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Welcome to FHA Mortgage Guide.

We take long-term mortgages for granted today, but it wasn't always that way. Long ago it was likely that if you financed a home you borrowed money with a five-year "term" mortgage -- and even then you needed 50 percent down. FHA's have changed dramatically, learn why! FHALoanPros.com is devoted to providing useful information about FHA Loans, but please note that neither FHALoanPros.com nor any of the products advertised on FHALoanPros.com are affiliated with or endorsed by the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), or other US Government department or agency.

How will FHA loan-limit changes impact borrowers?

admin
January 14th, 2014

Beginning January 1, 2014, new loan limits were put in place by the Federal Housing Administration (FHA). While the current standard loan limit in areas with low housing costs will remain the same at $271,050, the new limit for the highest cost housing markets have been reduced from $729,750 to $625,500 for a one-unit property. Loan limits vary by county, with approximately 650 counties impacted by this change.

The higher FHA loan limits have been in place since 2008 when they were established by Congress as part of the Economic Stimulus Act as an emergency measure to make sure that borrowers still had access to mortgage loans.

FHA refinancing and new loan limits

While the new loan limits apply to homebuyers who want to use an FHA 203b loan to purchase a home, they also apply to refinancing homeowners who currently have a conventional loan rather than an FHA loan. However, borrowers with an existing FHA loan who want to take advantage of the FHA streamline refinance program can refinance even if the size of their loan balance is above the new loan limits.

High-balance borrowers

Borrowers are attracted to FHA loans because FHA’s requirements in terms of credit guidelines are looser than the requirements for conventional loans, and these loans also require a down payment of just 3.5 percent. However, now that limits have been lowered, these borrowers will have several options to consider, such as:

·Buying a less costly house so that they can keep their loan amount under $625,500.

·Finding additional funds for a larger down payment to reduce the size of the loan. FHA loans allow gift funds to be used for a down payment, so some borrowers may be able to increase their cash availability with gifts from relatives.

Alternatives to FHA loans

Borrowers who need to borrow more than the FHA loan limits for their housing market will need to apply for a jumbo loan. In order to qualify for a jumbo loan, whether for a purchase or refinancing, borrowers typically need to make a down payment of 20 percent or more or have home equity of at least 20 percent. In addition, jumbo loan lenders typically want borrowers to have a credit score of at least 700 or higher and sufficient cash reserves to minimize the risk of the loan.

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Are lenders loosening up on FHA loans?

admin
November 18th, 2013

FHA-insured loans have been available since the 1930s when they were introduced as a method to help low- and moderate-income families become homeowners. These low-down-payment loans have waxed and waned in popularity over the years depending on what other loan products are available from lenders; but after the housing crisis, many borrowers turned to FHA lenders because FHA loan guidelines are generally looser than conventional loan requirements. Eventually, lenders began to add their own requirements above FHA mortgage requirements and consumers found it more difficult to obtain an approval even for these government-insured loans.

While the FHA requirements include a minimum standard set by the FHA such as a credit score above 580, most lenders require a credit score of 620 or 640 or higher. Some lenders have even higher standards.

Credit scores and debt-to-income ratios

A recent report from Ellie Mae, a company that provides mortgage loan data, shows that more consumers are being approved for FHA loans with lower credit scores and higher debt-to-income ratios than in 2012. For example, the average FICO score for FHA refinance loans in 2012 was 718; in September 2013, the average FICO score for an FHA refinance was 687. The average debt-to-income ratio in 2012 for an FHA refinance was 39 percent; in September 2013, the average rose to 40 percent.

For purchase loans, the average FHA credit score in 2012 was 700; in September 2013, the average credit score for an FHA purchase loan was 694. The average debt-to-income ratio for purchase loans for both periods was 41 percent.

