The FHA Home Loan ebook

Transcription

1 The FHA Home Loan ebook 1

2 FHA Home Loan ebook By Kevin Fritz, Branch Manager MLO # Welcome to the Iron Point Mortgage FHA Home Loan ebook. This book is an overview and brief guideline to the FHA Home Loan Program. It is our intent to provide you with enough information and education in order for you to understand if this program might be the right tool for your home ownership goals. We are here to answer more specific questions and offer guidance in accordance to your specific needs and financial situation. The FHA guidelines are updated and amended throughout the year. For the most current information, please give us a call or send an . 2

3 Table of Contents 1. Overview The History of the FHA Loan Program Does the Government Provide the Loan? Benefits of using an FHA Loan Why Are FHA s Rates Lower? Who is This Loan for? What Types of Loans Are Offered? How Does an FHA Loan Work? What Are Lender Overlays? What is a Case Number? FHA Loan Employment and Income Qualifications Who Can Be On the Loan? How Many Borrowers Can Be On an FHA Loan? What are the FHA Loan Limits? What is Mortgage Insurance? What Mortgage Insurance Is Required On an FHA Loan?

4 1. Overview An FHA is a mortgage loan insured by the Federal Housing Authority. While it is like any other loan, when underwritten to meet official FHA loan guidelines, it can be insured with the full backing of the US Government. As a result, the lender is able to provide interest rates that are often lower than conventional backed. FHA guidelines provide for less stringent underwriting as well. In the case that a borrower defaults and the lender has to take the property back FHA Insurance will make the lender whole. FHA Loans provide new homeowners, re-entering homeowners and those with less than perfect credit an opportunity to purchase a home or refinance. Whether you are a first time buyer with limited credit history or re-entering the market after a bankruptcy or foreclosure, an FHA Loan is a great place to start. Highlights of the FHA Loan: Low Down Payment: 3.5% of purchase price Flexible Guidelines: Insured by FHA Lower Rates Often less than Conventional 30-Year Fixed Mortgage Insurance Up-Front and Annual paid monthly Purpose: Purchase, Refinance, Cash Out Co-Signor: A non-occupying co-borrower can help qualify gifted from family Who is Eligible? All qualified applicants without current FHA Income Limitations: None Reserve Requirements: None Credit Required: Most banks require at least a 580 Fico Score Foreclosure Seasoning: 3 years Short Sale Seasoning: 3 years Bankruptcy Seasoning: 2 years Chapter 7 and 1 Year 13 4

5 2. The History of the FHA Loan Program FHA Loans were created in the 1930 s to help banks provide loans to would-be home-buyers with very little down payment. Prior to that time, home-buyers had to supply large downpayments and the terms were not altogether favorable. The FHA Loan is insured by the Department of Housing and Urban Development (HUD), who does not actually provide the loan, they insure it against default for banks who are approved to provide the FHA Loan. This protects the bank and frees them up to originate more loans with the full backing of the federal government. The loan strengthened the economy in the 1930 s, helped bring the US out of the Great Depression, and has remained one of the most popular government backed loans for firsttime and re-entry home-buyers to this day. 3. Does the Government Provide the Loan? No they do not. Many borrowers think that the government provides the loan directly, but that is not true. Federal Housing Authority insures FHA Loans that are offered by qualified participating lenders. 5

6 4. Benefits of using an FHA Loan FHA has many positive points, but the most obvious are the ability for a borrower to purchase a home for 3.5% down payment, qualify through relaxed guidelines, and obtain interest rates that are often lower than conventional 30-Year Fixed Mortgages. 5. Why Are FHA s Rates Lower? FHA Insured Loans are tied to Ginnie Mae Bonds which are the only mortgage bonds that have the full backing of the federal government. These bonds are considered risk-less and therefore are priced accordingly. This allows lenders to provide lower rates on FHA Loans. 6. Who is this Loan for? FHA Loans provide first time homeowners, re-entering homeowners and those with less than perfect credit an opportunity to purchase a home or refinance. Whether you are a first time buyer with limited credit history or reentering the market after a bankruptcy or foreclosure, an FHA Loan is a great place to start. FHA has many positive points, but the most obvious are the ability for a borrower to purchase a home with a 3.5% down payment, qualify through relaxed guidelines, and obtain interest rates that are often lower than conventional 30-Year Fixed Mortgages. If you ve had a foreclosure or short sale, the seasoning is 3 years. The seasoning if you ve had a bankruptcy is 2 years for a Chapter 7 and 1 year for a Chapter 13. Now, as long as a borrower is not already using an FHA Loan, anyone that qualifies is eligible for their primary residence, but there are exceptions. 6

