The Ins and Outs of FHA Loans
The FHA was originally formed in 1934 and aids in providing affordable housing. The Federal Housing Administration (FHA), which is a government agency within the U.S. Department of Housing and Urban Development, doesn’t actually make the loans. Rather, it insures the loans made by private lenders. This is done by providing protection for the nation’s banks against default and loss by the borrower. Today, the FHA is the largest insurer of mortgage loans in the nation.
In order to obtain an FHA loan, one must first meet the FHA guidelines. These guidelines set forth what is and is not allowed. For instance, there is a limit as to the size of the FHA-backed loan which will vary from county to county. Typical loan limits range from $271,200 for a single-family home all the way up to $1,202,925 for a four-unit home.
When applying for credit through an FHA lender they evaluate “The Four C’s”. These stand for Collateral, Credit (Character), Cash (Capital) and Capacity.
Collateral – This is what the borrower uses as a pledge to the lender to secure the repayment of the loan.
Credit – Otherwise known as credit history, this is what your credit score number reflects and helps determine if you are a good candidate to lend to (please refer to last week’s article for more information). Remember the higher your credit score, the lower the interest rate on everything from an automobile loan to a home loan.
Cash – This is better defined as the assets/liquid funds you have available to close the mortgage.
Capacity – Your ability to repay the loan, i.e. do you have income?
Piggy backing off of the Four C’s are the credit score, down payment and credit history.
Credit Score – Starting with the most recent housing crisis, the FHA market standards have changed as a better credit score is now required than what the FHA had previously allowed. While the guidelines vary from one FHA loan product to the next, the general rule of thumb is a credit score of 640 or better to obtain maximum financing on a new home purchase. If you have a lower credit score, then typically you will be limited to 90 percent loan-to-value (LTV).
Down Payment – The down payment on an FHA loan can be less than other types of loans. For instance, the typical FHA required down payment is only 3.5 percent of the homes purchase price. Down payment funds can come from the borrower’s savings, as a gift from a family member or through down payment assistance programs available through the federal government.
Credit History – Should you have a limited credit history, then the FHA does tend to make some allowances. In addition, if you have had a foreclosure, short sale or bankruptcy then you have to wait a minimum of 12 months before being considered for a FHA home loan.
Want to learn more about a FHA loan?
You can get a Free FHA Loan Reference Guide by clicking here
In other FHA related news, If you currently have an FHA loan and are contemplating paying if off, then you are subject to paying interest after the loan has been paid to a zero balance. Many home sellers and refinancers are unaware of this current loophole that benefits the Federal Housing Administration to the tune of $587.4 million in excess interest fees in 2003 alone. Today there are an estimated 7.8 million existing FHA borrowers that will still have to cough up more interest should they decide to sell or refinance. Want to get around this? Make sure that you close the loan at the end of the month as opposed to the beginning of the month.
Here’s how it works. If you close on the 5th of the month you are still responsible for a full month’s interest even though you didn’t have the loan for +/- 25 days of the month! FHA loans are the only ones that currently have this loophole in place as Fannie Mae, Freddie Mac and the Department of Veterans Affairs all stop the interest meter on the date of closing.
Statistics by the National Association of Realtors have shown that about 40 percent of FHA borrowers close within the first 10 days of the month which means that there is typically a minimum of 20 days of interest charges accrued for the remainder of the month.
Complaints have long been made about the “gouging” of sorts to the borrowers but nothing has ever been able to be done. Until now. Due to a recent regulatory mandate from the Consumer Financial Protection Bureau, the full-month interest policy by the FHA will soon come to an end. But with one caveat – this only applies to new FHA borrowers. Meaning if you are currently an FHA borrower you still owe a full month’s interest on the loan no matter what day of the month it gets paid off. Th
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