FHA loan pros and cons

The number of FHA loans as a percentage of all approved home loans dropped from an average of 23 percent in 2012 to 19 percent of all mortgages in September 2013. One reason for this decline in popularity is that FHA loans, while they generally have lower mortgage rates than conventional loans, have higher mortgage insurance premiums. In addition, those premiums typically must be paid for the life of the loan.

FHA loans have value, though, for borrowers who have low home equity when refinancing or want to make a minimum down payment of just 3.5 percent when purchasing a home. In addition, the credit score requirements and debt-to-income ratios are looser than conventional loan guidelines.

Consumers who want to refinance or buy but have cash or credit challenges can compare both FHA loan and conventional loan options by consulting a mortgage lender.

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FHA needs government aid

admin
October 13th, 2013

The Federal Housing Administration (FHA), created during the Depression to help low income families become homeowners, has always touted its ability to fund itself through insurance premiums charged to borrowers. The agency helped revive the housing market after the most recent financial crisis by continuing to offer loans to borrowers with down payments as low as 3.5 percent and looser FHA requirements. According to Reuters, the FHA insures approximately $1.1 trillion in mortgages.

On September 27, 2013, for the first time in its 79-year history, the FHA requested an infusion of cash from the U.S.Treasury to shore up its reserve fund. By law, the FHA must keep a two percent capital ratio in its reserve fund. The agency has more than $30 billion in cash and investments currently available to pay potential claims, but an additional $1.7 billion is required to meet the two percent ratio.

FHA guidelines

FHA insurance provides an incentive for lenders to loan money to individuals without requiring additional cash for a bigger down payment or significant personal cash reserves because the agency’s insurance will pay the lenders if the borrowers default. FHA loan guidelines allow for lower credit scores than conventional loans. While the FHA guidelines say that borrowers can have a credit score as low as 580, FHA lenders typically require a credit score of 620 or 640 and above.

The FHA has taken steps in recent years to tighten loan standards and has raised FHA insurance premiums to build up its reserve fund. Although the agency needs the cash to fulfill its reserve requirement, FHA Commissioner Carol Galante told Congress that loan performance is improving. The number of FHA loans that are delinquent has fallen to the lowest level in three years. However, rising mortgage rates earlier this summer slowed the pace of new FHA loan applications, which meant that revenue from insurance premiums was lower than anticipated.

While FHA loans are certain to continue attracting buyers and homeowners who want an FHA refinance, higher mortgage insurance premiums on the loans have led some borrowers to pursue conventional financing even if it means they must make a larger down payment. Those borrowers must have good credit to get the lowest mortgage rates, though, while FHA mortgage requirements offer the same mortgage rates to all borrowers regardless of their credit score.

Every borrower should compare FHA loan rates and conventional loan rates to find the loan product that meets their needs.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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FHA mortgage offers comeback for bankrupt borrowers

admin
September 13th, 2013

The housing crisis and the recession crushed a lot of Americans who lost their jobs and their homes in an economic tsunami that spread throughout the world. Now the FHA is offering a chance for some of those consumers to qualify for a new home loan. New FHA guidelines announced August 15, 2013, in Mortgagee Letter 2013-26 say that borrowers who meet certain criteria and qualify for a loan under FHA requirements will be able to apply for an FHA loan without the usual mandatory waiting period after a foreclosure, short sale or bankruptcy.

The new program, known as “Back to Work — Extenuating Circumstances” applies to FHA loans issued between August 15, 2013, and September 30, 2016, and is available for purchase loans and refinancing.

Standard FHA loan guidelines for credit scores and debt-to-income ratio and full documentation of income, job history and assets must be met.

FHA requirements

In addition to meeting general FHA requirements, borrowers must provide documentation that they experienced what the FHA calls an “economic event.” The event, which must be either unemployment, the loss of income or both, must have caused a reduction in the borrowers’ income of 20 percent or more for at least six months or more. Besides providing proof of the economic event, borrowers must prove that they had good credit before the job loss or loss of income and that any subsequent bad credit was a result of the economic event.

