FHA Home Loans

FHA, also known as the Federal Housing Administration, operates under the control of the Department of Housing and Urban Development (HUD) and has the primary responsibility for administering the government home loan insurance program. This program allows buyers who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA.

The most popular FHA home loan program nationwide is the 203(b) FHA home loan that only requires a minimum of 3% from the borrower and permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.

Only applicable for buyers who intend to purchase the home as a primary residence.

The main advantage to a FHA home loan is that the credit criteria for a borrower are not as strict as FNMA or FHLMC. Someone who may have had a few credit problems should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan. In addition, the seller must pay for part of the "traditional" closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan. 100% of the down payment and closing costs can be gifted.

The greatest disadvantage of FHA home loans is the upfront mortgage insurance premium (MIP). On a 30 year FHA home loan that equals to 1.50% of the loan amount (0% for a 15 year with more than 10% down)) in addition to the 0.5% annual renewal premium that a borrower will pay (until the loan reaches 78% of the original value of the home). In addition, the maximum FHA will allow a person to borrow is limited.

The following are highlights of this program:

Down payment requirements: Since this mortgage is insured by HUD, the minimum down payment required is 3% of the sales price. Furthermore, the down payment can be a gift from a family member, the government, or a non-profit agency designed to help first-time and low/moderate income home buyers. No cash reserves are required.

Income and employment: There are no limitations placed upon income requirements. As for employment, there are no limitations on a specific length of time at a particular job. However, a 2 year history is required, preferably in the same line of work (education can be counted towards this 2 year history if it is for the same profession the borrower is currently in).

Eligible properties and occupancy requirements: FHA loans are restricted to 1 to 4 unit single family residences that are new, under construction, or existing (i.e. resale properties), condominiums, and townhomes. Homes located in a PUD (planned urban development) must be approved by FHA or VA. Also, mobile homes with a permanent foundation, taxed as real property, and built after June 16, 1976 are eligible. All FHA insured properties must be owner-occupied.

Closing Costs: HUD has created a list of allowable and non-allowable closing costs that may be charged to the home buyer. Non-allowable closing costs generally are referred to as "garbage fees" or "junk fees" and include costs such as the lender's tax service or document preparation fees.  

Qualifying ratios: HUD limits a borrower's monthly payment not to exceed 29% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 41% of their gross monthly income.

Mortgage Insurance Premium: There is a 2.25% fee for a 30 year mortgage and 2.0% fee for a 15 year mortgage assessed at the time of originating a FHA mortgage that is paid to HUD that can be wrapped into the loan. This fee goes towards maintaining the FHA insurance program. Furthermore, the borrower will pay 0.5% per year MIP renewal premium for the life of the loan. This is paid monthly. It is important to note that condominiums are exempt from the upfront mortgage insurance premium, but a borrower would still be required to pay the monthly renewal premium.