Federal housing administration (FHA)
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).
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 investor
properties 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.
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