Entries Tagged 'FHA Financing' ↓

FHA Loans Carry Many Benefits for Home Buying or Refinancing

FHA loans are becoming popular again! It’s an institution that has been around for a long time, since June 27, 1934. The Department of Housing & Urban Development folded the Federal Housing Administration (FHA) under its umbrella in 1965.

FHA loans began to lose favor in the late 1990s, when home values began to inch upwards, surpassing FHA mortgage limits, and sellers balked at FHA’s stringent appraisal guidelines.

How FHA Loans Work
Now, FHA does not make loans or guarantee loans. It insures loans. The insurance removes or minimizes the default risk lenders face when buyers put down less than 20 percent. Without further approval from FHA, its approved lenders are authorized to:

• Take loan applications
• Process loan applications
• Underwrite and close the loan

It’s almost inconceivable to think of a home costing that today. As a result, FHA periodically increases its mortgage limits. As of July, 2006, mortgage limits range from:

• $362,790 for high-cost areas
• $200,160 for low-cost areas
• $544,185 in Alaska, Guam, Hawaii and the Virgin Islands

Blemished Credit History
If your credit is less than perfect, FHA might be the loan for you. You may qualify for an FHA loan even though you have had financial problems.

• Fico Scores do not apply.
• Bankruptcy. You can obtain an FHA loan two years from the date of your bankruptcy discharge, as long as you’ve maintained good credit since your debts were discharged.
• Foreclosure. If you keep your credit in excellent shape since a foreclosure, an FHA loan will be available to you two years from the final date of your foreclosure.

Competitive Rates & Terms
Today’s terms are pretty straightforward. In fact, in many markets the rates and terms are better than those for 80% / 20% Piggy Back loans.

• There is little or no adjustment to the interest rate for an FHA loan, as the rates vary within .125 percent of a conventional loan.
• Mortgage insurance is funded into the loan, meaning a premium of 1.5% is added to the loan balance instead of being paid out-of-pocket. In addition, a small portion for the mortgage insurance premium is added to the monthly payment, but it is far less than private mortgage insurance premiums.
• Borrowers can finance 97% of the purchase price and put down 3 percent. In some instances, when combined with other types of loans, the down payment can be zero.
• Allowable debt ratios are higher than the debt-ratio limits imposed for conventional loans.

Fewer Required Repairs
At one point, FHA repair demands were so excessive that sellers would discount the list price to buyers who would agree to obtain conventional loans over FHA loans. Today the requirements appear more reasonable.

• Defective roofs that leak still need to be replaced but an older roof does not necessitate replacement if it doesn’t leak.
• Windows that stick upon opening or have cracked panes do not require replacement.
• FHA appraisals do not take the place of a home inspection, never have. Buyers should still obtain a professional home inspection.

FHA loans are available to anybody but are used most often by first-time home buyers and low- to moderate-income buyers.

Effective today, Amerifirst Home Mortgage officially offers the new FHA Secure Mortgage product to borrowers who qualify. The FHA Secure product allows homeowners to refinance various types of Adjustable Rate Mortgages that have recently reset. Some of the eligibility highlights include:

1. The mortgage being refinanced must be a non-FHA ARM that has reset.
2. The borrower’s payment history on the non-FHA ARM must show that prior to the reset, the borrower was current in making monthly mortgage payments.
3. Under certain conditions, if there is sufficient equity in the home, FHA will insure mortgages that include missed mortgage payments. FHA will permit first liens, purchase money seconds, closing costs, pre-paids, discount points, prepayment penalties and late charges. The amount of the FHA Secure Mortgage may not exceed either the geographical maximum mortgage limits or the standard maximum LTV ratios set by FHA.
4. Lender must document that the reset of the non-FHA ARM monthly payments caused the borrower’s inability to make the monthly payments and that the borrower has sufficient income and resources to make the monthly payments under the new FHA insured refinance.
5. FHA encourages the use of Total Mortgage Scorecard to obtain risk classification. If TOTAL renders an “accept/approve”, the underwriter will not need to perform review of the borrower’s credit history and capacity to repay. In the more likely event that the risk class is a “refer”, the underwriter must determine borrower has the capacity to pay, and ratios should remain 31/43. Compensating factors are to be provided to underwriter when ratios are exceeded.
6. The FHA Secure initiative is for refinancing borrowers that were harmed by non-FHA ARMs that have recently reset. It is not to be used to solicit homeowners to cease making timely mortgage payments. FHA reserves the right to reject applications where it appears that a loan officer or other mortgage employee suggested that the homeowners could stop making their payments; refinance into an FHA insured mortgage and keep the amount of payments not made on time.

