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FHA Financing – How to Get Approved for a FHA Loan Monday, March 10th, 2014

FHA financing is a terrific loan program for home buyers, with 1 in 5 buyers currently using FHA to finance a home. With it’s low down payment requirements, easier qualification rules for buyers with less than perfect credit, and flexible loan programs to allow co-signers etc, FHA financing plays a huge role in the housing market by helping many home buyers finance a home that would not be able to otherwise. This list of FHA frequently asked questions and FHA tips, will help you better understand the in-and-outs of how the FHA mortgage program works.

FHA Loan Frequently Asked Questions

Here are some tips for helping you better understand the FHA financing program, as well as some of the most frequently asked questions that buyers and agents have about FHA.

What is an FHA loan?

FHA stands for Federal Housing Administration. The FHA was formed in 1934 and was moved to the U.S. Department of Housing and Urban Development (HUD) in 1965. FHA is the world’s largest mortgage insurer. The FHA does not “make” the loan – it insures the loan for the lender.

What is FHA mortgage insurance and why do buyers have to pay it?

FHA mortgage insurance premiums (MIP) are premiums you’ll pay at closing, and in the monthly mortgage payment, to insure your lender’s loan against default. The amount of FHA MIP paid is linked to the size of your down payment, and the length of your loan.

Homeowners making a down payment of 10% or more and financing via a 15-year mortgage pay the least amount of FHA MIP. Homeowners making the minimum down payment of 3.5% and using a 30-year loan, will pay the most FHA MIP. Please note, if you put down less than 10%, you will pay FHA MIP for the life of the loan, see HERE for more details.

How Do I Cancel FHA Mortgage Insurance?

If you put down less than 10%, you will pay FHA MIP for the life of the loan, so the only way to cancel it would be to refinance into a conventional loan.

If you put down more than 10%, FHA MIP will cancel after a certain amount of years. See HERE for more details when the FHA mortgage insurance will cancel.

What down payment is required for an FHA loan?

Most FHA loans only require a 3.5% down payment. The 3.5% is calculated against the your home’s purchase price or its appraised value, whichever is lower.

For example, if you buy a home for $300,000 and the home appraises for $310,000, your 3.5% down payment will be based on the $300,000 figure, regardless of what the home “is worth”.

What is the Maximum Loan I can Qualify For?

FHA offers financing based on county loan limits. For example, FHA buyers can get 3.5% down payment financing up to a loan of $546,250 in San Diego (reduced from $697,000 in 2013), $625,000 in Los Angeles and Orange County (reduced from $729,000 in 2013), and $355,350 in Riverside and San Bernardino (reduced from $417k in 2013). See HERE for the maximum loan limits for your county.

*Please note that interest rates are better for loans under $417k which are known as conforming loans, and rates are higher for loans >$417k, as these are considered FHA jumbo loans.

What is the FHA waiting period after a foreclosure, bankruptcy or short sale?

Short Sale: It is 3 years before a buyer can repurchase again using FHA financing. *TIP: The FHA has a loophole that not many people know about, if the FHA buyer did not have any late payments before their short sale, they are allowed to automatically qualify again for FHA financing.

Foreclosure: It is 3 years before a buyer can repurchase again using FHA financing.

Bankruptcy: For a chapter 7 Bankruptcy it is 2 years and 1 year for a chapter 13, before a buyer can repurchase again using FHA financing.

FHA Reduces Wait Times for Buyers Who Had Foreclosure or Short Sale

The FHA announced a few months ago, they have reduced the time buyers must wait after a bankruptcy, foreclosure or short sale before qualifying for an FHA-backed mortgage, if the buyer experienced an “economic event” whereby their household income fell by 20% or more for a period of at least six months.

The period had previously been two years following a bankruptcy, and three years following a foreclosure or short sale. The agency has now reduced the waiting period to ONE YEAR. 

For additional information on how to qualify under this new rule, I wrote an article recently on this subject for the San Diego Union Tribune newspaper, see HERE

What Credit Score is Required to qualify for a FHA loan?

Most lenders will require a credit score of 620 to qualify for a FHA loan and 3.5% down. I have 2 lenders that only require a 580 score, and we can still offer a loan that only requires a 3.5% down payment.

Did you know a FHA buyer with a credit score below 580 is also allowed to qualify for a FHA loan, but they need to put down 10%.

Can I use a cash down payment gift for an FHA loan?

