Melanie Dages' Blog

Understanding the FHA Mortgage

In 1934 the FHA was founded after the depression to help people buy a home to regulate the loan terms and interest rates on the mortgages it insured. FHA is a Federal Housing Administration loan guarantee and is backed by the Federal government. This is done through the purchase of Upfront Mortgage Insurance Premium fees that are added into the back end of the loan and MIP monthly fees that are collected each month for 60 months. FHA loans are not held by the US government, but are bundled together over a wide geographical area, and then sold in the secondary market allowing more capital to be raised through these sales.

FHA is not a sub prime lender, but do give the clients the ability to get a home loan if the borrowers have shown the capacity to make payment on the loan. Technically, FHA does not have any FICO restrictions but most Automated Underwriting will give approval with a 580 FICO or above. That does not mean that exceptions are not made, if the manual underwriter review of letters of explanations detail the reasons for past payment problems satisfactorily they are likely to get an approval also.

FHA loan limits are based on a complex logarithm to determine the loan limits in each county of the US. FHA Mortgage Insurance Premium is now a risked based pricing meaning that the lower your FICO score the higher the up front and monthly fee will be. Pending legislation will raise this limit to $417,000.00 for all counties. (HR3221)

The Benefits of a FHA loan are:

1) Lower Fico scores preferably 580 or above, but with extenuating circumstances and letter of explanation can be lower.

2) FHA loans allow non owner co-borrowers, but must qualify with both parties’ debts.

3) Lower down payment needed, 3% of the sales price which can be from a family member as a gift funds.

4) FHA allows the seller to contribute 3% down and 3% seller’s contributions for recurring and non-recurring closing costs.

5) FHA allows you to have someone assume your loan, if they can qualify.

6) FHA loans are very competitive in pricing and terms offering 3 and 5 year ARMS (can be converted to fix after 12 months through a streamline re-finance) and 15 and 30 year fixed.

7) FHA allows for a streamline refinance of the existing loan terms without income documentation or appraisals, but must show a benefit in reduction of rate or terms.

8) The streamline fees are set by FHA to reduce the costs associated with typical refinances. Streamline loans can also be done on non owner occupied properties as well.

This is a very short overview of the FHA product and its benefits. Next week we will discuss the VA loan and its requirements. If you have any questions please feel free to e-mail me at melanie.dages@dalusa.com