Amerifirst Home Mortgage also notes that this program is temporary and requires applications be signed no later than December 31, 2008.  This program subject to change at anytime.

Much has been made of late on HUD trying to eliminate Down Payment Assistance (DPA) programs such as the popular Ameridream and Nehemiah programs.  HUD actually issued a rule in September banning all down payment assistance from the seller, effectively closing down the traditional DPAs.  Both companies sued and were issued an injunction until the judge can rule on the Ameridream case.

But why is HUD trying to shut these programs down when their name just sounds so good…”down payment assistance”? 

You first have to understand how the DPAs work with FHA financing. 

With FHA, the buyer is required to have 3% into the deal.  When the borrower lacks 3% to put into the deal the obvious answer in the FHA world is to utilize a DPA program.
The DPA would provide the buyer their 3% investment in the form of a gift, from a non-for profit organization.  In return the seller would pay the DPA program the 3% plus a fee. 

So what would the seller do? 

They would either, A) raise the price of the home to cover the DPA costs or B) not lower the price as much as they would have, to cover the DPA.

So in essence, the buyer was obtaining 100%, which is not something FHA wants — or will want (I’ll be discussing possible changes to FHA in a future blog).

In the past, when prices of homes were appreciating rapidly, this would not normally be a problem.  In many cases, by the time the deal actually closed, the 3% had been earned (and then some) and the buyer would have equity built in already.  However, now the market has turned and home prices are now stagnant to declining in most markets across the country. 

In today’s market, if a buyer uses a DPA to get into a home, by the time the home closes now, it may be worth less than what it was when they purchased the home.  If the buyer were to be forced to sell the home, they would not be able to sell it for what they paid for it.  In those cases the buyer/borrower is more likely to just walk away from the home.

This issue with DPAs is not a new one.  It has always been a hot button issue with HUD.  But when the market was good, it was easier to overlook.  Now is the appropriate time to examine what can be done.

With the market changing and FHA financing coming back onto borrowers and lenders radar, changes to the DPAs had to come.  What the ultimate outcome will be is yet to be seen, but it does not look good for Ameridream and Nehemiah.  You may still be able to take advantage of these programs for the next few months, but maybe not much longer.  The elimination of the DPAs is sad, as the program has helped hundreds of thousands of people get into their homes. 

It is also another reason that FHA must change to be more accommodating to those with lesser means.  FHA must modernize, to be able to continue to provide homeowners and lenders the types of financing that is attractive to both.  Look for more information about “FHA Modernization” soon to come.

FHA will allow you to refinance up to 97.75% of the value of your home when just refinancing the balance of your loan plus closing costs and prepaids.  FHA will also allow you to pull cash out of the value of your home up to 95% of the value of your home.  FHA will also allow you to go above 100% combined loan to value “CLTV” when refinancing your loan, this is one of the changes that FHA has come out with.  Let me explain what this means.   If you have a first loan and a 2nd loan, 1st loan for 100k and the 2nd loan for 50k and the value of your home is only 145k obviously there isn’t enough value to refinance both loans into one loan.   What they will allow you do to “(2nd mortgage company permitting and 99% of the time they will)” is to only refinance the 1st loan for 100k and leave the 2nd mortgage in place.    As long as your Debt To Income DTI, job time and credit profile are in place you should be fine with this time of scenario and should qualify for a refinance into nice interest rate, fixed rate mortgage.  Call for details or to get a FREE evaluation.   We might even be able to lower your payment and take years off your loan.