Borrowers must also prove they have fully recovered financially from the event. Their credit history must be clear of any late payments for at least 12 months on installment debt and mortgage or rent payments and clear of any major derogatory issues on revolving credit accounts. No collections or judgments can be part of the credit report unless they involve medical bills or identity theft.

The FHA also requires borrowers to participate in an FHA-approved housing counseling program before a new FHA loan can be approved.

FHA lenders must verify that at least one year has passed since the foreclosure, short sale or bankruptcy and that the economic event was directly responsible for the bankruptcy or foreclosure rather than any irresponsible behavior by the borrowers.

FHA loans carry higher mortgage insurance premium costs than conventional loans, but they are often the only option for borrowers who have experienced credit issues or financial challenges in the recent past.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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Looking for a low rate? Try FHA

admin
August 14th, 2013

Home buyers and homeowners interested in refinancing have been keeping watch over mortgage rates in recent weeks, waiting for the right window to lock in the lowest available rates. Government-insured FHA rates are typically lower than the mortgage rates on conventional home loans, so some borrowers may want to compare payments and fees on both types of home loans.

FHA rates

According to HSH.com, interest rates on 30-year fixed-rate loans averaged 4.01 percent for conventional conforming loans during the week ending May 31, 2013. FHA 30-year fixed-rate loans averaged 3.64 percent during that same week. On a $300,000 loan, the FHA loan would have a lower principal and interest payment of $63 per month, which comes to $756 per year and $22,680 over the life of the loan.

The difference between conventional and FHA loan rates varies along with fluctuating mortgage rates and borrowers also need to consider the additional costs associated with both loans. All FHA lenders are required to charge both an up-front and annual mortgage insurance premium regardless of the size of a borrower’s down payment or home equity. Conventional lenders only charge private mortgage insurance on borrowers who have less than 20 percent home equity or are making a down payment of less than 20 percent of the purchase price.

Factors impacting mortgage rates

The actual mortgage rate on a loan approval varies from one borrower to another and is influenced by a variety of factors, particularly for conventional loans, such as:

  • Credit score - Conventional mortgage rates are incrementally higher for borrowers with a credit score below 740, so borrowers with a lower credit score may be better off with an FHA loan. FHA rates don’t adjust according to borrower’s credit scores.
  • Loan-to-value - Conventional loans often carry higher interest rates if the loan-to-value is less than 20 percent; FHA loans have the same interest rates regardless of the amount of home equity or down payment.
  • Points – Mortgage rates are often quoted with discount points, so be certain to compare loans with either zero discount points or the same number of points.

When deciding between FHA mortgage loans and conventional loans, borrowers should compare mortgage rates, lender fees and mortgage insurance before choosing a loan.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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What does it take to qualify for an FHA loan?

admin
August 13th, 2013

After the housing bubble burst, conventional lenders stopped offering low- and zero-down-payment financing and upped their requirements for credit scores. Borrowers today are scrutinized more carefully, regardless of whether they choose an FHA-insured loan or conventional financing. As the FHA itself began to have reduced reserves, the agency revised FHA guidelines for lenders. FHA lenders can also establish their own loan requirements, such as a higher credit score or a lower debt-to-income ratio.

FHA mortgage requirements

FHA mortgage requirements are based on the borrower’s credit profile and the appraised value of the home. To qualify for an FHA loan, a lender will review:

Credit score: While the FHA itself says that borrowers must have a credit score of 580 or above in order to buy a home with 3.5 percent down or to refinance with as little as 3 percent in home equity, most lenders require even FHA borrowers to have a credit score of 620 or 640. In May 2013, the Ellie Mae Origination Insight Report showed that the average credit score for an approved FHA refinance was 704, while the average score for an approved FHA purchase loan was 697.

Loan-to-value: FHA loans require 3.5 percent as a down payment or 3 percent to refinance, but Ellie Mae says that the average loan-to-value for an FHA refinance in May 2013 was 87 percent.

