FHA financing is a very popular program with homebuyers and homeowners. According to RealtyTrac, 1 in 4 homebuyers are using FHA again to purchase a home, the highest share since the first quarter of 2013. As the amount of investors flooding the market has started to dissipate, first-time homebuyers and boomerang buyers have started to step into the gap and pick up the slack, and many of them are using FHA to finance their homes. Here are some FHA buyer tips and recent updates from the FHA, so you are fully informed how to take advantage of FHA financing to purchase a home or refinance.
Why 1 in 4 Homebuyers are using FHA Financing to Purchase a Home!
Lot’s of first time buyers are taking advantage of FHA financing. 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 significant role in the housing market by helping many first time homebuyers finance a home that would not be able to otherwise.
As the housing downturn started back in 2008, there are many buyers who suffered a financial hardship who are now back in the market to purchase a home. The FHA only requires a 3 year waiting period after a foreclosure or short sale (see below for more details), so FHA financing has become a very popular financing option for “Boomerang” buyers too.
“Effective” FHA Mortgage Rates Near Cheapest in History
With FHA 30-year mortgage rates still near all time lows at 3.5% on a 30-year fixed, this means the “Effective” overall mortgage rate (interest rate + FHA mortgage insurance rate) leaves FHA loans near the cheapest they’ve ever been in history, see below.
On some loan scenarios, the monthly mortgage insurance on a FHA loan is now lower than the monthly mortgage insurance on many conventional loans, especially on the low down payment options, so the overall monthly payments with a FHA loan are lower than a conventional loan on scenarios.
Therefore it’s a good idea for buyers with less than perfect credit (lower than 680 credit scores) to compare the monthly payments on both conventional and FHA options.
FHA Loan Frequently Asked Questions
Here are some tips as well as some of the most frequently asked questions that buyers and agents have about FHA loans.
What is the FHA?
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?
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 more FHA MIP.
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. Click HERE for a separate FHA article I wrote on when and how 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. TIP: We can also give a FHA buyer a 3% lender credit to cover ALL their closing costs. Make sure to ask me how you can qualify for this lender credit to help pay all your closing costs.
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 $612,950 in San Diego, $636,000 in Los Angeles and Orange County), and $424,150 in Riverside and San Bernardino. Click HERE for the maximum loan limits for your county.
*Please note that interest rates are better for loans under $424,150 which are known as conforming loans, and rates are higher for loans >$424,150 as they are considered FHA jumbo loans.
What is a FHA Streamline Refinance?
A FHA streamline Refinance is a terrific refinance program available to homeowners who already have a FHA loan. This program allows a homeowner with an existing FHA loan refinance into a new FHA loan with no appraisal or income requirements.
Because you already have a FHA loan, the FHA allows you to refinance your current loan balance into a lower rate with very limited documentation so you can take advantage of lower rates and save extra money . It is a fantastic program available only to FHA homeowners members.
Most homeowners will be able to save around $100 – $200 a month with the lower FHA monthly mortgage insurance payments and low interest rates. Ask me for more details how to qualify for this refinance program.
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 just announced last month, 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, click HERE
What Credit Score is Required for FHA?
Most lenders only require a credit score of 580 to qualify for a FHA loan.
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, a fiance, an employer, an FHA-approved charitable organization, or a government housing grant program. Cash gifts may not come from friends or co-workers. 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.
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?
FHA buyers can finance up to $699k for a 2 unit purchase, $845k for a 3 unit purchase, and $1,050,00 for a 4 unit purchase.
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.
Can I Buy an Investment Property With FHA?
No, you have to occupy the property, as 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 ensure 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, it is important to know when you are allowed to go into contract on a home that was flipped.
FHA’s 90 Day Flip Waiver Discontinued! The FHA just announced at the beginning of 2015 they will not be extending their Flip waiver. This flip waiver allowed FHA buyers to purchase properties that are being resold within 90 days of being fixed and flipped.
So this means FHA buyers will have to wait >90 days to purchase a home that was fixed and flipped by a seller. Any contracts dated after Dec 31st 2014 will qualify under this new rule.
Click HERE for additional information that buyers and sellers should know when buying flipped properties with FHA financing.
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. Click Here for additional information how to qualify with this program.
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.
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 answers useful. If you have any questions about FHA or getting approved for financing, please feel free to contact me directly at 858-442-2686.