7 7. What Types of Loans Are Offered? What can FHA loans be used for? Here s the types of loans offered through the FHA Program: Purchase You may use an FHA Loan to purchase a single family residence, 2-4 unit, condominiums on the FHA Approved Condo List, manufactured, or PUD that you intend to owner-occupy (live in). But investment properties are not eligible with an FHA Loan. Refinance This may be from another type of loan to an FHA Loan or from an FHA Loan to an FHA Loan. You may pay off high-interest debt or take cash out for other purposes including home improvement or sending kids to college as long as you qualify and there is enough equity in the property. Streamline Refinance For existing FHA Loans, when rates go down, FHA permits a Streamline Refinance. Typically, no appraisal, income or assets are required. 7

8 8. How Does an FHA Loan Work? All normal qualifying criteria are used including income, asset, and credit qualification. Once the loan is originated, FHA insures the lender against loss should the borrower default. 9. What Are Lender Overlays? In addition to FHA s rules or guidelines, lenders follow their own set of guidelines called overlays. These are additional restrictions imposed by the bank due to the fact that these are typically higher risk loans and borrowers. 10. What is a Case Number? An FHA Case Number is a tracking number that is issued to a property when a borrower initiates a loan. The case number stays with the property for six months and must be released if the borrower cancels and another borrower wishes to use an FHA Loan to purchase the property. 11. FHA Loan Employment and Income Qualifications Lenders will look at credit history, employment history, assets and income. While there are some exceptions, most lenders will want to see the following: 1. 2-Year Employment History Lenders will want to see two years in your current industry. a. Duration in the specific job is not as important. Lenders want to see industry experience to show income will continue. b. For those newly out of college, if the job is related to your degree, school may often be used to show the 2-year employment history Year History of Income Lenders look for a two-year history of stable income to determine what can be expected in the future. a. Salary For salaried employees, verifying income is usually pretty basic. Unless there are un-reimbursed employee deductions on your tax return that reduce usable in come, then income can be determined straight from a W2. 8

9 b. Hourly Hourly income is not always as straight forward if a borrower works a variable number of hours. To determine income, a Verification of Employment will be required with a break-down of hours worked per year. Any required tax deductions will be subtracted in calculating monthly income. c. Commission, Overtime and Bonus Income - Lenders will average the 2-year history of commission, bonus, overtime and use the average for qualification. If it is in addition to salary or hourly, then take the base income plus the average commission, overtime, and bonus. d. Self-Employed To determine self-employment income, lenders average the past two years filed tax returns to determine income. If income is decreasing, the lower year will most likely be used. If you are the following business filing status then you will need the following 2 years additional tax returns as well as the 1040s. i. S-Corporation 1120s ii. C- Corporation 1120 iii. Partnership 1065 iv. Sole Proprietorship - Schedule C is found inside the 1040s, so no additional tax return required 12. Who Can Be On the Loan? There are very few restrictions regarding who may be on the loan: Unmarried Borrower Alone Married Borrower and Spouse Married Borrower Alone (if a spouse is not going to be on the loan, their monthly debt commitment will still be calculated into the qualifying ratio even though their income will not be used) Un-Married Borrowers Together and Borrower(s) and a Co-Signor who will not occupy the home. 13. How Many Borrowers Can Be On an FHA Loan? FHA does not specify how many borrowers can be on the loan, but each lender will have their own rules. It is common to cap the number of borrowers at four. Well, thanks for watching. us if you have any questions and click below for the next video in this series. We look forward to seeing you there. 9

10 14. What are the FHA Loan Limits? Each year, HUD determines the loan limits for the FHA Loan for each county. There is a Standard Loan Limit as well as a High Balance Loan Limit. FHA rules are set up for the standard loan amount, and additional requirements exist for the High Balance including higher credit score, lower debt to income, and longer waiting periods after Foreclosure and Bankruptcy. Standard Loan Limit: $417,000 High Balance Loan Limits: Over $417,000 up to the County High Balance Loan Limit The Sacramento area including El Dorado, Placer, and Yolo Counties high balance limit is $474,950, whereas the San Francisco Bay area is $625,

11 15. What is Mortgage Insurance? While FHA Loans require only a minimum of a 3.5% down payment, which means less risk to the borrower, they do provide more risk to the lender. Therefore, FHA Loans require mortgage insurance. This is an insurance policy paid for by the borrower, which insures the lender in case of a default on the mortgage. If a borrower is putting less than 10% down on the property, the mortgage insurance is required over the life of the loan. If putting 10% or more down, mortgage insurance is required for at least 11 years. 16. What Mortgage Insurance Is Required On An FHA Loan? Each FHA Loan requires the two forms of mortgage insurance. Up-Front Mortgage Insurance which a one-time percentage of the mortgage charged up front and added to the balance of the loan. It may be paid out of pocket but generally is not. See the chart below to determine what your Up-Front Mortgage Insurance may look like. In addition to the Up-Front Mortgage Insurance, Annual Mortgage is required. This is percentage of the loan spread over the year and paid monthly as part of the mortgage payment. See the chart below to determine what your monthly Mortgage Insurance may look like. 11