Debt-to-income ratio: FHA underwriting guidelines allow for a debt-to-income ratio up to 43 percent, but lenders may have a lower threshold for that ratio. Ellie Mae’s research shows that the average debt-to-income ratio for FHA refinances in May 2013 was 39 percent, while the average ratio for purchase loans was 40 percent.

FHA mortgage insurance

While FHA lenders and FHA itself have tightened guidelines for borrowers, the FHA has also increased the amount of mortgage insurance borrowers must pay and extended the length of time the insurance premiums are required. In some cases, borrowers will have to pay mortgage insurance for the entire term of their loan.

Borrowers should compare FHA and conventional financing options before choosing the right loan program for their financial needs.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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FHA loans decline in popularity

admin
August 13th, 2013

Government-insured FHA mortgage loans have been in existence since the 1930s as a way to help low and moderate-income borrowers afford a home. FHA guidelines have always allowed lower down payments and looser credit qualifications than conventional financing; but during the freewheeling time before the housing bubble burst in 2003-2007, conventional loans were just as easy to obtain and many had zero-down-payment options so FHA loans were less popular. After the housing crisis, borrowers turned to FHA loans for low-down-payment financing. At their peak in 2009, FHA 203b loans were 32.6 percent of all new mortgage loans. In 2012, FHA loans dropped back to just 14.6 percent of all new home loans.

FHA requirements

Since 2009, FHA loan guidelines have changed. Mortgage insurance premiums are now required for a minimum of 11 years on all FHA loans and for the life of the loan on all FHA loans with a down payment of less than 5 percent. The mortgage premiums have gone up to 1.75 percent for up-front mortgage insurance and 1.35 percent in annual mortgage insurance, which means buyers of a $200,000 home are required to pay an extra $3,500 in initial loan costs which can be wrapped into the loan balance. In addition, FHA borrowers must pay $225 per month for their mortgage insurance.

FHA approved lenders have raised their credit standards along with conventional lenders. The average credit score for an approved FHA loan, according to the FHA, was 695 during the second quarter of 2013.

FHA loan advantages

In spite of higher credit standards and higher mortgage insurance costs, many consumers still opt for an FHA loan. FHA loans are appealing for several reasons:

  • Higher loan limits. Conventional loans are limited to $417,000 or to $625,500 in markets with higher housing costs; but in those high-cost markets, FHA loan limits go up to $729,750.
  • Lower interest rates. FHA interest rates are typically slightly lower than conventional loan rates. For example, during the week ending July 19, 2013, conventional 30-year fixed-rate mortgage rates averaged 4.60 percent, while 30-year fixed-rate FHA loan interest rates averaged 4.22 percent.
  • Looser credit standards. Even though FHA lenders have tightened their standards, these loans are still a little easier to qualify for than a conventional loan. In addition, FHA interest rates are the same regardless of the borrowers’ credit scores, while conventional loans have higher rates for borrowers with lower credit scores.
  • Lower down-payment requirements. Few conventional loans are available with a down payment of less than 5 percent and many lenders require a higher down payment, particularly for borrowers with credit issues. FHA loans require only 3.5 percent as a down payment.

Consult a lender to compare both conventional and FHA loan options before choosing a mortgage.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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Is a bailout in FHA’s future?

admin
May 14th, 2013

The Obama administration estimates that the FHA could need an infusion of cash from taxpayers of nearly $1 billion, according to a report on April 10, 2013. The agency, which insures approximately $1.1 trillion in mortgage loans, faced a projected deficit of $16.3 billion in November 2012 according to an independent audit.

Since that audit, FHA mortgage requirements have changed in order to increase the size of the agency’s cash reserves. FHA Commissioner Carol Galante says that policy changes could bring in as much as $18 billion in 2013.

Some of the changes to FHA 203b loans in 2013 include increased mortgage insurance premiums and, in some cases, the requirement to continue paying mortgage insurance for the entire term of the loan.

