FHA insured loan
|This article's factual accuracy may be compromised due to out-of-date information. (November 2010)|
An FHA insured loan is a US 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, an upfront mortgage insurance premium (UFMIP) equal to 1.75 percent of the base loan amount at closing is required, and is normally financed into the total loan amount by the lender and paid to FHA on the borrower's behalf. There is also a monthly mortgage insurance premium (MIP) which varies based on the amortization term and loan-to-value ratio.
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.
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 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. By November 2012, the FHA was essentially bankrupt and regulators would have shut it down if it were a private firm.
How to obtain an FHA loan
|This section does not cite any references or sources. (July 2009)|
The 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. FHA loans for buyers who don't meet a minimum 640 FICO score may be subject to higher mortgage rates.
The FHA makes provisions for home buyers who have recovered from "economic events". Via the Back To Work - Extenuating Circumstances program, the FHA reduces its standard, mandatory three-year application waiting period for buyers with a history of foreclosure, short sale or deed-in-lieu; and two-year application waiting period after a Chapter 7 or Chapter 13 bankruptcy. For buyers who can show that the economic event was preceded by at least a twenty percent household income reduction which lasted for six months or more; and who can show a satisfactory credit history for the most recent 12 months, the FHA will allow an application, and will agree to insure the home loan. The Back To Work program lasts through September 30, 2016.
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. However, 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 that person to reside in the home with the first time homebuyer. The co-signer does not have to be a blood relative. This is called a Non-Owner-Occupied Co-Borrower.
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.
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  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
The FHA employs a two-tiered mortgage insurance premium (MIP) 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 1.55%. 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 0.01% and 0.55%, respectively.
The FHA MIP schedule was most recently updated June 2013. The current schedule is shown below:
- 15-year loan term, LTV up to 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.
FHA MIP will self-cancel for some FHA-insured homeowners, and not others.
- 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
Cash Out Limits
If one has an FHA insured loan and has equity in their home, per the FHA, one can opt for a Cash Out Refinance up to 95% LTV. FHA Cash-Out Refinance criteria per HUD:
- Homeowners with an FHA or conventional loan that is seasoned at least 12 months with last 12 payments made within the month due may apply for a cash-out refinance at 95%. If you don’t meet this, you’re limited to 85% Loan-to-Value (LTV).
- Up to 95% LTV on your FHA First note/mortgage that doesn’t exceed $417,000 (general loan limits for FHA).
- Current appraised value is used in determining maximum loan amount. There are no seasoning requirements for subordinate liens (i.e. second mortgages).
- Unlimited CLTV for re-subordination and/or modification of existing subordinate financing. Also applicable for FHA first mortgages limited to 85% LTV.
- Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood, Ill: Irwin. pp. 118–121. ISBN 0-256-13948-2.
- HUD News Release 07-123
- HUD News Release 08-030
- "FHA delays controversial collections rule for mortgage coverage eligibility". HousingWire. Retrieved 30 November 2012.
- "Mortgagee Letter 2012-10". U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT. Retrieved 30 November 2012.
- "F.H.A. Hopes to Avoid a Bailout by Treasury". New York Times. Nov 16, 2012.
- "F.H.A. Audit Said to Show Low Reserves". New York Times. Nov 14, 2012.
- "Bet the house: why the FHA is going (for) broke". Jan 19, 2012.
- Green, Dan. "Effective Immediately, FHA Waives Foreclosure Waiting Periods Via Its "Back To Work – Extenuating Circumstances" Mortgage Program". The Mortgage Reports. Retrieved 18 August 2013.
- Downpayment Assistance News » Blog Archive » IRS Revenue Ruling to end Seller-funded DPA “scam”
- GAO-06-24 Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance
- AmeriDream Granted Extension
- Grant America Program | Down Payment Assistance for Homebuyers
- "FHA Streamline Refinance Mortgage Guidelines (Plus Mortgage Rates)". The Mortgage Reports. Retrieved 20 August 2013.
- "Beat The New FHA MIP Cancellation Policy, Effective June 3, 2013". The Mortgage Reports. Retrieved 20 August 2013.
- "FHA Cash Out Refinance Guidelines".
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