Joanne Marie Tucker

Joanne Marie Tucker
Residential Mortgage Loan Originator

o: FAX817-329-3487

FHA Loans

The Ups and Downs of FHA:

In 1934 the government set up the Federal Housing Authority (FHA) to help stimulate an economy in crisis. FHA programs were designed to help people buy their houses rather than rent. FHA programs allow more flexibility than is available for borrowers seeking conventional loans (Fannie Mae / Freddie Mac loans). However, the FHA does not actually make the loans; they insure them.

The importance of FHA in the home mortgage market has changed markedly over the years. This has been due less to changes in the FHA itself than to changes in the broader market in which it operates.  

In the early 90s, FHA had about 15% of the home purchase market. In subsequent years through 2006, FHA lost business to the growing sub-prime market, which took many borrowers who could have gone FHA. In addition, FHA lost business to the prime conventional market, which developed and aggressively merchandised option ARMs and interest-only products, as well as reduced documentation underwriting, none of which FHA offered. In 2006, FHA's share of the purchase market had fallen to less than 4%. 

Then came the financial crisis. With home prices declining and defaults rising, the sub-prime market largely disappeared; option ARMs declined to a trickle; and documentation requirements on conventional loans were substantially tightened. In addition, FHA loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA's market share of new purchases was back to about 15%, and its share of refinances was substantially higher.

The FHA Market Niche


An FHA borrower in  2010: 1) Does not need a loan larger than the FHA maximum in the borrower's county; 2) Can put down a minimum of 3.5% 3) Is not eligible for a VA or USDA loan, which allow zero down; and 4) Can't be approved for a conventional loan but can be approved under FHA's more liberal underwriting rules.

On conventional conforming loans (those eligible for purchase by Fannie Mae and Freddie Mac), mortgage insurance is required if the loan-to-value ratio exceeds 80%, and private mortgage insurance is not available to borrowers with FICO scores below 680. Hence, borrowers with LTVs above 80% and FICOs below 680 must go FHA, which will take scores down to 620.

A borrower who can put 10% down on a loan no larger than the FHA maximum, and with a credit score of 680 or higher, will usually do better with a conventional loan, but there can be exceptions.

FHA loans are assumable while conventional loans are not. That means that a home purchaser today who finances the purchase with an FHA, and who sells his house later when interest rates are higher, will be able to offer a potential buyer the right to assume his low-rate FHA loan. After approval of the buyer by FHA, on sale of the property, the buyer will assume all the obligations under the mortgage, just as if the loan had been made to her, and the seller will be relieved of liability.

The major driving force behind assumptions is the lower interest rate on the assumed mortgage relative to current market rates. If the home seller has a mortgage with a rate below the current market rate, both buyer and seller can be better off if the buyer assumes the seller's loan. The buyer enjoys a lower rate and also avoids the settlement costs on a new mortgage.

Working with approved lenders, the FHA serves to lower the risk for the lender, thus making loans more readily available. If the borrower defaults, FHA pays the lender. Even though the insurance cost is passed down to the home owner, after paying down the loan, the borrower may drop the insurance. The equity that has been built up serves as the security the lender needs to feel comfortable with the loan. With an FHA loan, if the borrower experiences unforeseen hardships, FHA has options to help keep the home out of foreclosure. The lender must follow FHA's servicing guidelines; therefore, an FHA insured loan offers the borrower protection as well as the lender.

On loans closed on or after January 1, 2001, FHA's annual mortgage insurance premium will automatically be canceled-once the unpaid principal balance, excluding the upfront premium, reaches 78% of the lower of the initial sales price or appraised value. The 78% is based on the initial amortization schedule, and does not take account of extra payments. This cancellation rule applies only to FHA's mainstream insurance program. It does not cover mortgages on condominiums or Section 203(k) rehabilitation loans, among others.

Borrowers who have made additional payments to principal must take the initiative, through their lender, to have the insurance terminated using the 78% rule. The insurance must be in force for at least 5 years unless the original term was for 15 years or less, in which case there is no minimum period

FHA Loan Limits


The loan limits on FHAs effective until year-end 2010, established on a county basis, ranged from $271,050 to $729,750 on one-family houses. Loan limits on 2-4 family houses were higher. The limits were the same as those applicable to Freddie Mac and Fannie Mae except that the lowest limit for the agencies was $417,000. You can find the FHA limit applicable to any particular county at https://entp.hud.gov/idapp/html/hicostlook.cfm.

Down Payment Requirements


In 2010, FHA's 3.5% down payment compared to 5%-10% on most conventional loan programs.  The only generally available zero-down loans are VAs and USDA loans in rural counties.

FHA borrowers in some cities, counties or states have access to special programs that eliminate the need for a down payment by offering second mortgages at favorable terms. Usually, no payments are required on the second until the house is sold. The public agencies offering these programs have their own eligibility rules that are independent of FHA.

Other Underwriting Requirements

FHA will accept lower credit scores than are acceptable on prime conventional loans, as noted above, and are more forgiving of past mistakes. FHA will forgive a bankruptcy after only 2 years with reestablished credit, and a foreclosure after 3 years. 

