The Federal Housing Administration(FHA) is a division of HUD. FHA loans are loans meeting FHA program criteria made by approved lenders. FHA insures those lenders against loss in the event of default on those loans. The insurance allows lenders to make loans with more flexible underwriting guidelines. (higher LTV, lower credit scores, etc.)
FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. Most FHA mortgages require payment of an upfront mortgage insurance premium (UFMIP). For most mortgages the premium is 1.75% of the loan amount, payable at closing or added to the loan amount and financed. The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years).
In addition, most FHA loans require payment of an annual mortgage insurance premium, payable monthly as part of the mortgage payment. This premium is based on the loan program, the loan term and the loan-to-value ratio:
Effective June 11, 2012
|
|
Term > 15 years |
|
|
Base Loan Amount |
LTV |
Annual MIP |
|
≤ $625,500 |
≤ 95% |
1.20% |
|
≤ $625,500 |
> 95% |
1.25% |
|
Above $625,500 |
≤ 95% |
1.45% |
|
Above $625,500 |
> 95% |
1.50% |
| Term ≤ 15 Years LTV >78% | ||
|
Base Loan Amount |
LTV |
Annual MIP |
|
≤ $625,500 |
≤ 95% |
.35% |
|
≤ $625,500 |
> 95% |
.60% |
|
Above $625,500 |
≤ 90% |
.60% |
|
Above $625,500 |
> 90% |
.85% |
The most popular of the FHA loan programs has been the 203b program. This program helps finance the purchase of a one- to four-unit family home that the borrower intends to occupy as his residence (i.e., move in within 60 days after closing and stay in the property for 12 months), using a 15- or 30-year loan and a cash investment of as little as 3.5% of the lesser of the property value or the purchase price.
Some or all of the cash investment can come from a gift from:
- an immediate relative.
- a labor union or employer.
- a government agency or public entity.
- a nonprofit charitable organization.
The gift donor, and the source of the gift donor’s funds, may not be a person or entity with an interest in the sale of the property (e.g., the seller, the real estate agent or broker, the builder, or an associated entity). A gift from any of these sources would be considered an inducement to purchase and would have to be deducted from the sales price.
Therefore, a seller could not give the buyer a gift directly or channel funds through a nonprofit charitable organization to assist the buyer in acquiring the funds for his down payment. FHA will allow the seller to contribute up to 6% of the purchase price toward the buyer’s actual closing costs, prepaid taxes and insurance, discount points, buy down fees, mortgage insurance premiums, and other financing concessions, but nothing toward the down payment.
FHA loans are not restricted to first-time homebuyers or those with low- or moderate income. Anyone who can meet the liberal underwriting criteria can obtain a FHA loan. The borrower’s income and employment must be verified and his credit history will be analyzed. FHA also accepts nontraditional mortgage credit reports on borrowers lacking the types of trade references that normally appear on traditional credit reports provided the information is verified and documented. These may be a substitute or a supplement to a traditional credit report.
Such reports include as credit references rental housing payments, utility payments and other bill payments (insurance, child care, phone, auto leases, etc.)
A borrower can qualify for an FHA loan with monthly payments for principal, interest, and property taxes and insurance (PITI) of up to 31% of his gross monthly income and total monthly debt up to 43% of his gross monthly income.
Sources of regular income not subject to federal taxes (e.g., certain types of disability and public assistance payments, social security income and military allowances) and child support income can be grossed up by 25% in calculating the borrower’s income for qualifying purposes. This means the amount of continuing tax savings attributable to that source may be added to the borrower’s gross income. When a borrower does not have to file a federal income tax return, the tax rate used is 25%.
On the other hand, FHA requires that gross rental income be reduced by 25% or a percentage developed by HUD’s jurisdictional HOC (Homeownership Center) for vacancies and maintenance.
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