FHA approved lenders have tightened some of their guidelines, too, so that home buyers and borrowers who want to refinance with an FHA loan now must have a credit score of 620 or 640 or above for most lenders, a debt-to-income ratio of no more than 43 percent and sometimes less, and documented income and assets.

However, the Obama administration estimates that risky FHA loans made as housing values dropped could result in losses of as much as $943 million.

How do FHA problems impact consumers?

Since the FHA was created during the Depression it has functioned as a source of funding available to all homebuyers and homeowners who qualify but primarily geared to borrowers with a modest income and to first-time buyers. However, FHA loan limits are higher in 2013 than loan limits for conventional financing in communities with high cost housing. For example, the conforming loan limit in Washington, D.C. for a conventional loan is $625,500, but the loan limit for an FHA loan in that area is $729,750.

Greater scrutiny of FHA borrowers and higher mortgage insurance premiums are two consequences that have already impacted FHA borrowers, but critics of the government agency believe loan requirements should be tighter to avoid future loan defaults.

Whether this bailout actually occurs and the consequences for future FHA guidelines remains to be seen.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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FHA mortgage insurance premiums shift in 2013

admin
April 10th, 2013

FHA loan rates, while often slightly lower than conventional mortgage rates, are off-set by the fact that borrowers must pay both upfront and annual mortgage insurance on these loan products. Insurance premiums jumped again in April and additional changes to the program will take effect June 1, along with other new FHA requirements that are aimed at reducing the number of FHA loan defaults and increasing the funds available to reimburse lenders for those loans that do go into default.

FHA mortgage insurance

Upfront insurance premiums for both purchase mortgages and refinancing mortgages remain the same in 2013 at 1.75 percent, but new annual mortgage insurance premiums (MIP) on FHA 203b loans vary according to the loan-to-value and the loan term. For loans longer than 15 years with a loan-to-value under 95 percent, the annual MIP is 1.30 percent; for loans above 95.01 percent, MIP goes up to 1.35 percent. FHA loans of 15 years or less require 0.45 percent in MIP.

Another change instituted as of April 1, 2013, is that mortgage insurance premiums, which used to be cancelled once the borrowers had paid for five years and their loan-to-value had reached 78 percent, will now continue for the entire loan term for borrowers who have a loan-to-value of 90 percent or less when they first take out the loan. MIP payments must be made for at least 11 years by other borrowers.

FHA refinancing

In spite of the mortgage insurance that is part of FHA mortgage requirements, FHA loans were 20 percent of all closed loans in February 2013, according to Ellie Mae, a provider of mortgage data. FHA loans had dipped to 18 percent of all mortgage loans in January 2013, so it’s possible that the uptick in these loans in February represents a flurry of activity prior to the increase in mortgage insurance premiums.

For purchasers, FHA loans remain appealing because borrowers can make a down payment as low as 3.5 percent and can use gift funds from family members or friends for the entire down payment.

For refinancing homeowners, FHA guidelines can make refinancing easier for borrowers who might be unable to qualify for a conventional loan. For example, FHA guidelines allow:

  • Loan-to-value as high as 97.5 percent.
  • Credit scores as low as 620.
  • Debt-to-income ratio as high as 43 percent.

Keep in mind that individual lenders may have other guidelines for FHA and conventional loans, so borrowers should always consult a lender before making a decision on the type of loan that meets their needs.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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Can an FHA loan solve a credit score conundrum?

admin
March 10th, 2013

FHA loans represented 23 percent of all home loans in 2012, according to Ellie Mae, a provider of mortgage data — and this is in spite of the fact that mortgage insurance premiums have been increased several times for these government-insured home loans. Borrowers, whether they need a mortgage to buy a home or to refinance a home, often find that FHA lenders are able to approve an FHA 203b loan for someone who might not qualify for a conventional mortgage.

