fha home loan

Documents Required for FHA home loan

fha home loan

FHA loan: how to qualify?

fha home loan

Get a low down payment loan

NEW YORK (CNNMoney.com) — The credit crunch has made it hard for anyone to get a loan these days – and borrowers who can only make a small down payment are facing even tougher odds.

But it’s not impossible to land a low-down payment loan. The Federal Housing Administration (FHA) is actually still offering 3.5%-down mortgages to qualified buyers, even as the subprime loans that these types of borrowers had traditionally relied upon have dried up.

The FHA has been flooded with applications; in 2008 it helped 630,000 borrowers buy homes, most of them using low-down payment loans.

“People can get an FHA loan with very little out of pocket,” said George Hanzimanolis, a mortgage broker in Pennsylvania and past president of the National Association of Mortgage Brokers.

He recently arranged an FHA mortgage for a client last month for $242,500 on a $250,000 home. The interest rate came in at 4.75% for a 30-year fixed rate loan, yielding a monthly payment of only about $1,265 – just $15 more than the rent the buyer had been paying on a smaller home. The tax savings will more than offset that, as well as his property taxes and insurance.

No wonder the program is flourishing.

Applying for an FHA loan isn’t difficult, and the parameters for those who qualify are fairly straightforward. Start by calling a mortgage broker or an FHA-approved lender. You can search for an FHA lender on the Web site of the U.S. Department of Housing and Urban Development.

For lenders, income is the main factor in determining who qualifies for an FHA loan. The agency’s guidelines dictate that that buyers spend no more than 31% of their gross income on mortgage payments.

Lenders do look at buyers’ credit histories, but the interest rates that FHA borrowers pay aren’t actually based on their credit scores, as they are for most home buyers, according to Keith Gumbinger of HSH Associates, a publisher of mortgage loan information. Instead, FHA borrowers get the same interest rate that any conforming borrower with a good credit score would receive.

One catch: Borrowers with scores of 500 or less are generally required to pony up a down payment of 10% rather than the 3.5% minimum.

The FHA also charges insurance premiums, which pay to cover any defaults. Borrowers pay an up-front fee of 1.5% to 2.5% of the dollar-value of loan, as well as an annual fee of 0.5%.

So a buyer of a $200,000 home would be expected to come up with a $7,000 down payment as well as $5,000 for the initial insurance premium. The borrower’s monthly mortgage payment would come to about $1,096, including the 0.5% ongoing fee, at an interest rate of 5%.

And there is a limit to just how much can be borrowed. In most parts of the country, FHA borrowers may not finance more than $271,500. In high-cost areas like New York and California, the cap is $625,000 for single family homes. In Hawaii, the cap is as much as $721,050.

And there is even more help available to lower-income home buyers from the government-funded American Dream Down Payment Initiative program. That fund makes $200 million a year available to help low-income home buyers pay for down payments, or to make home repairs. To be eligible, a borrower’s income must be no more than 80% their area’s median income. And the grants may not exceed $10,000, or six percent of the home price, whichever is greater.

After the FHA issues a loan, it has a strong track record of keeping its borrowers in their homes.

The agency’s loans do have significantly higher delinquency rates than prime loans – almost 12% compared with 4.3% for prime, according to the Mortgage Bankers Association. But thanks to the FHA’s well developed loss mitigation procedures, its delinquent loans rarely end up in foreclosure.

Fewer than 1% of FHA loans were foreclosed on during the third quarter of 2008 compared with 0.6% for prime loans. At the same time, more than 4.5% of subprime loans went into foreclosure.

The FHA keeps foreclosure rates low by working hard with delinquent borrowers, according to John Courson, president of the Mortgage Bankers Association.

“It does a lot of forbearance [postponing payments] and pays a lot of partial claims [one time payments from the insurance fund borrowers pay into] to keep foreclosure rates down,” he said.

With access to credit so restricted these days, the fact that people can still obtain safe, affordable mortgages while putting very little money down provides a real boost to housing markets.

FHA loans are especially critical for first-time home buyers, who are considered by experts to be critical to getting housing moving again. When they buy homes from existing home owners, that allows those homeowners to trade up to more expensive homes. That’s the kind of cycle that could help get the market going.

Says Hanzimanolis: “These loans are really helping to move real estate these days.”  

fha home loan

FHA Loan Qualifications

What is the difference between FHA home loan and Fannie Mae/Freddie Mac?  Freddie and Fannie essentially make sure that there is enough money flowing through the mortgage system.  They purchase mortgages from lenders to free up funds for those lenders to make more mortgages.  So what does FHA home loan do and what are the FHA loan qualifications?  Simply, for a FHA home loan you need around 3.5% to put down and your credit score needs to be above 580.  FHA is the government’s sub-prime program.

The FHA isn’t the only game in town. There are other government insurance programs offered by the departments of Veterans Affairs and Agriculture (for rural housing), as well as private mortgage insurance sold by companies such as Radian and PMI and AIG.

Lending standards for FHA-insured mortgages are looser than for loans eligible for sale to Fannie and Freddie. That’s an oversimplification, but it’s mostly true. I’ll get an admonishing phone call from Washington if I call the FHA “the government’s subprime program,” so I won’t call it that. Wink wink.

Aw, what the heck — the bigwigs at the FHA are busy clearing out their offices, so they won’t read this. The FHA is the government’s subprime program.

The FHA has no minimum required credit score. Now, some lenders have minimum required credit scores for FHA-insured loans, but those are imposed by the lenders, not by the FHA. You can get an FHA-insured mortgage with a down payment of less than 5 percent. That would be difficult to do with a conforming loan. (The term “conforming loan” means “eligible for sale to Fannie or Freddie.”)

FHA loan limits can vary depending on your location.  To check your FHA loan limits, click here.

fha home loan

FHA Loan Guidelines

FHA Loans have numerous advantages over conventional loans, which include lower down payments and credit-qualifying guidelines that are typically more relaxed. The FHA loan was created to stimulate home buying throughout the country. The FHA can help people to obtain a loan with little down payment. The FHA does not supply the loan; it simply insures the loan to limit the risk to the lender.

Benefits of FHA Loans:

• A 3.5% down payment, as opposed to a 5% down payment on traditional loans
• Low monthly mortgage insurance
• Low closing costs that are overseen by HUD
• More relaxed credit score requirements
• Qualify for a loan two years after a bankruptcy
• Qualify for a loan three years after a foreclosure

The FHA loan guidelines are more relaxed than conventional loan guidelines; this includes less strict regulations about past bankruptcies and/or foreclosures, job requirements, use of alternative credit, and debt-to-income ratios. The FHA ensures that their interest rates remain competitive with the interest rates of conventional loans.

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