ROB’S GUIDE TO FHA LENDING PROGRAMS

Is FHA Financing for YOU?

FHA is an acronym for the Federal Housing Administration which operates under the control of the Department of Housing and Urban Development (HUD) and has the primary responsibility for administering the government home loan insurance program. This program allows buyers who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA.

The most popular FHA home loan program nationwide is the 203(b) FHA home loan (explained below) that only requires a minimum of 3% from the borrower and permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.

The main advantage to a FHA home loan is that the credit criteria for a borrower are not as strict as the FNMA or FHLMC lending guidelines. Someone who may have had a few credit problems should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan. In addition, the seller must pay for part of the traditional closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan. 100% of the down payment and closing costs can be gifted.

The greatest disadvantage of FHA home loans is the upfront mortgage insurance premium (MIP). On a 30 year FHA home loan that equals to 2.25% of the loan amount (2% for a 15 year) in addition to the 0.5% annual renewal premium that a borrower will pay for the life of the loan. In addition, FHA limits the amount a borrower can borrow

Here are several notable FHA home loan programs currently available.

The 203(b) Program Explained

As the centerpiece to the single family mortgage program, the 203(b) program allows many fortunate Americans to qualify for a home mortgage when under "conventional" underwriting guidelines, they would have been disqualified. Here are highlights of this program:


Down payment requirements: Since this mortgage is insured by HUD, the minimum down payment required is 3% of the sales price. Furthermore, the down payment can be a gift from a family member, the government, or a non-profit agency designed to help first-time and low to moderate income home buyers. No cash reserves are required.

Income and employment: There are no limitations placed upon income requirements. As for employment, there are no limitations on a specific length of time at a particular job. However, a two year history is required; preferably in the same line of work (education can be counted towards this two year history if it is for the same profession the borrower is currently in).

Eligible properties and occupancy requirements: FHA loans are restricted to one to four unit single family residences that are new, under construction, or existing (i.e. resale properties), condominiums, and town homes. Homes located in a PUD (planned urban development) must be approved by FHA or VA. Also, mobile homes with a permanent foundation, taxed as real property, and built after June 16, 1976 are eligible. All FHA insured properties must be owner-occupied.

Closing Costs: HUD has created a list of allowable and non-allowable closing costs that may be charged to the home buyer. Non-allowable closing costs generally include costs such as the lender's tax service or document preparation fees.

Qualifying ratios: HUD limits a borrower's monthly payment not to exceed 29% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 41% of their gross monthly income.

Mortgage Insurance Premium: There is a 2.25% fee for a 30 year mortgage and 2.0% fee for a 15 year mortgage assessed at the time of originating a FHA mortgage that is paid to HUD that can be wrapped into the loan. This fee goes towards maintaining the FHA insurance program. Furthermore, the borrower will pay 0.5% per year MIP renewal premium for the life of the loan. This is paid monthly. It is important to note that condominiums are exempt from the upfront mortgage insurance premium, but a borrower would still be required to pay the monthly renewal premium.

Assumability: Yes. The person assuming the loan must credit qualify for the mortgage and the seller is automatically released from liability with the approval of the lender.

FHA 251 Program Explained

Designed to assist first time home buyers, the FHA 251 is a 30 year adjustable rate mortgage. This ARM is tied into the one year Treasury Bill with adjustments annually (determined by the index and the interest rate margin that is set at the time the loan is originated). There is a 1% annual interest rate cap (that could increase or decrease) and a 5% cap over the life of the loan. Translation: The adjusted interest rate cannot move higher or lower than 1% per year and no more than 5% over the life of the loan. Furthermore, the borrower must qualify at an interest rate 1% greater than the initial mortgage rate.
The following are highlights of this program:

Down payment requirements: Since this mortgage is insured by HUD, the minimum down payment required is 3% of the sales price. Furthermore, the down payment can be a gift from a family member, the government, or a non-profit agency designed to help first-time and low and moderate income home buyers.

Eligible properties and occupancy requirements: FHA loans are restricted to one to four unit single family residences that are new, under construction, or existing (i.e. resale properties), condominiums, and town homes. Homes located in a PUD (planned urban development) must be approved by FHA or VA. Also, mobile homes with a permanent foundation, taxed as real property, and built after June 16, 1976 are eligible. All FHA insured properties must be owner-occupied.

Closing Costs: HUD has created a list of allowable and non-allowable closing costs that may be charged to the home buyer. Non-allowable closing costs generally include costs such as the lender's tax service or document preparation fees.

Qualifying ratios: HUD limits a borrower's monthly payment not to exceed 29% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 41% of their gross monthly income.

Mortgage Insurance Premium: There is a 2.25% fee assessed at the time of originating a FHA mortgage that is paid to HUD that can be wrapped into the loan. This fee goes towards maintaining the FHA insurance program. Furthermore, the borrower will pay 0.5% per year MIP renewal premium for the life of the loan. This is paid monthly. It is important to note that condominiums are exempt from the upfront mortgage insurance premium, but a borrower would still be required to pay the monthly renewal premium.


FHA 2-1 Buy Down Program Explained

Often times lenders will allow borrowers to temporarily "buy down" the interest rate on a mortgage. The FHA 2-1 buy down allows a purchaser to reduce the initial interest rate on their mortgage by 2% the first year, 1% the next year, and 0% every year thereafter. It is important to note that there is generally a fee in the form of discount points to buy down a mortgage.


This 2-1 buy down should not be confused with a permanent buy down. A permanent buy down is when the borrower pays points to lower the interest rate on the mortgage over the life of the loan. Therefore, if you permanently buy down the note rate from 7% to 6.5% on a 30 year mortgage, your note rate will always be 6.5% for the next 30 years.


With a 2-1 buy down, if you were to temporarily lower the rate on a 7% 30 year mortgage, the interest rate the first year would be 5%, the next year would be 6%, and it would return back to 7% the third year and every year thereafter.


Most mortgage professionals generally do not recommend a 2-1 buy down for a mortgage if the borrower is paying for the buy down. This is because the costs that are charged the borrower at closing generally equal the savings in the lower payment. Furthermore, if the seller is paying for the buy down and the buyer will occupy the property for more than 3 years; most mortgage professionals will recommend a permanent buy down so that the borrower can enjoy the savings over a longer period of time.


Energy Efficient Mortgage Program Explained

The Energy Efficient Mortgages Program (EEM) helps home buyers or home owners save money on utility bills by enabling them to finance the cost of adding energy-efficiency features to new or existing housing as part of their home purchase or FHA refinance.


Borrowers who apply for the 203(b) home loan, 203(k) rehabilitation program, or 203(h) disaster relief program may qualify for the EEM improvements. The cost of the energy improvements that may be eligible for financing is either 5% of the property's value (not to exceed $8,000) or $4,000--whichever is greater. To be eligible for inclusion in the mortgage, the energy efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.


The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating system (HERS) or an energy consultant. Up to $200 of the cost of an energy inspection report may be included in the mortgage. All applications must be submitted to the local HUD office through an FHA approved lender.


For more information, the Department of Energy and HUD have published DOE/HUD Initiative on Energy Efficiency in Housing: A Federal Partnership, Program Summary Report, which is available at 1-800-483-2209.