Every lender will need to meet FHA guidelines for a loan approval and will typically also be required to match the standards of their mortgage investors which may be higher than FHA standards. For example, while the FHA mandates that borrowers with a credit score of 580 or less must make a down payment of at least 10 percent, very few FHA lenders approve borrowers with a credit score under 620 or 640. Borrowers with a low credit score should search with several lenders to see if they can find one willing to approve an FHA loan.

FHA loan originations in 2012

According to Ellie Mae, the average borrower of an approved FHA loan in 2012 for a refinance had a credit score of 718, 88 percent loan-to-value, and a debt-to-income ratio of 39 percent. The average borrower of an approved FHA loan in 2012 for a home purchase had a credit score of 700, 96 percent loan-to-value, and a debt-to-income ratio of 41 percent.

Borrowers who were denied an FHA loan in 2012 for a refinance had an average credit score of 670, a loan-to-value of 88 percent, and a debt-to-income ratio of 44 percent. Those who were denied an FHA loan for purchase had an average credit score of 667, a loan-to-value of 95 percent, and a debt-to-income ratio of 47 percent.

FHA rates

Average FHA rates have been competitive with conventional mortgage rates in recent months and sometimes even lower. For example, according to HSH.com, for the week ending March 1, 2013, FHA mortgage rates averaged 3.39 percent while the average mortgage rate for a conventional loan was 3.80 percent. Borrowers can compare mortgage programs with a lender to find the best rates and the highest probability of a loan approval.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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Why FHA loans may become less popular

admin
February 8th, 2013

FHA-insured loans have been available since the 1930s, when they were introduced to assist low- and moderate-income families to become homeowners. Just 3.1 percent of all home loans were FHA-insured in 2005, at the height of the housing boom; but in 2011, 34 percent of all new mortgages were FHA 203(b) loans. In December 2012, Ellie Mae says that FHA loans dipped to 19 percent of all new loans. New regulations have increased the mortgage insurance requirements of these loans over the past few years. At the same time, some mortgage lenders are beginning to offer home loans to qualified borrowers with down payments of 5 percent, not much higher than the FHA requirement of 3.5 percent down.

New changes to FHA guidelines that go into effect April 1, 2013 and June 3, 2013 include:

  • Higher mortgage insurance premiums.
  • Mortgage insurance paid for the life of the loan if the initial loan-to-value is 90 percent or less.
  • Borrowers with a credit score under 620 will be required to have a debt-to-income ratio lower than 43 percent.
  • Loans of $625,000 to $729,000 will require a down payment of 5 percent.

FHA loan advantages

In spite of these higher costs, there are several reasons many borrowers may still prefer an FHA loan for a home purchase or refinancing:

  • Lower down payment and equity requirements. FHA loans require a down payment of just 3.5 percent of home equity or 2.75 percent for homeowners, compared to minimum down payments of 5 percent and home equity of 5 or 10 or more percent by conventional lenders.
  • Lower credit score requirements. FHA lenders often accept borrowers with a credit score as low as 620 or 640.
  • Gift allowance for down payment funds. FHA guidelines allow the entire down payment to come from a gift rather than the buyers’ own funds.
  • Qualification guidelines are looser. FHA lenders often allow a higher debt-to-income ratio or lower cash reserves than conventional lenders.

Consult with FHA-approved lenders to find the best FHA rates.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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Why FHA loans may become less popular

admin
January 12th, 2013

While no official date has been given for the changes, Acting FHA Commissioner Carol Galante promises several policy changes would be put in place before January 31, 2013, according to Inman News. The changes will impact new FHA loans and place a moratorium on the Standard Fixed Rate Home Equity Conversion Mortgage reverse mortgage program. Borrowers who currently have an FHA 203b loan will not be impacted by the changes, but borrowers who are refinancing an FHA loan may be impacted by the new FHA mortgage requirements.

The anticipated changes will be felt primarily by would-be FHA borrowers with a low credit score, loan applicants who have experienced a foreclosure, and borrowers at the high end of FHA loan limits.