Yes, FHA mortgage guidelines allow for cash gifts of down payment. Down payment gifts may come from a relative, an employer, an FHA-approved charitable organization, or a government housing grant program. Cash gifts may not come from friends, co-workers, or a fiancé/fiancée. All cash down payment gifts must be accompanied by an FHA Gift letter.

Are FHA Loans for first-time home buyers only?

No, FHA loans are not restricted to first-time home buyers. Anybody can use an FHA mortgage. Whether you’ve owned a home before does not affect your FHA mortgage eligibility.

Can I Buy an Investment Property With FHA?

No, you can only purchase a primary residence using FHA financing, no second or vacation homes either.

Tips for FHA Buyers Purchasing Condos!

FHA buyers have to be careful when looking to buy a condo, as the complex has to be FHA approved. Here are 4 tips to make sure you are buying a condo that will qualify for FHA financing.

1. Is the complex currently FHA approved? Check HERE
2. What are the owner occupied ratios? FHA requires 51% Owner Occupied.
3. Are there >15% of the units currently 60 days delinquent on their HOA dues? (FHA requires <15%)
4. Is there any current litigation in the complex? (None allowed).

TIP: Did you know PUD’s do NOT have to be FHA approved for buyers to obtain financing? I have seen this a lot recently whereby a complex is Not showing up FHA approved and the agent and FHA buyer give up looking in the complex because they assume all the properties are “Condos”. But upon further research it’s discovered that many of these properties are actually detached condos built within a condo project and are classified as PUDs and NOT condos, and therefore do not need to be FHA approved for financing.

Tips for Buying Flipped Homes With FHA Financing

As investors continue to scoop up properties and flip them to FHA buyers, here are 5 FHA rules to follow if a property is resold within 90 days and there is >20% profit to the seller.

1. A 2nd Appraisal is required if >20% profit within 90 days, The FHA is NOT allowed to pay for it.
2. Home inspection is required on all flips (all repairs called out by appraiser must be fixed by seller prior to funding).
3. Health & Safety repairs (Any noted on inspection report must be repaired by funding).
4. All transactions must be arms-length (NO identity of interest between parties)
5. A minimum 12-month chain of title required (can’t be flipped twice in 12 months).

See HERE for additional information that buyers should know when buying flips with FHA.

Down Payment Tip: Create a Bridal Registry Account

Did you know the FHA allows couples to set up a “Bridal Registry Account” if they are planning on getting married soon and want to accumulate funds for their down payment to buy a home? This is a great way for “married to be” couples to come up with their down payment to buy a home. Here’s how it works—3 simple steps:

1. Couple opens a savings account prior to the wedding (label it “Bridal Registry”).
2. Gifts are deposited.
3. All of the 3.5% down payment can come from these gift funds.

No gift letters. No paper trails. Just a simple savings account labeled “Bridal Registry account” and buyers are on their way to having the wedding present of their dreams.

Buyers Can Purchase a Home with a FHA 203(k) mortgage?

The FHA 203(k) mortgage is similar to a construction loan. With the 203k, you can buy a home and finance its major repairs into the purchase price. The 203k allows for almost anything — roof replacement, garage addition, new flooring and finishes, and more.

Use a Co-Signer to Qualify to Purchase a Home

If a buyer needs help qualifying to purchase a home, the FHA allows a co-signer to help them qualify. The co-signer does NOT have to live in the home either. Also, an unmarried couple can also purchase a home together using FHA financing too.

FHA Buyers Can Purchase a 3-4 Unit Property

Did you know the FHA allows buyers to purchase a 3-4 unit home with FHA financing and they only have to put down 3.5% to qualify. Buyers can live in one unit and rent out the other 3, they can also use the rental income from the other 3 units to qualify for a loan. This is a great way for buyers to start out as a real estate investor.

The FHA Good Neighbor Next Door Program

The FHA Good Neighbor Next Door program (GNND) is a special FHA program for teachers, law enforcement officers, firefighters and emergency medical technicians. The Good Neighbor Next Door program allows eligible buyers to purchase HUD homes at a 50% discount from the list price, and with a down payment of just $100. You must only occupy the home as your principal residence for three years. Let me know if you want further information on this.

I hope you found this list of FHA questions and FHA tips useful. If you have any questions about FHA or getting approved for financing, please feel free to contact me directly at 858-442-2686.