Posted November 3, 2013Tweet
Today's home buyers have a bevy of mortgage options -- this mortgage flowchart proves it. Flowcharts, though, do little to explain the nuances of a specific mortgage loan type.
For example, conventional loans -- loans which meet the guidelines of Fannie Mae or Freddie Mac -- may be the best choice for a buyer of a single-family home because of mortgage rate discounts. Or, for buyers with low downpayments, VA loans may be best because of their 0% downpayment requirement.
Nearly 1 in 5 home buyers use FHA financing, though, and there are good reasons why. The FHA has been helping U.S. home buyers since 1934 and, with its myriad of loan programs, there's an FHA loan program for just about anyone.
This FHA FAQ will help you understand the in-and-outs of how the FHA mortgage program works.
FHA stands for Federal Housing Administration. The FHA was formed in 1934 and was moved to the U.S. Department of Housing and Urban Development (HUD) in 1965. The FHA is self-supported -- the agency has never taken money from the U.S. taxpayer. FHA is the world's largest mortgage insurer.
An FHA loan is a mortgage that meets two criteria. First, everything about the loan -- and that means everything! -- must fall within the FHA's minimum acceptable standards for a mortgage. These minimum standards are known as FHA mortgage guidelines. Second, the loan must be funded by an FHA-approved lender. FHA-approved lenders may include any of the following : banks, savings-and-loan associations, credit unions or mortgage companies. The FHA does not "make" the loan -- it insures the loan for the lender.
In order to get approved for an FHA loan, you will need to meet the minimum standards of the FHA mortgage guidelines. The guidelines are flexible and forgiving. Buyers should expect to provide evidence of income, proof of U.S. citizenship, and access to funds for a downpayment. The FHA will not insure investment property mortgages so you will also be asked to verify that you plan to move to your new home with 60 days of closing.
The FHA changes its maximum loan size by location. In some areas, the maximum loan size that the FHA will insure is $271,500. In other areas, though, the FHA will insure loans all the way up to $729,750. Before applying for an FHA loan, do a lookup of your area's FHA loan limit. You can find a complete, county-by-county FHA loan limit chart here.
FHA mortgage insurance premiums (MIP) are premiums you'll pay at closing, and monthly, to insure your lender's loan against default. The amount of FHA MIP paid is linked to the size of your downpayment, and the length of your loan. Homeowners making a downpayment of 10% or more and financing via a 15-year mortgage pay the least amount of FHA MIP. Homeowners making the minimum downpayment and using a 30-year loan pay the most FHA MIP. FHA mortgage insurance premiums are paid for at least 11 years, regardless of your home's loan-to-value.
There are two ways to get rid of FHA mortgage insurance premiums. The first method is to let the FHA MIP expire on its own. For certain 30-year and 15-year fixed rate mortgages, FHA MIP cancels after a fixed number of years. If your MIP is perpetual, or if you're tired of waiting for MIP to expire on its own, FHA homeowners can refinance into a conventional (i.e. non-FHA) mortgage. Start the FHA MIP removal process here.
Most FHA loans require a 3.5% downpayment. The 3.5% is calculated against the your home's purchase price or its appraised value, whichever is lower. For example, if you buy a home in Phoenix, Arizona for $200,000 and the home appraises for $210,000, your 3.5% downpayment will be based on the $200,000 figure, regardless of what the home "is worth".
Yes, FHA mortgage guidelines allow for cash gifts of downpayment. Downpayment gifts may come from a relative, an employer, an FHA-approved charitable organization, or a government housing grant program. Cash gifts may not come from friends, co-workers, or a fiancé/fiancée. All cash downpayment gifts must be accompanied by an FHA gift letter.
No, FHA loans are not restricted to first-time home buyers. Anybody can use an FHA mortgage. Whether you've owned a home before does not affect your FHA mortgage eligibility.
The FHA will insure all property types, assuming the home will be owner-occupied. Buyers can use FHA financing for any of the following home types : single-family detached home, row homes, townhomes, walk-ups, condominiums, manufactured homes as well as 2-unit, 3-unit and 4-unit properties. For multi-unit homes, the FHA will require that you occupy exactly one of the building units.
The FHA 203(b) mortgage is the basic, run-of-the-mill FHA home loan. The name 203(b) comes from the section of federal law that authorizes that FHA to insure such mortgages.
The FHA 203(k) mortgage is similar to a construction loan. With the 203k, you can buy a home and finance its major repairs into the purchase price. The 203k allows for almost anything -- roof replacement, garage addition, new flooring and finishes, and more. If your repairs are strictly related to energy-efficiency improvements, you can apply for the FHA energy-efficiency mortgage which is similar to the 203(k), but with more streamlined paperwork.
The FHA Streamline Refinance is among the simplest, fastest refinance programs available to homeowners today, and its available to homeowners with existing FHA-insured loans only. Read an in-depth FHA Streamline Refinance Q&A here.
Yes, mortgage lenders offer 15-year and 30-year fixed rate FHA loans. The 15-year mortgage requires less FHA mortgage insurance to be paid each month, and mortgage rates are often lower, too. However, because loan payments are compressed into 15 years instead of 30, monthly payments are often higher. Some lenders offer 20- and 25-year FHA mortgages, too.
Yes, mortgage lenders offer adjustable-rate FHA mortgages. The most common FHA ARMs are 1-year ARMs and 5-year ARMs. FHA ARMs carry "rate caps" which can soften the impact of big jumps in rates. Typically, one-year FHA-insured ARMs can not adjust more than 1 percent per year, or more than 5 percent over the life of the loan. 5-year ARMs cap at a 2 percent change after the first five years, then up to 2 percent annually, and never more than 6 percent over the life of the loan.
Assumable loans are loans which can, literally, be assumed by some other person. Most often, assumable loans are transferred when a home is sold. Because your FHA loan is assumable, you can sell your home with the mortgage attached to it. This FHA benefit is especially important in a rising mortgage rate environment. Imagine selling your home and its 4.5% assumable mortgage during a time when mortgage rates are in the 7- or 8-percent range.
The FHA Good Neighbor Next Door program (GNND) is a special FHA program for teachers, law enforcement officers, firefighters and emergency medical technicians. Via the Good Neighbor Next Door program, eligible buyers can purchase HUD homes at a 50% discount from the list price, and with a downpayment of just $100. You must only occupy the home as your principal residence for three years. There are no other "catches". Click here to get FHA Good Neighbor Next Door mortgage rates.
The FHA Back To Work - Extenuating Circumstances program allows people with foreclosure, bankruptcy or short sales to get back into homeownership sooner. Via the Back to Work program, the typical two- and three-year FHA waiting periods are reduced to just 12 months. To qualify for FHA Back to Work, buyers must show that their household income dropped 20% or more, lasted 6 months or longer, and that their "economic event" was directly tied to the income loss. Apply to use the FHA Back to Work program here.
The FHA mortgage program has been used more than 34 million times since the group's inception, and the FHA currently insures hundreds of billions of U.S. mortgages. It's a popular loan program and is worthy of consideration.
Talk to a mortgage lender about FHA loans and take a look at today's FHA mortgage rates. Part of understanding the program is knowing what it costs. You can get a rate online, at no cost, and with no obligation. Start here.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.