The Federal housing
administration was created by Congress in 1934 as part
of the national housing act.The purpose of
the act, and of the FHA, was to generate new jobs
through increased construction activity, to exert a
stabilizing influence on the mortgage market, and to
promote the financing, prepared, and sale of real
estatenationwide.Today, the FHA
is part of the Department of Housing and Urban
Development (HUD).
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The FHA's primary
function is to insure loans. FHA approved
lenders are insured against losses caused by borrower
default.
The FHA insurance
program is called mutual mortgage insurance plan (MMI).
Under the plan, lenders who had been approved by the FHA
to make insured loans either submit applications from
prospective borrowers to the local FHA office for
approval, or, if authorized by the FH to do so, from the
underwriting functions themselves.Lenders who are
authorized by the FHA to fully underwrite their own FHA
loan applications are called direct endorsement lenders
(DE Lenders).A direct endorsement lender is responsible for
the entire mortgage process, from application for
closing.When a direct endorsement lender has approved and
closed a loan, the application for mortgage insurance is
submitted to the FHA.
As the insurer, the
FHA incurs full liability for losses resulting from
default and property foreclosure. In turn, the FHA
regulates many of the terms and conditions of the
loan.FHA
regulations have the force and effect of law.
FHA loan
features.
Any loan intended for
submission for FHA insurance has a number of features
that distinguish it from a conventional loan.The most
significant of these features are:
1.Less stringent
quality standards.FHA will allow re-establishment of a credit
within two years after a discharge of bankruptcy, when
any judgments have been fully paid, any tax liens have
been repaid, or a repayment plan has been established by
the IRS, and within three years after a foreclosure has
been resolved.
2.Low down
payment.The 3% cash down payment is generally less than
for a similar conventional loan.
3.No secondary
financing is allowed for the down payment.The FHA minimum
down payment for a loan must be paid by the borrower in
cash.The
borrower is not allowed to resort to secondary financing
from the seller or from any lender to make up any part
of the down payment.The FHA permits
the use of either a nom- repayable gift of money, credit
from a portion of rents from pay rent/purchase contract
between a buyer and seller, or some home repairs made by
the purchaser (sweat equity) to be used to satisfy the
3% down payment costs.
4. Some closing costs
may cover the down payment.While a borrower
may not finance any of the closing costs along with the
sales price, FHA permits the use of some closing cost to
satisfy the 3% down payment requirement.
5.FHA mortgage
insurance is required for the loan regardless of the
amount of the down payment.
6.No prevent
penalties are allowed.FHA loan may be
paid off in full at any time with no additional
charges.A
lender is allowed to require that any such payment be
made on a regular installment due date.
7.The property
must be owner occupied.The FHA used to
insure investorproperties but they have virtually eliminated all
such programs.Two-to-four unit properties qualify if they are
owner occupied.
Other
characteristics of FHA loans.
The typical FHA loan
has a 30 year term.However, FHA
offers long terms as short as 15 years.They also offer
adjustable loans and home repair loans.The rate is
fully negotiable between the borrower and lender.They still tend
to be lower than college loan rates because the lenders
risk is lessened by the FHA mortgage
insurance.
A lender may only
charge 1% ordination of the own FHA loan, but is allowed
to charge discount points.Typically,
discount points allow a lender to recover and the
interest loss upfront.Although
discount points may be paid by the buyer in an FHA
transaction, they are almost always paid by the
seller.
The lender is
required to obtain an appraisal of the property from an
FHA approved appraiser.The a praise it
will note any health and safety deficiencies and
necessary repairs needed on a validation conditions
form.The
lender is required to provide the buyer with a
home-buyer summary of all the deficiencies noted by the
appraiser.All problems with health and safety conditions,
as well as necessary repairs, must be completed before
the FHA will issue insurance on the property.
Income
qualifications and a maximum amounts
.
There is no minimum
income requirement for an FHA loan.Borrowers of the
show two years of steady employment and demonstrate that
they have consistently paid their bills on time.The FHA has a
ratio of 29% and 41%.This means that
a payment for a home loan may not exceed 29% of the
borrower's gross monthly income and all installment
debt, including the home loan payment, may not exceed
41%.
The FHA sets maximum mortgage loan
amounts.These amounts, which vary by state as well as
location within a state, are adjusted yearly.FHA loan limits
are found on HUD website.