Specific proposals set to change FHA requirements:

  • Credit score, debt-to-income ratio, and compensating factors
    Borrowers with a credit score below 620 will be required to have a debt-to-income ratio of no more than 43 percent for automatic underwriting. Borrowers with a higher debt-to-income ratio will require manual processing and FHA lenders will need to document compensating factors such as a bigger down payment or more cash reserves. However, very few FHA lenders even accept applications from borrowers with a credit score below 620 and many require a credit score of 640 or higher.
  • Down payments and mortgage insurance premiums
    Loans between $625,500 and $729,000 will require a down payment of 5 percent rather than the standard 3.5 percent for FHA loans. In addition, mortgage insurance premiums for these larger loans will rise to 155 basis points (1.55 percent).
  • Underwriting criteria after foreclosure
    FHA loan applicants who have owned property that was foreclosed on will need to meet all underwriting criteria and have reestablished their credit. Some FHA lenders have promised that borrowers can automatically qualify for an FHA loan as long as three years have passed since the foreclosure. In addition, the FHA will ask lenders to review loan performance to see if borrowers who lost their homes due to a one-time event such as a job loss are more likely to keep up with payments on a new home loan than borrowers who lost their home for other reasons.

While this may not be happy news to borrowers, higher down payments, higher mortgage insurance payments, and stricter credit guidelines are likely to be part of the solution to fix the FHA mortgage program.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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Bad credit? An FHA loan may still be an option

admin
November 27th, 2012

While the FHA (Federal Housing Administration) loan program has been in place since the 1930s and was specifically designed to help low- and moderate-income families become homeowners, FHA-insured loans have become increasingly popular since 2006-2007 when credit standards for conventional loans were tightened.

Mortgage loans for bad-credit borrowers, no-documentation loans and zero-down-payment loans virtually disappeared once home values began to tumble and thousands of homeowners defaulted on their mortgage loans. FHA loans, while not quite as easy to obtain as mortgages at the height of the housing boom, do offer benefits for homeowners interested in refinancing or potential home buyers.

  1. FHA loans are available for buyers with limited cash for a down payment and for homeowners with low equity.
  2. FHA-insured loans, because of the protection the insurance offers lenders, are available for borrowers with a low credit score.

FHA loan requirements

FHA loan requirements say that borrowers must make a down payment of 3.5 percent of the sales price and refinancing homeowners can refinance up to a maximum loan-to-value of 97.5 percent. While the FHA guidelines do not set a minimum credit score to qualify for a loan, borrowers with a credit score below 580 must make a down payment of 10 percent or more and homeowners must have at least 10 percent equity in order to refinance. However, the reality is that very few lenders approve a loan for borrowers with a credit score under 620 or 640.

FHA loan drawbacks

While an FHA mortgage loan may be the only option for some borrowers with poor credit and a lack of cash, the main disadvantage of these loans is FHA mortgage requirements for both up-front and annual mortgage insurance. Combined, these two insurance premiums significantly raise the price of borrowing and increase monthly mortgage payments.

FHA loan tips

To qualify for an FHA loan in spite of a low credit score, borrowers must prove their ability to repay the loan. An improving credit score can help, along with an explanation for the reason the borrower’s credit score was low. For example, a borrower with a history of carrying too much credit card debt is more of a risk than a borrower whose credit score is low because of a period of unemployment.

Borrowers with extra savings in the bank, a history of on-time mortgage payments for one or two years, a high income in relation to debts and a solid job history may be able to qualify for an FHA loan in spite of a low credit score.

One more option: FHA loans allow a co-signer, even if that co-signer does not live in the home.

