While working with many FHA borrowers and home buyers I realize that there is a lot of misinformation out there and figured I could help give people good information about this great loan option. I try to cover some of the points that cause problems for borrowers in today’s market and try to give you ways to navigate through them while saving yourself time, headache, and money.
Some FHA Guidelines to know:
- An FHA loan requires a minimum 3.5% down payment from the Buyer, but this can also be paid by a family member on the buyers behalf in the form of a gift.
- They will also allow a seller to pay up to 6% of the buyers closing costs and/or prepaid escrow items (prepaid taxes, prepaid interest, discount points, etc).
- FHA will require the property owner occupied and it will need to be habitable prior to closing. This is a good thing, but depending on the FHA appraiser that is appraising to property that will even include minor things like having a working stove and possibly refrigerator which can become a headache if the property is a foreclosure and has no appliances. Appliances are minor items and this e frustrating when the appraisal puts a halt to the purchase over minor things like this.
- FHA will also require Mortgage Insurance for the loan. The upfront mortgage insurance amount is between 1.5%-2.25%. There is also a monthly amount paid which is roughly .5% per year until the loan reaches 78% LTV. That might sound like a lot of money to some people, member, with a low down loan today you will more than likely be paying mortgage insurance anyway, and it’s about the same each month as a conventional loan. Plus, the 1.5%-2.25% can be financed in the loan so there is no out of pocket necessary at the time of purchase.
- Condo Purchasers need to also be aware that FHA has to approve any condo complex they finance in and there are certain requirements that need to be met. Some condo complexes are part of an FHA approved condo list that will save time during the loan process and wondering whether complex will be approved by FHA. For example, FHA will require at least 51% of the owners in the complex to be owner occupants, that there is no more than 15% of the owners in the complex who are past due on maintenance fees, etc.
- Getting an FHA loan will require the buyer to escrow their yearly property taxes and property insurance (if applicable) which will be included in their monthly payment. Each month 1/12th of the yearly amount will be paid with your monthly mortgage payment and the lender will axes and insurance when they become due.
Possible changes to FHA loan requirements and guidelines:
According to Housing and Urban Development (HUD) Secretary Shaun Donovan on Wednesday 12/2/09, FHA borrowers may soon be facing stricter borrowing standards due to high FHA loan defaults and depleted reserves held by the agency.
If enacted, there could probably be an increase of the down payment requirement (possibly 5% instead of the current 3.5%), higher credit score requirements, and a reduction of seller concessions buyers can receive to 3% of the purchase price (currently 6%).
FHA’s low reserves and high default rate have caused officials to begin talks about finding ways to limit the risk of borrower default. They must also begin to replenish their reserves which congress requires to be no less than 2% of FHA’s outstanding loans, currently about 0.53%.
There is a lot of thought going into these new guidelines since FHA borrowers are part of the reason the housing market has seen at least some signs of recovery over the past 18 months. Officials do not want to run the risk of hurting the housing market, but need to make oon before FHA has financial difficulties of its own.
Whatever changes are coming, borrowers who are considering getting an FHA loan should do so while down payment and other requirements are easier to manage.