FHA Loan Answers: Understand FHA Refinancing and FHA loan requirements...

 
 
 
 
 
 

FHA refinance and loan requirements you NEED to know...

FHA Loan Answers.com is a site that I (a Realtor in S. FL) created to help people understand FHA loans and FHA loan requirements. While working with many FHA borrowers and home buyers I realize that there is a lot of misinformation out there and figured I could help give people good information about this great loan option. I try to cover some of the points that cause problems for borrowers in today's market and try to give you ways to navigate through them while saving yourself time, headache, and money.

 
 
     
 
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Basic overview of an FHA loan & requirements:

If you are thinking of buying a home and want to know more about FHA loan requirements and what FHA loans are all about then keep reading. I will give you some of the basic FHA loan requirements you'll want to know as a buyer, and even as a seller, if FHA loans are a popular way buyers are financing in your area.

Some benefits of using FHA loans to buy a home:

If you're wondering what the benefits FHA loans offer today's home buyers than you're not alone. Many home buyers hear of these loans and how great hey are, but are not really sure why.

Two reasons why these loans can be a good option for any home buyer are: Low down payment requirement and easier qualifying standards.

Low down payment requirement: FHA only requires 3.5% of the purchase price of the home as a down payment. Most lenders these days will want to see 20%-25% down even with good credit. That can keep a lot of people from realizing their home buying dreams. The reality is many people CAN afford the monthly payment of a home but coming up with tens of thousands of dollars out of pocket is a little trickier.

Easier Qualifying Standards: With FHA loans there are easier guidelines and more forgiving standards than some conventional lenders. FHA loan requirements in regards to a buyer's credit are lower than conventional loans, and as of this writing, a buyer must have at least a 620 FICO score. That means that those with less than perfect credit can still borrow the money they need, and the rates are usually similar with those of conventional loans.


 
 
 
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What is an FHA Loan?

There are tons of people asking me, What is a FHA loan? or What is an FHA mortgage?, so let me answer the question. In addition to FHA loans being one of the most popular loan products in 2009, and their gaining popularity, few people understand the role FHA plays in the loans it insures.

FHA is NOT a bank or lender as many believe. They DO NOT write checks for people who are buying homes. The FHA is actually a government entity that insures loans made by lenders/institutions/banks to people who are approved by FHA to borrow the money, based on FHA’s loan requirements and criteria.

This is a very oversimplified explanation, but the bottom line is this: FHA lets lenders know that if the borrower defaults on their home loan that they (FHA) will insure any loss to the lender. That in turn allows lenders to feel more secure in lending money to borrowers who usually have a smaller down payment and may even have less than otherwise acceptable credit according to the lenders standards.

Basically, FHA is almost co-signing the loan for you. That is not 100% accurate, but it may help paint the picture for you.

Many people also falsely believe that FHA loans are for first time home buyers only. FHA loans can be obtained by anyone purchasing an owner occupied residence (some other restrictions may apply). This means that you can buy every home you ever own with an FHA loan if the other loan requirements are met.

In addition, depending on many loan programs or first time buyer programs, the definition of a first time home buyer is someone who has not been on title to a property in the last 3 years. Every program is different and you would need to check with the programs you are interested in, but this is a very common definition of the term.

Lastly, some people believe FHA loans and FHA loan requirements ensure that only low income people can get these loans. That is also false. There is no cap on income for these loans. However, there is a maximum loan amount meaning that depending on where in the country the property is located there will be a maximum amount FHA is willing to let someone borrow to purchase a home there.

This means that most people are able to take advantage of this great loan product and ease the burden of buying that first home. No one earns too much to be approved for an FHA loan so if this sounds like the right option for you go for it!

     
 
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Some FHA Guidelines to know:

- An FHA loan requires a minimum 3.5% down payment from the Buyer, but this can also be paid by a family member on the buyers behalf in the form of a gift.

- They will also allow a seller to pay up to 6% of the buyers closing costs and/or prepaid escrow items (prepaid taxes, prepaid interest, discount points, etc).

- FHA will require the property owner occupied and it will need to be habitable prior to closing. This is a good thing, but depending on the FHA appraiser that is appraising to property that will even include minor things like having a working stove and possibly refrigerator which can become a headache if the property is a foreclosure and has no appliances. Appliances are minor items and this e frustrating when the appraisal puts a halt to the purchase over minor things like this.

- FHA will also require Mortgage Insurance for the loan. The upfront mortgage insurance amount is between 1.5%-2.25%. There is also a monthly amount paid which is roughly .5% per year until the loan reaches 78% LTV. That might sound like a lot of money to some people, member, with a low down loan today you will more than likely be paying mortgage insurance anyway, and it's about the same each month as a ional loan. Plus, the 1.5%-2.25% can be financed in the loan so there is no out of pocket necessary at the time of purchase.

- Condo Purchasers need to also be aware that FHA has to approve any condo complex they finance in and there are certain requirements that need to be met. Some condo complexes are part of an FHA approved condo list that will save time during the loan process and wondering whether complex will be approved by FHA. For example, FHA will require at least 51% of the owners in the complex to be owner occupants nvestors, that there is no more than 15% of the owners in the complex who are past due on maintenance fees, etc.

- Getting an FHA loan will require the buyer to escrow their yearly property taxes and property insurance (if applicable) which will be included in their monthly payment. Each month 1/12th of the yearly amount will be paid with your monthly mortgage payment and the lender will axes and insurance when they become due.


 
 
 
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Possible changes to FHA loan requirements and guidelines:

According to Housing and Urban Development (HUD) Secretary Shaun Donovan on Wednesday 12/2/09, FHA borrowers may soon be facing stricter borrowing standards due to high FHA loan defaults and depleted reserves held by the agency.

If enacted, there could probably be an increase of the down payment requirement (possibly 5% instead of the current 3.5%), higher credit score requirements, and a reduction of seller concessions buyers can receive to 3% of the purchase price (currently 6%).

FHAs low reserves and high default rate have caused officials to begin talks about finding ways to limit the risk of borrower default. They must also begin to replenish their reserves which congress requires to be no less than 2% of FHAs outstanding loans, currently about 0.53%.

There is a lot of thought going into these new guidelines since FHA borrowers are part of the reason the housing market has seen at least some signs of recovery over the past 18 months. Officials do not want to run the risk of hurting the housing market, but need to make oon before FHA has financial difficulties of its own.

Whatever changes are coming, borrowers who are considering getting an FHA loan should do so while down payment and other requirements are easier to manage.