FHA insured loan

World War II poster

An FHA insured loan is a Federal Housing Administration mortgage insurance backed mortgage loan which is provided by a FHA-approved lender. FHA insured loans are a type of federal assistance and have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. To obtain mortgage insurance from the Federal Housing Administration, a mortgage insurance premium (MIP) equal to 1 percent of the loan amount at closing is required, and is normally financed by the lender and paid to FHA on the borrower's behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well.

The program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. Some FHA programs were subsidized by the government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers. Over time, private mortgage insurance (PMI) companies came into play, and now FHA primarily serves people who cannot afford a conventional down payment or otherwise do not qualify for PMI. The program has since this time been modified to accommodate the heightened recession.

History

The National Housing Act of 1934 created the Federal Housing Administration (FHA), which was established primarily to increase home construction, reduce unemployment, and operate various loan insurance programs. The FHA makes no loans, nor does it plan or build houses. As in the Veterans Administration's VA loan program, the applicant for the loan must make arrangements with a lending institution. This financial organization then may ask if the borrower wants FHA insurance on the loan or may insist that the borrower apply for it. The federal government, through the Federal Housing Administration, investigates the applicant and, having decided that the risk is favorable, insures the lending institution against loss of principal in case the borrower fails to meet the terms and conditions of the mortgage. The borrower, who pays an insurance premium of one half of 1 percent on declining balances for the lender's protection, receives two benefits: a careful appraisal by an FHA inspector and a lower interest rate on the mortgage than the lender might have offered without the protection.

Until the latter half of the 1960s, the Federal Housing Administration served mainly as an insuring agency for loans made by private lenders. However, in recent years this role has been expanded as the agency became the administrator of interest rate subsidy and rent supplement programs. Important subsidy programs such as the Civil Rights Act of 1968 were established by the United States Department of Housing and Urban Development.

In 1974 the Housing and Community Development Act was passed. Its provisions significantly altered federal involvement in a wide range of housing and community development activities. The new law made a variety of changes in FHA activities, although it did not involve (as had been proposed) a complete rewriting and consolidation of the National Housing Act. It did, however, include provisions relating to the lending and investment powers of federal savings and loan associations, the real estate lending authority of national banks, and the lending and depositary authority of federal credit unions.

Further changes occurred in the 1977 Housing and Community Development Act, which raised ceilings on single-family loan amounts for savings and loan association lending, federal agency purchases, FHA insurance, and security for Federal Home Loan Bank advances. In 1980 the Housing and Community Development Act was passed; it permitted negotiated interest rates on certain FHA loans and created a new FHA rental subsidy program for middle-income families.

On August 31, 2007, the FHA added a new refinancing program called FHA-Secure to help borrowers hurt by the 2007 subprime mortgage financial crisis.

On March 6, 2008, the "FHA Forward" program was initiated. This is the part of the stimulus package that President George W. Bush had in place to raise the loan limits for FHA.

On April 1, 2012, the FHA enacted a new rule that requires their customers to settle with medical creditors in order to get a mortgage loan. This controversial change was rescinded and postponed until July 2012 but was later cancelled altogether pending clarification and additional guidance.

How to obtain an FHA loan

FHA does not make loans. Rather, it insures loans made by private lenders. The first step in obtaining an FHA loan is to contact several lenders and/or mortgage brokers and ask them if they are FHA-Approved by the U.S. Department of Housing and Urban Development to originate FHA loans. As each lender sets its own rates and terms, comparison shopping is important in this market.

Second, the potential lender assesses the prospective home buyer for risk. The analysis of one's debt-to-income ratio enables the buyer to know what type of home can be afforded based on monthly income and expenses and is one risk metric considered by the lender. Other factors, e.g. payment history on other debts, are considered and used to make decisions regarding eligibility and terms for a loan.

Section 251 insures home purchase or refinancing loans with interest rates that may increase or decrease over time, which enables consumers to purchase or refinance their home at a lower initial interest rate.

FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise credit-worthy borrowers and projects that might not be able to meet conventional underwriting requirements, protecting the lender against loan default on mortgages for properties that meet certain minimum requirements, including manufactured homes, single and multifamily properties, and some health-related facilities. The basic FHA mortgage insurance program is Mortgage Insurance for One-to-Four-Family Homes (Section 203(b)).

FHA allows first time homebuyers to put down as little as 3.5% and receive up to 6% towards closing costs. Specific FHA lender overlays may be tighter. For example very few lenders will allow a seller to contribute more than 3% toward allowable closing costs. If little or no credit exists for the applicants, the FHA will allow a qualified non-occupant co-borrower to co-sign for the loan without requiring them to reside in the home with the first time homebuyer. Unlike a conventional loan the co-signer does not have to be a blood relative. This is called a Non-Owner-Occupied Co-Borrower. Depending on the state you reside in, you may receive a discount on your State Transfer Taxes at settlement. Again, the specific FHA lender's underwriting guidelines will have their own standards. Very few lenders will fund FHA loans for buyers without a minimum 640 FICO score. For below 640 FICO scores, interest rates will be higher.

First Time Homebuyers can use the Mortgage Credit Certificate Mortgage Credit Certificate. The Tax Credit | MCC program is only available to homebuyers who have owned a primary residence in the past three years. Most State Housing Finance Agencies offer Downpayment Assistance Programs, including forgivable grants of $8000 or more. These programs saw a huge change in 2013, and no longer have a three year "waiting" period in order to qualify for the program. The Downpayment Assistance Programs do not carry monthly payments.

