What is a FHA Mortgage Loan?The FHA 203(b) Mortgage Loan is the most “basic” FHA-insured mortgage loan. There are several types of FHA-insured loans … a whole alphabet soup of them. This is the one buyers talk about when they apply for a home loan.
FHA loans are Not Just for First Homebuyers. FHA loans can also be used to:
• move up to a bigger home
• downsize to a smaller one
• Buy a second/vacation home
• Refinance an existing mortgage loan
• However … You can have only one FHA-insured loan at a time. You can’t have a FHA insured loan in your name and get a second loan.
But before we go too much further …Let’s Talk About Some Basics. The Federal Housing Administration (FHA) is a federal agency that insures loans made by FHA-approved lenders. The FHA’s objective is to assist in providing housing opportunities to families who cannot meet the qualification requirements for conventional mortgage loans.
• FHA does not set interest rates. Rates are determined by market conditions and negotiated between the buyer and the lender.
• FHA does not lend directly. The money comes from participating lenders. FHA works with these lenders to insure quality, regulatory compliance, and fairness in the lending process.
• FHA Mortgage Insurance provides FHA-approved lenders with protection against the risk that homeowners will default (foreclosure) on their mortgage obligation. The comfort level of FHA insurance enables these lenders to consider applications from buyers with as little as 3.50% down payment, credit scores in the mid-600 range and low interest rates.
FHA 203b Loan Guidelines: FHA sets the guidelines to qualify for a 203(B) mortgage. There are a lot of them. Participating lenders may add “overlay” criteria to qualify for their version of the 203b mortgage. For example; FHA sets minimum credit score of 580 to qualify for this program. Most lenders require a minimum score of 640 to qualify. Talk candidly with your mortgage broker about your situation and about his access to lenders who offer FHA mortgages with the overlays that address your needs. Here is an overview of the more attractive features of a FHA 203b mortgage: • Owner occupied homes only — you must intend on living in the property.
• The program is not restricted First-Time Home Buyers. Any qualified borrower may utilize these loans for financing the purchase of a new home.
• FHA insurance enables lenders to offer the program at a lower interest rate than might be available to a buyer with similar circumstances who opts for a conventional loan product.
• The FHA 203b program allows for a 3.5% down payment. These monies can come from the borrowers’ own savings or can be a gift from family members. The program also allows 100% of the closing costs can be in the form of a gift.
• The FHA 203(b) will consider the income of non-occupant co-borrower to help qualify for the loan. This is a great way for parents to help young buyers purchase their first home.
• Seller Concessions: Home sellers can elect to contribute up to 6% of the house purchase price toward the closing costs associated with the loan. Buyers should discuss this option with their Realtor® when negotiating the purchase contract.
• The 203(b) loan can be structured as a fixed rate mortgage or an adjustable rate mortgage (ARM) loan. There tends to be more flexibility in calculating household income and debt-to-income ratios.
• The FHA 203(b) can be used to a single family, a duplex, a 3 family, or a 4 family multi-unit, owner occupied property. Remember, with a 3-4 unit loan, the down payment requirement is greater and the buyer must have 3 months mortgage, taxes and insurance payments (PITI) available in savings after the loan closes.
Now Let’s Talk About Mortgage Insurance. To cover the risk of a borrower defaulting on the monthly payments, FHA charges an Up Front Mortgage Insurance Premium (UFMIP) as well as an annual MortgageInsurance Premium (MIP). The cost of this insurance is paid for by the borrower. The UFMIP is typically added to the base loan amount and becomes part of borrower’s monthly payment. The annual MIP is divided into monthly installments and included in the borrower’s monthly obligation.
Recent legislation has made FHA insurance more expensive. Give me a call. Let’srun the numbers to see if an FHA 203(b) is the best option for you and your family
Bottom Line When your mortgage is insured by FHA, you become a secure and desirable borrower. Lenders are willing to extend benefits to you can’t find with conventional loans. The major benefit of FHA Loans is that you can qualify for a loan with a low down payment. Most conventional loans require a 20% down payment. FHA loans require a 3.5% down payment. With a gift for the down payment and seller concessions for the closing costs, you could move in with very little out-of pocket expense. Plus, should you have low credit scores or low income, you will still be able to take advantage of the benefits that make FHA Loans so affordable. Talk to your loan officer, or give me a call, to see if this is the Right mortgage option for you.