Friday, April 20, 2007

Frequently Asked Questions Regarding FHA Mortgages

Do FHA borrowers have to be first-time homebuyers?

No. FHA loans are available to any borrower on a primary residence as long as they do not have another FHA loan at the same time.

What is the minimum investment required on an FHA loan?

Based on existing FHA guidelines there is a minimum investment of three percent; the funds do not have to be the borrower’s own funds. The borrower can receive a gift (which include seller funded down payment programs such as The Nehemiah Program) for the entire amount of funds needed to close.

How much of the closing costs can be financed?

Based on FHA guidelines, of the three percent minimum investment requirement, .75 percent can go toward the closing costs.

What is the best way to apply seller paid cost to an FHA loan?

It is important to remember that while most closing costs can be included in the amount of closing costs that can be financed, prepaid escrows and discount points cannot be financed. So if the seller is paying the first $3,000 it is best to apply those funds first to the prepaids and then to the discount points. That will result in less out-of-pocket expense to the borrower.

What are some advantages to an FHA loan over a conventional product?

Mortgage Insurance. Since premiums for mortgage insurance on conventional loans are risk-based, based on credit scores, the monthly mortgage insurance on a conventional 100 percent loan can be cost prohibitive. FHA loans are based on .50 percent of the unpaid principal balance regardless of credit scores. For example, if the maximum FHA loan amount for a particular area is $200,160, the monthly mortgage insurance premium would be $83.40. On a conventional loan, that same loan amount on a My Community Mortgage product with a credit score of 620 the monthly mortgage insurance would be $98.41. If the credit score were below 620, the monthly premium would go to $228.52.

Another advantage is the treatment of student loans. In Fannie Mae’s Desktop Underwriter (DU) all student loans, regardless if they are in deferment, must be included in ratios. On an FHA loan if the file documents that the loans were in deferment during the first year of the new FHA loan, the payments do not have to be included.

The treatment of a Chapter 13 bankruptcy is also an FHA advantage. On a conventional loan any bankruptcy must have been discharged. Borrowers could still be in the payout period of a Chapter 13 bankruptcy and be eligible for an FHA loan.

Why is Up-front Mortgage Insurance added to the loan amount?

All FHA loans have mortgage insurance, and most programs require and upfront premium. FHA allows the upfront portion of 1.5 percent of the base loan amount to be financed into the loan amount. This reduces the amount of out-of-pocket expense to the borrower. However, if a seller or borrower wants to pay that in cash it is acceptable. This occurs mainly when there is an employer relocation package and the borrower wants to take advantage of all the costs the employer is willing to pay.

What are the reserve requirements for FHA?

FHA does not require the borrower to have funds in reserve after closing.

How is the income from a non-occupying co-mortgagor used on FHA loans?

This is another advantage to FHA. Fannie Mae’s desktop underwriter does not consider the income of a non-occupying co-mortgagor (co-signer). FHA will consider the total income and liabilities of all mortgagors. That means the primary occupant borrower is not required to have any income. This is particularly useful for parents wanting to purchase a home for their college age children. While it would never be the intent that the co-mortgagors would be actually making the payment, this is a viable scenario with an FHA loan.

For more information, contact Aaron at 317-805-4860 or aaronw@sierrapacificmortgage.net

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