Mortgage Insurance

Effective October 4, 2010 - the upfront mortgage insurance premium is 1%. The monthly mortgage insurance for loans over 95% will be .9 and for less than 95% will be .85 for 30 yr loans. For 15 yr loans there will be no monthly mortgage insurance for loans smaller than 90% and .25 for loans over 90%

Types of FHA loans:

Energy Efficient Loan - FHA's Energy Efficient Mortgage program allows homebuyers to build the cost of energy efficient improvements into their FHA mortgage. The Energy Efficient Mortgage is a great way for homebuyers to save money on future utility bills

Officer Next Door/Teacher Next Door/Firefighter/Emergency Medical Technician Next Door

The "Officer Next Door" program offers HUD-owned, single family homes to law enforcement officers at a discount. It helps to prevent crime and promotes neighborhood safety and security by encouraging law enforcement officers to become resident homeowners in economically-distressed communities. The "Teacher Next Door" (TND) initiative offers HUD-owned, single family homes to public and private school teachers at a 50% discount if certain requirements are met. The TND program recognizes teachers for the value they bring to community and family life, and provides them with increased homeownership opportunities so that they can serve our most needy communities outside the classroom. The most recent addition, "Firefighter/Emergency Medical Technician Next Door" program recognizes these professionals with a discount on a HUD home too.

FHA's 203(k) - purchase and rehabilitation loan offers home buyers a single mortgage which provides money for home purchase, repairs and improvements.

FHA FAQ

Question: I believe that I may have experienced discrimination when I was looking for housing. How can I file a complaint?

Answer: You can file a complaint right on-line. Use HUD's Housing Discrimination web page. Or you can call the Housing Discrimination Hotline, toll free at (800) 669-9777.

Question: What is RESPA?

Answer: RESPA stands for the Real Estate Settlement Procedures Act. RESPA covers conventional mortgage loans on one-to-four family properties, as well as government insured and guaranteed loans. It requires lenders to provide borrowers certain settlement cost and loan information throughout the loan process (i.e., the Good Faith Estimate, Settlement Cost Booklet, HUD-1). RESPA also sets forth certain requirements for loan servicing and escrow accounts. The statute further protects borrowers by prohibiting kickbacks and referral fees which may increase costs in the settlement process. Further information can be found on HUD's web site. You may also call HUD's Customer Service Center for a copy of the helpful brochure "Buying Your Home." The number is (800) 767-7468.

Question: How can I find out about my credit history?

Answer: To find out about your credit standing you may wish to contact the three major credit reporting companies. Experian 1-800-682-7654 Equifax (800) 685-1111 Trans Union (800) 916-8800 A charge ranging from $5 to $20 dollars may be assessed for each copy of your report.

Question: Why do I need a home inspection? Aren't the physical deficiencies noted in the appraisal?

Answer: Appraisals are prepared for lenders; home inspections are for you, the buyer. Home inspections give you detailed information on the physical condition of your new home. For more information and a helpful brochure on home inspection call (800) 569-4287, or check out HUD's Home Buyers information on the web.

Question: Can the mortgage insurance premium be discontinued on an FHA loan?

Answer: If you have an FHA-insured mortgage, your mortgage insurance is a legal agreement between FHA and your lender. As of January 2001, newly FHA-insured mortgages may have premium-discontinuance options that you will want to understand. Carefully read FHA Mortgagee Letters 00-38 and 00-46 so that you are aware of these options when you ask your lender to discontinue the mortgage insurance.

Question: What is a Title I loan? What is the difference between a Title I and a Title II loan?

Answer: A Title I loan is a FHA-insured home improvement loan which can be used for the alteration, repair, or improvement of an existing single family structure; preservation of an historic residential structure listed or eligible to be listed on the National Register of Historic places; or alteration, repair or improvement of an existing manufactured home and/or mobile home classified as personal property or real estate. A Title I loan can also be used to finance the purchase of a new or used manufactured home on an installment contract. Title I home improvement loans are typically offered as 2nd mortgage loans and are available up to $25,000. Loans for purchase of a manufactured home are available up to $69,679 for the home only and $92,904 for the home and lot combined.

A title II loan is a FHA-insured 1st mortgage loan that a borrower can use to help purchase a home as a primary residence. Title II loans are available under a number of programs, including the popular Section 203(b) program which many first-time buyers use to buy a new or existing one-to-four-family home; the Section 203(k) program which allows borrowers to purchase or refinance and rehabilitate their residence if the home is a least one year old; and the Section 234(c) program for borrowers interested in purchasing a condominium residence. For more information contact an FHA approved lender or call the Customer Service/Distribution Center at (800) 767-7468 for written materials such as "Guide to Single Family Home Mortgage Insurance."

Question: How do I register a complaint about the M & M contractor?

Answer: Contact the nearest Homeownership Center. Or call (888) 827-5605.

Question: What is a "SuperNOFA"?

Answer: The "SuperNOFA" is a new streamlined way HUD notifies the public and distributes funding available through its competitive grant programs. Instead of more than 40 disparate, hard to track Notices of Funding Availability (NOFAs), HUD has consolidated information on HUD's competitive programs into three "SuperNOFAs". For more information visit HUD's website or contact your local HUD office.

Question: How do I apply for public housing or Section 8 certificates?

Answer: To apply for public housing or Section 8 certificates or vouchers, you must go to your local housing authority. Each housing authority has a system for accepting applications. For more information on public housing and Section 8 certificates visit HUD's webpage or contact your local HUD office.

Question: What is the telephone number for HUD handbooks and forms?

Answer: The telephone number for HUD handbooks and forms is (800) 767-7468. The information may also be located on the HUDclips website.

Question: I'm interested in renting and I don't have much money. Can HUD help me?

Answer: HUD doesn't operate and rent housing directly. But HUD does fund three kinds of local housing assistance that might help you:

  • Public housing, which is low-income housing operated by your local housing authority:
    Section 8 in which the housing authority gives the tenant a certificate or voucher that says the government will subsidize your rent payments. You must find your own housing; and
  • Privately owned subsidized housing, where the government provides subsidies directly to the owner who then applies those subsidies to the rents he/she charges low-income tenants.

Contact your local public housing agency for more information about public housing and Section 8 certificates and vouchers and how you to apply for these programs. If you're interested in privately-owned subsidized housing, you will need to check directly with the management office of rental agencies, which can be found in the classified section of your local newspaper.

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