Financing Residential Real Estate. FHA-Insured Loans

Financing Residential Real Estate Lesson 11: FHA-Insured Loans

Introduction In this lesson we will cover: FHA loan programs, graduated payment mortgages, FHA insurance premiums, sales concessions such as seller contributions, secondary financing and FHA loans, and assumption of FHA loans.

Introduction Two federal home financing programs: FHA-insured loan program VA-guaranteed loan program.

Introduction Federal Housing Administration (FHA) was created in 1934 as part of National Housing Act.

Introduction Federal Housing Administration (FHA) was created in 1934 as part of National Housing Act. Purpose of act: to generate new jobs by increasing construction activity, stabilize mortgage market, and promote financing, repair, improvement, and sale of real estate.

Introduction Today, FHA is part of Department of Housing and Urban Development (HUD). Primary y function is insuring mortgage g loans. Compensates lenders for losses from borrower default. Does not build homes or make loans.

Introduction Mutual Mortgage Insurance Plan is FHA insurance program funded by premiums paid by FHA borrowers.

Introduction Direct endorsers Lenders authorized to handle entire underwriting process for FHA loans.

Introduction If FHA borrower defaults on loan: FHA reimburses lender for full amount of loss. Borrower required to repay FHA.

Characteristics of FHA Loans Typical FHA loan has a 30-year term, but borrower may have option for shorter term. Required q to have first lien position.

Characteristics of FHA Loans Typical FHA loan has 30-year term, but borrower may have option for shorter term. Required q to have first lien position. Interest rate is negotiable.

Characteristics of FHA Loans Typical FHA loan has a 30-year term, but borrower may have option for shorter term. Required q to have first lien position. Interest rate is negotiable. L d h 1% i i ti f d Lender charges 1% origination fee and may charge discount points.

Characteristics of FHA Loans Distinguishing features of FHA loans: Less stringent qualifying standards. Low downpayments (minimum cash Low downpayments (minimum cash investment of 3% of sales price).

Characteristics of FHA Loans Distinguishing features of FHA loans: Less stringent qualifying standards. Low downpayments (minimum cash investment of 3% of sales price). Secondary S d financing i restrictions. ti Maximum loan amounts set by local limits and by LTV rules.

Distinguishing i features of FHA loans (continued): Mortgage insurance always required. No prepayment p charges. Property must be owner-occupied primary residence.

Distinguishing i features of FHA loans (continued): Mortgage insurance always required. No prepayment p charges. Property must be owner-occupied primary residence. Almost every FHA-insured loan has these characteristics.

Summary Characteristics of FHA Loans FHA HUD Mutual Mortgage Insurance Plan Direct endorsers Minimum cash investment Mortgage insurance

FHA Loan Programs FHA has many different programs to fit different needs. Each is funded annually on a national basis.

Programs of greatest interest to home buyers: Section 203(b) fixed-rate mortgages on owner-occupied residences with up to four units.

Programs of greatest interest to home buyers: Section 203(b) fixed-rate mortgages on owner-occupied residences with up to four units. Section 203(b)(2) loans on one-unit residences purchased by veterans. Section 203(k) mortgages used to ( ) g g purchase/refinance and rehabilitate a residence with up to four units.

Section 223(e) loans in older, declining urban areas.

Section 223(e) loans in older, declining urban areas. Section 234(c) loans on owner-occupied condominium units.

Section 223(e) loans in older, declining urban areas. Section 234(c) loans on owner-occupied condominium units. Section 245 and Section 245(a) graduated payment mortgages g and growing g equity mortgages.

FHA Loan Programs Section 203(b) Most FHA loans are 203(b) loans. Program can be used for purchase loans or Program can be used for purchase loans or refinancing for residences with up to four units.

Section 203(b) Maximum loan amount HUD imposes limits on size of loans that can be insured. Two different limits: local l l loan amount limits, it and loan-to-value ratio limits.

Section 203(b) Maximum loan amount Local loan amount limits FHA sets loan limits that vary from area to area and are based on local median housing costs. Basic amount: $172,632 Ceiling: C $312,895 (can t exceed 95% of median home price in area)

Section 203(b) Maximum loan amount Local loan amount limits HUD often sets loan amounts on county-by-county basis. In county with large city, entire county may be treated as high-cost area.

