By Paul Chandler
Unless you have been isolated from news media outlets for the past 18 months, you have probably heard a lot about FHA mortgages. Some of it may even be true. By the end of this article, you should have a clear understanding about what FHA is and whether or not it is a program that can help you. FHA stands for Federal Housing Administration and is under the auspices of HUD. It has nothing whatsoever to do with the old Farmers Home Administration or FmHA. So if friends and relatives start relating horrible things about that agency, just smile and nod politely and know that you are pursuing nothing of the kind.
FHA is not a lender. It is an insuring body to lenders who make mortgage loans written to FHA standards. Most FHA loans are fixed rate loans. Those that aren’t generally have modest adjustment caps and margins to protect the consumer. You should always ask your loan officer about which type of FHA loan is on your application. FHA loans have no income limits or recapture of equity provisions like many state housing programs do. And, although there are loan limits, they generally will be sufficient to purchase most homes in most areas of the country.
FHA loans have competitive interest rates and in many cases when the homebuyer has less than a 20% down payment, the overall rates and payments will be lower than for a similar type of conventional loan. Mortgage insurance is less expensive in most cases and is not subject to pricing based on credit scores. A portion of that mortgage insurance or MIP is paid up front and is usually financed. The new housing bill will result in a to be announced rate for that portion of the premium.
FHA loans are for a primary residence only and are assumable loans under certain circumstances. They can be used for up to 4 units and the rental income from the other units can be used to help you qualify. The rehab portion of the housing act known as section 203k can allow for the financing of certain repairs to the property to be done within 6 months after purchase for a regular rehab loan or within 60 days for an FHA 203k Streamline rehab loan.
The down payment will end up being 3.5% of the sale price and can be a gift from family. There are some municipalities who may have qualifying grant funds, too. The seller may contribute up to 6% of the sale price toward closing costs and pre-paid expenses, too. Also different with FHA is the non-resident co-borrower feature whereby a closely related party can co-sign. This will not offset poor credit however.
Although there are some provisions for different types of refinancing options with FHA, those will be discussed in a future article. What you SHOULD know is that FHA is NOT the new subprime. It has been around since the Depression Era in the 1930s. Many folks should have utilized this program instead of others when they purchased or refinanced. I have used the program myself to buy a home. It is a tremendous program and, when used properly, can provide the means for many consumers to become homeowners.
Paul Chandler, Certified Mortgage Professional, is the Newport Branch Manager for Universal Mortgage Corporation. He graduated from the University of Maine’s business school in 1979 and has been in the financial services industry ever since. Since 1991, he has exclusively been involved in mortgage lending, moving to the Newport area in 1993. He also authors a blog at http://www.misterva.typepad.com. His regular column “Mortgage Matters” is published almost weekly in the Newport Daily Express. If you have a mortgage related question, please call 334-1999. You may also email questions to misterva@hotmail.com.