The Hybrid adjustable rate

FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are low, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan. In 2006 FHA received approval to allow hybrid ARMs, in which the interest is fixed for the first 3 or 5 years, and is then adjusted annually according to market conditions and indices.

The FHA Hybrid provides for an initial fixed interest rate for a period of three or five years, and then adjusts annually after the initial fixed period. The 3/1 and 5/1 FHA Hybrid products allow up to a 1% annual interest rate adjustment after the initial fixed interest rate period, and a 5% interest rate cap over the life of the loan. The new payment after an adjustment will be calculated on the current principal balance at the time of the adjustment. This insures that the payment adjustment will be minimal even on a worst case rate change.

INDEX AND MARGINS The index is the weekly average yield on U.S. Treasury Securities adjusted to a constant maturity of one year which is currently at .27%.(12/3/2010) Also known as the 1-Year Constant Maturity Index. FHA ARM loans have a 2.00% margin so the indexed rate that FHA loans adjust off of today is 2.27%.

Down payment grants

Down payment assistance and community redevelopment programs offer affordable housing opportunities to first-time homebuyers, low- and moderate-income individuals, and families who wish to achieve homeownership. Grant types include seller funded programs, the [1] Grant America Program and others, as well as programs that are funded by the federal government, such as the American Dream Down Payment Initiative, or local governments, often using mortgage revenue bond funds.

On May 27, 2006, the IRS issued Revenue Ruling 2006-27, categorizing the non-profit seller funded down payment assistance programs (DPA programs) as "scams." The IRS ruled that organizations such as AmeriDream and Partners in Charity are no longer eligible for non-profit status and are not acting as "charitable organizations" as defined by the IRS. This ruling was based largely on the circular nature of the cash flows, in which the seller pays the charity a "fee" after closing. Many believe that the "grant" is really being rolled into the price of the home. According to the Government Accountability Office, there are higher default and foreclosure rates for these mortgages.

On October 31, 2007, the Department of Housing and Urban Development adopted new regulations to ban so-called "seller-funded" down payment programs. The new regulations state that all organizations providing down payment assistance reimbursed by the property seller "before, during, or after" that sale must cease providing grants on FHA loans by October 30, 2007, with the exception of the Nehemiah Corporation. Nehemiah is the beneficiary of a lawsuit settlement with Department of Housing and Urban Development in April 1998. The terms of that settlement will allow Nehemiah to operate until April 1, 2008. Ameridream was granted an extension to the new regulations until February 29, 2008.

Several similarly operated government grant programs were introduced in response to the IRS Revenue Ruling in May 2006. Their governmental status made them exempt from the IRS Ruling, but they are still affected by the HUD Rule Change. One such organization was The Grant America Program, which was conducted by the Penobscot Indian Nation and had been available to all homebuyers in all fifty states.

Private mortgage insurance

Main article: Private mortgage insurance

Private mortgage insurance (PMI) guarantees home mortgage loans that are conventional, that is, non-government loans. This private "default insurance" covers the lender in a similar way that government loans likeFHA,USDA Home Loans and VA loan provide default coverage to lenders.

The PMI company insures a percentage of the consumer's loan to reduce the lender's risk; this percentage is paid to the lender if the consumer does not pay and the lender forecloses the loan.

Lenders decide if they need and want private mortgage insurance. If they so decide, it becomes a requirement of the loan. PMI companies charge a fee to insure a mortgage loan; the VA insures a loan at no cost to a veteran buyer (if the veteran has a service connected disability, otherwise the veteran pays a fee for the loan guarantee); the FHA charges a fee to guarantee the loan.

On June 11, 2012, the FHA deployed a two-tiered private mortgage insurance schedule. New FHA mortgages and refinances of an existing FHA mortgage which was endorsed by the FHA on, or after, June 1, 2009 are subject to an upfront mortgage insurance premium (UFMIP) of 1.75% and an annual mortgage insurance premium (MIP) of up to 1.25%. Upfront and annual mortgage insurance premiums for FHA loans which replace existing FHA which were endorsed by the FHA prior to June 1, 2009 via the FHA's streamline refinance program pay just 0.01% and 0.55%, respectively.

Beginning April 1, 2013, the FHA will raise its MIP schedules again. The new MIP rates are as follows :

• 15-year loan term, LTV greater than 78 percent, less than 90 percent : 0.45% annually
• 15-year loan term, LTV greater than 90 percent : 0.70% annually
• 30-year loan term, LTV less than, or equal to, 95 percent : 1.30% annually
• 30-year loan term, LTV greater than 95 percent : 1.35% annually

Loans which exceed $625,500 are subject to an MIP surcharge. Loan terms of 15 years or fewer are assessed an extra 0.25 percentage points of annual MIP. Loan terms of more than 15 years, including the 30-year fixed rate mortgage, are subject to a 0.20 percentage point surcharge.

June 3, 2013, the FHA implements additional changes.

• 15-year loan terms with a loan-to-value less than, or equal to, 78 percent will be assessed a 0.45% annual MIP.
• FHA mortgage insurance premiums will not cancel for loans with a starting LTV exceeding 90%
• FHA mortgage insurance premiums must be paid for a minimum of 11 years for loans with a starting LTV of 90% or less

FHA-insured homeowners using a 15-year loan term and with more than 22% home equity are exempt from annual mortgage insurance payments.

External links

• FHA loans (Department of Housing and Urban Development)
• FHA Loan Limit Calculator (City/State/Zip Loan Limit Calculator)
• FHA Approved Condo Lookup