‘net:
– Let FHA Loans Help You, the official HUD/FHA website
– A Solution for FHA Buyers Searching for a Down Payment, The Mortgage Porter
– FHA is waiting to give you a loan, The Seattle PI