Section 203(b) Maximum loan amount Local loan amount limits HUD often sets loan amounts on county-by-county basis. In county with large city, entire county may be treated as high-cost area. Check with local lender for current FHA ceiling in your community.

Section 203(b) Maximum loan amount Loan-to-value ratio limits FHA LTV limits that apply in particular state depend on whether state is classified as a high or low closing cost state.

Section 203(b) Maximum loan amount Loan-to-value ratio limits To find available loan amount, multiply LTV ratio by property s p sales price or appraised value (lesser of the two).

Section 203(b) Maximum loan amount Loan-to-value ratio limits For homes less than 1 year old, LTV can t exceed 90% unless builder complies with special rules.

Section 203(b) Minimum cash investment Borrower must make minimum cash investment of at least 3% of sales price. Closing costs paid by borrower and any downpayment count towards this requirement. Discount points and prepaid expenses don t count.

FHA Loan Programs Section 203(b)(2) Section 203(b)(2) is FHA insurance program for veterans of all branches of U.S. military, including National Guard and Coast Guard.

FHA Loan Programs Section 203(b)(2) Section 203(b)(2) is FHA insurance program for veterans of all branches of U.S. military, including National Guard and Coast Guard. Only finances one-unit dwellings. Veteran must occupy property.

FHA Loan Programs Section 203(b)(2) Other key characteristics include: Maximum loan amount is same as for 203(b) loans (between $172,632 and $312,895). Minimum cash investment between 1.25% Minimum cash investment between 1.25% and 2.85%, depending on property s value or sales price.

Section 203(b)(2) Eligibility Requirements To be eligible for this loan: Borrower must have served at least 24 months in any branch. Discharge must not have been dishonorable.

Section 203(b)(2) Eligibility Requirements Certificate of Veteran Status Certificate given to honorably discharged veteran that certifies that veteran has met minimum military service requirements.

FHA Loan Programs Section 203(k) 203(k) program insures mortgages used to purchase/refinance and rehabilitate a residence with up to four units.

FHA Loan Programs Section 203(k) 203(k) program insures mortgages used to purchase/refinance and rehabilitate a residence with up to four units. Portion of loan proceeds used to purchase or refinance property. Remaining funds deposited in Rehabilitation Escrow Account.

Section 203(k) Other requirements Home financed under this program must be at least one year old. HUD imposes structural and energy-efficiency standards on all rehab work.

Section 203(k) Other requirements Basic 203(b) rules apply to mortgages insured under 203(k). Lenders may charge supplemental origination fee. 203(k) borrowers don t pay upfront 203(k) borrowers don t pay upfront mortgage premium.

Section 203(k) Other requirements Property s value is least of: 1. property s current value, plus costs of rehabilitation; 2. existing debt to be refinanced, plus costs of rehabilitation; or 3. 110% of property s value after rehabilitation.

FHA Loan Programs Section 223(e) 223(e) program insures mortgages used to purchase, rehabilitate, or build housing in older, declining urban areas.

FHA Loan Programs Section 223(e) 223(e) program insures mortgages used to purchase, rehabilitate, or build housing in older, declining urban areas. Property purchased must be in a reasonably viable neighborhood. Neighborhood must need housing for lowand moderate-income families.

FHA Loan Programs Section 223(e) Mortgages under Section 223(e) are insured under another FHA program, with loan terms determined by the program used.

FHA Loan Programs Section 234(c) 234(c) program covers purchase or refinancing of condominium unit approved by FHA or VA.

Section 234(c) Characteristics Purchase loans for condominiums can be: fixed-rate 203(b) or 203(b)(2) loan; Section 245 GPM; Section 245(a) GEM; or Section 251 ARM.

Section 234(c) Characteristics Developer usually applies for FHA approval when project is built or converted. Spot loan L f d i i it i j t th t i t FHA Loan for condominium unit in project that isn t FHAapproved.

FHA Loan Programs Section 245 and 245(a) Programs providing insurance for graduated payment mortgages and growing equity mortgages. Property p y must be single-family, owner- occupied home. Work in conjunction with other FHA loan Work in conjunction with other FHA loan programs.

