FHA Loan. The Consumer Giude to FHA Loans.


Whether you are buying or refinancing a home, an FHA loan might be a great option. FHA loans have flexible credit guidelines and low fixed rates.

FHA loans also offer down payments and underwriting. These loans are backed by the government and administered by HUD. The FHA requires buyers to make down payments of at least 3 percent; however, it also allows nonprofit agencies to bestow gifts of down payment money to buyers. Many nonprofit agencies were started to do this.

Down Payment Assistance

A seller is not allowed to give down payments to the buyer. However, a non profit agency can facilitate a down payment assistance plan. This requires that the seller, buyer and lender all cooperate. The seller donates money to the down payment assistance provider (often equivalent to a 3 percent down payment). At closing, the program gives the money to the buyer out of the program’s pool of money. Immediately afterward, the seller gives the program a contribution equal to the down payment plus a processing fee.

Congress has raised the loan limits for FHA loans higher loan limits mean lower rates for more people. Fill out the form to find out if you can take advantage of an FHA loan.

FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. The loan may be issued by federally qualified lenders.

FHA loans have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. 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.

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.

The history of FHA loans

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 Bush had in place to raise the loan limits for FHA.

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 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% and receive up to 6% towards closing costs. If little or no credit exists for the applicants, the FHA will allow a blood relative, such as a parent, to co-sign for the loan without requiring them to reside in home with first time homebuyer. 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.

Required Documentation For FHA Loans

  • A two year history of employment. Employment in the same field is preferred, but not required. (W-2, 1099 or tax returns)
  • If you are a recent student, your last two years of schooling can be used if you are currently working with a minimum 30 days on the job with 2 pay stubs
  • Credit Scores normally need to be above 620 for Conventional financing-620 for FHA unless an exception is made (640 for streamline FHA) and VA looks at a case by case basis (620 is the rule of thumb). Collection accounts must be paid, except for medical collections
  • If no credit history exists-you may use cell phone bill, cable bill, previous rental history, etc. to establish a “pattern” of good credit payments (program has been eliminated)
  • Proper ID as defined by the Patriot Act (State Driver’s License or ID along with a copy of your Social Security card required)
  • Debt Ratios should be below 40% housing and 45% total (higher DTI may be acceptable with compensating factors)
  • Chapter 7 Bankruptcy discharged greater than 24 months or Chapter 13 twelve months with perfect pay history.
  • Foreclosure, deed in lieu, and SHORT SALES finalized (property sold) greater than 36 months.

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 program 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.