An amazing number of Southern California Real Estate professionals have never written an offer with FHA financing. The reason was simple: When home prices started to escalate, the FHA loan limits did not follow suit.
That has all changed now and suddenly FHA financed home purchases are back in vogue. To assist you in your planning, we've put together the rules of the road for FHA loans. Obviously, things change so you will want to consult with the lender of your choice for the latest information, but for starters the following information should help you decide if an FHA loan is in your future.
Remember the first step is to get fully approved by your lender. Then, armed with that approval and with the help of your Exclusive Buyer's Broker you can be assured that sellers will carefully consider your offer.
FHA
It’s not just for first-time home buyers
Multiple FHA programs
Basic FHA rules apply to most programs
203 (B) for single family residences, 1 to 4 units and PUD’s
234 (C) for condo’s (may be folded into 203 (B) in the near future, which may eliminate the need for condo project approval, but will still need to meet certain guidelines
203 (K) rehabilitation loan
Reverse
Secure
HOPE
Down payment assistance from State, County and (some) Cities
Documentation Needed
1. Copy front & back of ID, Social Security Card and if applicable, Permanent Resident card.
2. 30 days of pay stubs, OR
3. Current profit & loss year to date if self employed
4. Federal tax returns for previous 2 years, all pages with schedules
5. W 2’s / 1099’s for previous two years
6. 3 months bank statements, all pages, even if blank
F H A Basics
· Down payments as low as 3.5%
· Non-occupant co-borrowers allowed
· Up to 6% seller contributions
· 100% gift funds allowed
· No minimum reserve requirements
· Manual and automated underwriting
· NOT limited to first time home buyers, can own other homes
· Fixed rate assumable loan
· Fixed loans can be 10, 15, 20, 25 or 30 year terms
· ARMS 3/1, 5/1, 7/1, and 10/1 with 30 year terms
· 1, 3 and 5 ARMS have 1% annual cap & 5% over start rate
· 7 and 10 ARMS have a 2% annual cap and 6% over start rate
· Max loan amount (San Diego County) $546,250 on most programs. Loans over $417,000 and LTV is 95% or greater requires two appraisals
· MIP and MMI – All FHA loans, regardless of LTV, require an upfront mortgage insurance premium (MIP) and then monthly mortgage insurance (MMI). The borrower pays the MIP at closing and the MMI with each monthly payment. The upfront premium is added to the loan and financed over the term of the loan.
· Example using the 1.75% MIP and .55% MMI:
· $400,000 purchase price
· $386,000 Base loan amount ($400k x 96.5%)
· $6,755 MIP (386k x 1.75%)
· $392,755 Total loan amount ($386k + $6,755)
· $180.01 Monthly MMI ($392,755 x .55% = $2,160 divided by 12 months)
· MMI can be removed after a minimum of 5 years and reduction in principal balance to 78% of the original loan balance
· All FHA loans must have tax, insurance & MMI impounds – NO exceptions
· For loans submitted with a credit report, all borrowers must have at least one valid credit score.
· Use of the lower of 2 or middle of 3 scores for the lowest scoring borrower
· Non-traditional credit is allowed for borrowers with no credit scores; borrower must have 3 trades, rated for 12 months with no late payments in the previous 12 months. Borrowers do not have to have a minimum credit score, but scores under 580 are difficult to approve. Borrowers must pay all tax liens and judgments before COE. Collections must be explained.
· All FHA purchase loans, except reverse, require full income and asset documentation. All FHA loans can be run through Fannie Mae DU of Freddie Mac LP. An approval by one of these systems is acceptable to FHA regardless of debt to income ratios. However, the FHA underwriter has the discretion to override an automated approval based on certain negative factors such as poor credit payment history. If the loan is not approved through DU or LP, the loan may be manually underwritten. Regardless of the underwriting method, FHA loans must meet basic prudent underwriting standards. An FHA underwriter always has the final say. FHA loans are story loans. If the story makes sense and the borrower has the capability to repay the loan then it is more likely to be approved.
· Spouse’s debt and obligations must be included in the DTI even if the spouse is not on title.
· Borrower must provide proof of rental payment or VOR to prove 2 year residence history.
· 60 day paper trail on all borrowers’ asset accounts.
· Large deposits must be sourced
APPRAISALS
· All FHA loans require a full appraisal. Loans above 94.99% LTV and over $417k require two appraisals
· Appraisals must be performed by an FHA approved Appraiser
· (TIP) Turn on the utilities before the appraisal!
· Appraisers also inspect the property while appraising. The subject property must meet FHA standards prior to loan funding. This will affect properties being sold “as is”. Repairs noted on the appraisal must be completed before closing. The appraiser must inspect repairs and issue a clear inspection report prior to funding. (The appraiser is not a substitute for your home inspector).
· Site, Structural and Safety hazards are not different than conventional appraisal.
· The seller must pay the tax service (usually about $80). All other fees can be paid by the borrower.
· Termite report is not required unless it is a part of the contract, or requested by the appraiser. If a termite report is required, a termite clearance must be issued.
· Borrowers may only have one FHA loan at a time.
· Non-occupant borrowers are permitted to help the borrower qualify. Must be a relative or have a relationship that extends beyond the transaction.
· The subject property must be owner occupied. No investment property purchases are allowed.
· FHA Loans may take a little longer than conventional loans because of the current volume being written.
· Condos must be on the FHA approved list
· Condo conversions must have been converted for at least 1 year before you can close an FHA loan in the project.
203 (b) and 234 (c)
The majority of FHA loans are either 203 (b) or 234 (c). If the 234 (c) is folded into the 203 (b) program, this would open up more condo financing.
203 (k) Rehabilitation
· One loan to buy and rehabilitate a home
· 2 programs, (a) Streamline (b) Standard
· Streamline not for structural, max $35,000 for repairs
· Standard can do structural work up to FHA maximum limits
· Purchase REO’s in “as-is” condition
· Appraisal takes into account the future value of the home
FHA Reverse Mortgage
· Good credit not needed
· NO job needed
· No monthly payments
· Can have an existing mortgage up to 50% LTV
· Can do cash out to buy other properties
Secure
· Can refinance even if late on mortgage
· Must have been on time with mortgage for the previous 6 months, prior to loan adjusting
· Will have to qualify for a new loan
· Allows higher CLTV
· Voluntary from existing bank
Hope for Homeowners
· Currently only offered through banks for their clients
· Includes drop in principal balance
· Must show they have not purposely missed payments
· Have to share future equity
· Can only own 1 home
· Voluntary by existing bank
Down Payment Assistance
· Federal, state, county or city programs
· Silent seconds
· Some have shared equity
· Down payment help
· Closing cost help
· Tax credits