The FHA 203k purchase
and rehabilitation program was developed to help
revitalize communities and neighborhoods.It was developed
by HUD and is administrated by the FHA.
Normally, in
commercial practice, a home buyer must first purchase
the home and then obtain construction financing to
rehabilitate Tate the home.This often
creates multiple short-term mortgages at high interest
rates.In
most cases, conventional lenders will not make a
mortgage loan until all repairs are completed.As a result,
many basically some properties in need of repair were
left vacant, and at the risk of further deterioration
and vandalism, simply because prospective homebuyers
were unable to afford the purchase price without a
loan.
The 203k program
permits a borrower to obtain a property in need of
rehabilitation with just one loan.Available loans
may be either at a fixed rate or adjustable rate.The maximum
amount of the loan, including acquisition and
rehabilitation, is eligible for FHA insurance on the
mortgage proceeds are disbursed and a rehabilitation
account is established.
A 203k loan combines acquisition cost
and rehabilitation cost in one of mortgage
loan.
The program allows
loans on the one-to-four unit family dwellings that are
at least one year old.Loans may also
be made on properties that have been demolished, as long
as the foundation remains.The program
allows conversion of single-family dwellings into
two-to-four unit dwellings and core version of larger
than four unit dwellings into one-to-four unit
dwellings.It also permits a dwelling to be transported for
one site to another.The 203k program
also allows loans on the mixed use properties.A mixed-use
property combines a single family residence with a
commercial building.The loans are
limited to no more than 25% commercial use on a
one-story property, 49% owned two-story property, and
33% of a three-story property.
Condominiums units
are also eligible for 203k mortgages, as long as their
owner occupied and the borrower is not an investor.The
rehabilitation of the unit is a restricted to the
interior of the building only.In addition, the
rules dictate that after rehabilitation,, individual
buildings within the property may not contain more than
four units.
A 203k loan has a
minimum requirement of $5,000 in needed repairs.Eligible repairs
are those that covered the health and safety of the
occupants.These would include, but are not limited to,
repair of structural damage, elimination of lead-based
paint, room additions, replacement of roofing, flooring,
energy efficient improvements, electrical systems,
plumbing systems, and heating and air conditioning
systems.The maximum mortgage amount is either the “as-is”
value of the property plus the cost of repairs, or 110%
of the expected market value of the property after the
completion of all repairs.
Steps in
the 203k program.
The steps in the
process a slightly different than in a regular
purchase.First, after locating a prospective property, the
buyer and his or her real estate agent make a
preliminary analysis of the extent of repairs necessary
and a rough estimate of the cost of the work to be
carried out.That a sales contract is executed, including
provisions that a borrower has applied for 203k program
and that the contract is contingent upon approval of
this financing.The buyer then contacts and approved FHA
lender.The
lender will, at this stage, the command and FHA approved
203k consultant, generally a contractor, to help the
buyer draw up the necessary work write-ups and cost
estimates.Upon receipt of these documents, the lender will
cost the FHA to issue a case number and a sign an FHA
approved plan reviewer, appraiser, an inspector.The plan
reviewer will meet with the buyer and a consultant,
contractor, and the property to insure to the repairs
are acceptable.
The appraiser will then carry out an
appraisal of the property.The lender will
review the application and issue a conditional
commitment and statement of appraised value.After the buyer
has completed necessary documentation for an FHA loan,
the lender will issue a firm commitment.This document
will detail the maximum amount that can be loaned.The mortgage
will get close to the lender will submit the closing
documents to FHA.FHA then issues a mortgage insurance certificate
to the lender.Repair work may begin at the time of closing and
must be completed within six months.The repair funds
are disbursed as each stage of rehabilitation is
completed.Upon overall completion, a final inspection
is carried out by the FHA approved
inspector.
FHA 203b fixed rate
program.
With a 203b fixed rate program, a down payment of
3% of the sales price is required.The gifts from
family members are allowed, as are payments from
government or nonprofit agencies that are designed to
help first-time or low income buyers.FHA does not
require the borrower to have cash reserves.Lenders may only
charge closing fees that are found on an FHA approved
list.Fees
for document preparation, processing fees, underwriting
fees, and lender tax service are not allowed.All owner
occupied one-to-four unit family residences are
eligible.Homes located in planned unit development's
(PUDs) must be HUD approved
projects.
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