Borrowers can consult with an FHA lender to determine whether their credit issues can be overcome for a loan approval.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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FHA condo approval rules ease

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October 12th, 2012

Condominium owners know that lenders must review both their own credit qualifications for a mortgage as well as the qualifications of the condominium association. During the housing downturn, this dual qualification contributed to condo values tumbling farther and faster in many markets compared to single family homes. Some condo associations suffered as well when owners fell behind on their dues and reserve funds shrank. In response, the Federal Housing Administration (FHA) and most lenders made it more difficult to qualify for a condo loan.

Lower down payments for buyers, lower home equity for refinancing homeowners and lower credit score requirements are the appealing parts of FHA loan guidelines for condo owners; but unless a condo development is also on the FHA approved list, an FHA-insured loan cannot be approved. FHA guidelines used to allow for a spot approval, which meant that individual borrowers could request an FHA loan even for a development that wasn’t on the list, but spot approvals are not permitted by current FHA guidelines. There is a review process that associations and lenders can pursue to see if the development can be added to the list, however.

On September 13, 2012, the FHA changed some of its rules to help more condo developments become eligible for FHA loans, but many of the existing FHA mortgage requirements remain intact.
Condo dues
One big issue many condo associations face is delinquent dues. As it stands, eligibility for FHA loans is denied if more than 15 percent of the condo’s owners are delinquent on their dues. But new FHA rules define delinquency as condo fees that are 60 days past due rather than 30 days past due, and this could make more developments eligible for the loans.

Even if a building is on the FHA approved condominium list, if more than 15 percent of homeowners are 60 days or more past due on their fees, a new FHA mortgage cannot be approved for anyone regardless of whether they are buying or refinancing.
Owner-occupants and investors
Another issue particularly relevant to new condo developments is how many units are owned by investors. In order to be approved by an FHA lender, at least 50 percent of the units must be owner-occupied. The rules have eased a bit on investors, with one or more investors now allowed to own up to 50 percent of the total units. In the past, a single investor could only own 10 percent of the homes. For new condominium communities, the units owned by the developer will no longer count as investor-owned properties.

Your lender can check any development to find out if it’s on the list of approved communities for FHA loans.
Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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FHA loan options for high-cost housing

admin
September 12th, 2012

FHA lenders qualify borrowers based on their ability to repay the mortgage and the value of the property, not whether they are first-time buyers or meet income requirements. The government-insured loans do have established limits set by Congress each year, but FHA loan limits are actually higher than the loan limits established by Fannie Mae and Freddie Mac in 2012 in areas with expensive housing. For example, in Washington, D.C., conforming loan limits are capped at $625,500, while buyers and homeowners who are refinancing in that area can borrow up to $729,750 with an FHA loan.
FHA loans and high-income borrowers
A recent study by the Center for Real Estate and Urban Analysis of the George Washington University showed that more than 30 percent of the mortgages insured by FHA in 2010 were approved for households with an income higher than 115 percent of area median income. The FHA Assessment Report also showed that within that 30 percent of FHA-insured loans, more than half were issued to borrowers making more than 150 percent of their area’s median income.

When introduced in the 1930s, FHA guidelines were meant to provide mortgage financing for first-time, low-income and minority buyers. However, in 2011, the FHA Assessment Report shows that 54 percent of FHA loans were issued for properties with values greater than 125 percent of their area’s median value as compared to just 15 percent in 2007.

FHA loans for refinancing
While FHA requirements such as a down payment of just 3.5 percent clearly benefit home buyers, these loans can be equally appealing to homeowners who face refinancing challenges because they have credit problems or minimal equity in their homes.

Conventional financing typically requires a credit score of 720 or 740 or higher to get the best mortgage rates, while FHA lenders generally approve borrowers at the same interest rate as long as their credit score is higher than 620 or 640.

Borrowers who already have an FHA loan, may qualify for a streamline refinance with reduced documentation. Borrowers with a conventional loan can also benefit because FHA loans require as little as 3.5 percent in home equity.

The disadvantage of these loans is that all borrowers must pay mortgage insurance, which will increase their monthly payments. All borrowers should compare conventional and FHA loan options before choosing the appropriate mortgage.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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