Mortgage: Everything you need to know....and more!
During the real estate boom, home loans backed by the Federal Housing Administration, or FHA, made up only a minority of loans. Higher home prices and the popularity of interest-only and no-down payment loans made FHA loans almost nonexistent."In many areas, real estate prices had skyrocketed above the loan limits set by FHA per county," says John Councilman, federal housing chairman for the National Association of Mortgage Brokers, or NAMB, and president of Maryland-based AMC Mortgage Corp.
Now, the FHA is underwriting loans at quadruple the rate of three years ago, according to The New York Times. In fact, half of the FHA's current portfolio originated in 2009, and FHA loans comprise almost 50 percent of the entire home-loan market, says FHA Commissioner David H. Stevens.
Why the popularity?Higher loan limits, lower home prices and a low down payment requirement have made these government-insured loans a more secure bet for homeowners. As a result, more homes now qualify for an FHA loan and you can now purchase a higher priced home using an FHA loan than in past years, Councilman says.
Not only that, but stricter traditional loan requirements, such as higher down payments and higher required credit scores, have forced many homebuyers to turn to the less-restrictive FHA loan, he says.
"The huge benefit right now is the ability to still get into a home with a low down payment," says David Doerr, a mortgage consultant with Wells Fargo Home Mortgage in Salt Lake City. "That's the reason why FHA has gone from 3 percent of the market a couple of years ago to 50 percent of the market today."
However, things may be changing. "There's a great incentive to buy right now as there's a proposal out there to change the FHA loan program to require increased down payments, higher credit scores and more expensive FHA insurance premiums," says Councilman. Still, it takes an act of Congress to change FHA loan requirements, and it may be some time before FHA tightens the reins.
Here are seven things to know about getting an FHA loan today:
- You should go to an FHA-approved lender or broker, Councilman says. He recommends consumers also use a broker certified by the NAMB. For a list of FHA-approved lenders and brokers, go to the U.S. Department of Housing and Urban Development Web site.
- You can expect a low down payment. An FHA loan requires only a 3.5 percent down payment and you can get that down payment as a gift. For a borrower low on down payment funds, this is a great advantage. "You can get a gift from an approvable source such as an employer, relative or a nonprofit or government agency that offers down payment assistance," says Councilman.
- Because FHA insures your mortgage, lenders may be more willing to give borrowers loan terms that make it easier to qualify. According to HUD, in a 19-month period from January 2008 to August 2009, the average credit score for FHA-insured mortgage loans increased from 621 to 692. For conforming loans, credit scores in this range will require a 20 percent to 30 percent down payment. "It's up to the underwriter to determine the acceptable credit score," says Councilman.
- First-time buyers have some advantages. "A huge thing is that they can have a nonoccupant co-borrower," says Alexander Castellanos, a loan officer with SunTrust Mortgage and a governor for the Mortgage Bankers Association of Florida.
"For a kid who just finished college and has nominal credit, a parent can co-sign. Then, once the kid is in better financial shape, he or she can assume the loan without having to refinance to possibly higher rates," he says.
- Sellers can contribute to closing costs. "Sellers can pay up to 6 percent of the purchase price. So if you have a $100,000 home, they can pay up to $6,000 toward closing costs," says Councilman. In a traditional loan, sellers can only contribute up to 3 percent.
- There's help in finding the FHA loan limits in your area. FHA loan limits -- the maximum amount a homebuyer can borrow -- vary based on a variety of housing types and the state and county in which the property is located. To look up your area's loan limits, go to the HUD Web site.
"Some counties have loan limits below $300,000 while others have limits as high as $729,000," says Councilman.
- For FHA approval, you'll need to document your income well. "FHA does have some rules that are tougher than with conventional loans," says Councilman. For example, in order to get approved for an FHA loan, you must account for every penny (of income) that comes in, he says. "Conventional loans start with lower qualifying ratios," he says.
Councilman says, "Fannie Mae and Freddie Mac's qualifying debt to income ratio is approximately 28 percent (percentage of gross monthly income used to pay housing costs) to 36 percent (the percentage of income that goes toward paying all recurring debt payments including housing); FHA's starting ratio is 31 percent to 43 percent. They also want income documentation to prove you have a stable source of income before approving the loan."
For a moderate-income buyer who can't afford a large down payment, an FHA-insured mortgage loan can be a viable option.
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