Recent years show a decline in the housing market, a financial credit crisis and a subsequent tightening of underwriting guidelines, particularly applied to conventional mortgage loans. Those institutions known for sub-prime loans have either disappeared or severely limited their offerings. These realities – coupled with a fluctuating foreclosure rate – may discourage first-time homebuyers and others without the strongest applicant profiles from purchasing or refinancing in the current climate. Not to worry, FHA loans are still widely available to many borrowers who have run out of conventional options. Guaranteed by the US Department of Housing and Urban Development’s Federal Housing Administration, FHA loans provide home ownership pathways to borrowers while affording security to approved lenders.
The first thing a prospective borrower notices when considering an FHA mortgage loan is the low down payment – or equity requirement in the case of a refinance. Because mortgage insurance is built into the loan amount, lenders can offer customers a higher loan amount relative to the value of the dwelling. Accordingly, the insurance premium is part of the monthly payment, along with principal, interest, property tax and hazard insurance escrows. By consequence, homebuyers can put as little as 3.5 percent down toward purchase. Refinance customers can take advantage of cash-out loans for debt consolidation or home rehabilitation.
Although able to absorb the monthly payments, some potential homeowners find even the low FHA down payment to be cost-prohibitive. Ordinarily, gifts from friends or family would be employed for up-front or reserve requirements. However, under the more rigorous underwriting rules, conventional lenders have begun to disapprove this source of funds. FHA, fortunately, continues to accept gifted monies as long as signed documentation naming the donor, listing the gift amount, affirming the relationship to the borrower and asserting no expectation of repayment is submitted. Moreover, the donor can have no financial interest in the conveyance of the subject property.
Unlike many conventional programs, FHA does not price its loans based on risk factors. In short, those approved for a particular loan program and loan amount are all subject to the same interest rate. When risk factors are utilized, the borrower’s rate is adjusted according to credit scores, loan-to- property value ratio and debt-to-income ratio, for example. Such adjustments are not part of FHA pricing. If the homebuyer or owner passes the approval thresholds for those factors, the rate and fees are not subject to tweaking. A change in rate will only occur if the borrower decides to float – rather than lock – the rate at the time of application.
FHA offers yet another attraction for those seeking a simple rate and term refinance. Should the borrower already have an FHA lien on the subject property – and not seek any cash out from the transaction – a streamline refinance is available. This program spares the customer the cost of another appraisal, instead using the evaluation from the previous FHA transaction. As with all FHA programs, loan amounts are limited by county. Those caps are published on HUD’s FHA website or you can find out more at Ace Mortgage Loan Corp in Coral Springs, FL.