The Federal Housing Administration (FHA) is a government entity that provides insurance on loans made by FHA-approved lenders. The FHA provides the lenders with protection against borrowers defaulting on their mortgages. This allows lenders to offer borrowers more lenient terms on their home loans such as lower down payments, low closing costs, and easier credit qualifying.
Ritewaymortgages.com is a HUD Approved FHA Lender which means we are able to do all our underwriting for FHA loans in house. Non-HUD Approved lenders have to send the loans to a lender that is approved, adding a middle man to the underwriting process. For our FHA borrowers this means faster turn-times and increased efficiency during the loan transaction.
There are three basic transaction types for FHA loans: Purchases, Rate and Term Refinances and FHA’s Streamline Refinance. Click below for more information on each of these transaction types.
- Rate and Term Refinances
- Streamline Refinances
FHA Upfront Mortgage Insurance and Monthly Mortgage Insurance
If you are purchasing a 1-4 family dwelling you should take into consideration a FHA 203(b) loan. The FHA 203(b) program was designed to make housing available for home buyers with limited funds. Listed below are some of the main benefits of a FHA loan:
3.5% Down Payment – 3.5% is the minimum amount needed for a down payment on a purchase with a FHA loan. The minimum down payment for a conventional loan is 5%.
Gifts – Family members are allowed to give you a gift of money to help pay for your new loan. A gift of money can even cover the whole 3.5% required down payment and or closing costs. Conventional loans require that at least 5% of your own funds must be used for the down payment.
Closing Costs – Sellers, other third parties, or a combination of parties may contribute up to 6% of the sale’s price towards the buyer’s closing costs including prepaid expenses and discount points. Conventional loans with 5% down allow only a 3% contribution towards closing costs.
Lower Qualifying FICOs – FHA will grant loans to borrowers with FICO scores 620 and above. Conventional loans with a 5% down payment require a minimum score of 660.
Higher DTI – DTI, or debt to income, is the ratio of your gross monthly income compared to your monthly debt obligations – essentially what proportion of your income is used to pay your housing expenses, car loans, credit cards, etc. Conventional loans with a 5% down payment will only allow your DTI to be 45%. With a FHA loan your DTI can be as high as 55% which means it’s easier to qualify with a lower income or without having to pay off all of your debt.
Bankruptcies and Foreclosures – If you have experienced a bankruptcy or foreclosure you can be eligible to buy a new home with a FHA loan after waiting only 2 years after a bankruptcy, or 3 years after a foreclosure. Typically with a conventional loan you would have had to wait 3-5 years before being eligible.
Rate and Term Refinances
Refinancing a FHA loan provides the benefit of better loan terms, lower monthly payment, and/or to receive equity from your home, called a Cash Out Refinance. FHA Refinances are not limited to current FHA borrowers either; anyone with a conventional loan has the option of refinancing into a new FHA loan, with much of same appeal mentioned above for purchases – Including higher DTIs and lower FICOs allowed. This would be particularly beneficial to borrowers who have lost equity due to falling home prices since FHA allows the loan amount to be up to 97.75% of the new appraised value. You also have the option of including your closing costs in your loan amount if you are below the 97.75% loan to value mark.
If you want to improve your home, consolidate debt, etc., FHA also offers a Cash Out Refinance option up to 85% of the new appraised value.
One of the greatest benefits after purchasing a home with a FHA loan is the ability to do a Streamline Refinance. Streamline Refinances are only available to current FHA borrowers and have the added benefit of not requiring an appraisal, saving you money! A Streamline Refinance is a faster loan process then a conventional refinance and also requires less documentation. The thinking behind this is that if a borrower is already able to make their mortgage payments on time there should be no problem in making a smaller monthly payment after refinancing. If you are lowering your monthly payments with no other changes to the loan or title then it’s not even necessary to examine your income, decreasing the amount of paperwork needed.
The government is able to guarantee FHA loans by requiring borrowers to pay mortgage insurance. Keep in mind that for any conventional loan with a down payment less than 20% mortgage insurance is required as well. The FHA mortgage insurance premiums are placed into a fund, the FHA’s Mutual Mortgage Insurance Fund, and are used to pay claims if a loan goes into default – rather than using any taxpayer dollars.
The Upfront Mortgage Insurance, just as it sounds, is a premium paid at the time the loan closes. However, since the lender is the one actually sending the money to FHA, the borrower has the option to include the upfront payment in their loan amount. As of October 2010 this fee is 1% of the loan amount but is regulated by Federal law and may be subject to change.
Monthly Mortgage Insurance is paid on a monthly basis with your normal mortgage payment for a minimum of 60 months. It is then automatically cancelled once the LTV (loan to value) reaches 78%. The amount of the monthly mortgage insurance depends on individual loan attributes but the yearly rate ranges from 0.25% on a 15 year loan to 1.75% on a 30 year loan, depending on the size of the down payment.
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