Section 245 and 245(a) Graduated payment mortgage GPM is fixed-rate loan with lower payments in early years of loan term, and specified yearly payment increases until maximum amount is reached. Payments stay same for rest of loan term. Attractive to buyers who expect incomes to rise significantly in near future. Pay more interest over life of loan.

Section 245 and 245(a) Graduated payment mortgage Five different GPMs may be insured under Section 245. Each has payment plan calling for payments to increase annually over first 5 or 10 years of loan term.

Section 245 and 245(a) Growing equity mortgage GEM also has lower initial payments that increase over time, with increases applied directly to principal. Shorter loan term.

Section 245 and 245(a) Growing equity mortgage 5 different types of GEM, with payments that increase annually, at varying rates over 10-year period. May be used in conjunction with 203(b), 203(k), and 234(c) insured loans.

FHA Loan Programs Section 251 Section 251 ARM program can be used to purchase or refinance owner-occupied residence with up to four units.

FHA Loan Programs Section 251 Section 251 ARM program can be used to purchase or refinance owner-occupied residence with up to four units. 30-year loan term. Administered in conjunction with other FHA programs. Must conform to rules of Sections 203(b) Must conform to rules of Sections 203(b), 203(k), or 234(c).

Section 251 Characteristics Characteristics of FHA-insured ARMs: After initial fixed rate period, adjustments occur on an annual basis.

Section 251 Characteristics Characteristics of FHA-insured ARMs: After initial fixed rate period, adjustments occur on an annual basis. Lender required to give complete written explanation of loan s terms.

Section 251 Characteristics 1- and 3-year ARMS annual interest rate adjustment is limited to 1%; total increase in interest rate is limited to 5%.

Section 251 Characteristics 5-year ARMS annual interest rate adjustment is limited to 1%, with total increase limited to 5%; OR annual interest rate adjustment is limited to 2%, with total increase limited to 6%.

Section 251 Characteristics 7- and 10-year ARMS annual interest rate adjustment is limited to 2%; total increase in interest rate is limited to 6%.

Summary FHA Loan Programs Section 203(b) Section 203(b)(2) Section 203(k) Section 223(e) Section 234(c) Section 245 and 245(a) Section 251

FHA Insurance Premiums Insurance premiums for FHA loans are either: MMI (mutual mortgage insurance premiums), or MIP (mortgage insurance premiums).

FHA Insurance Premiums Insurance premiums for FHA loans are either: MMI (mutual mortgage insurance premiums), or MIP (mortgage insurance premiums). For most programs, borrowers pay an upfront premium and annual premiums.

FHA Insurance Premiums Upfront MIP Upfront premium (UFMIP) is also called one-time premium (OTMIP). Paid in cash, or financed. Percentage of base loan amount (currently 1.5%).

Upfront MIP Paying the UFMIP Either borrower or seller can pay UFMIP in cash at closing. May also be financed over loan term. Added d to base loan amount.

Upfront MIP Paying the UFMIP Either borrower or seller can pay UFMIP in cash at closing. May also be financed over loan term. Added d to base loan amount. Borrower can borrow maximum loan amount plus UFMIP.

Upfront MIP Paying the UFMIP Loan origination fee is based only on base loan amount, not including UFMIP. Discount points are based on total amount financed, including upfront MIP.

Upfront MIP UFMIP refund FHA buyer may be entitled to refund of part of UFMIP if loan is paid off early. FHA earns premium under a schedule.

Upfront MIP UFMIP refund Borrower gets refund whether UFMIP was paid in cash or financed. But borrower not entitled to refund if: selling property and allowing buyer to assume FHA loan. loan made after December 8, 2004 (unless loan is to refinance another FHA loan).

FHA Insurance Premiums Annual premium Most FHA buyers are required to pay annual renewal premiums in addition to UPMIP. Either 0.25% or 0.50% of loan balance.

FHA Insurance Premiums Annual premium Most FHA buyers are required to pay annual renewal premiums in addition to UPMIP. Either 0.25% or 0.50% of loan balance. 0.25% if 15-year loan or less and LTV 90% or higher. 0.50% if >15 years.

Annual Premium Cancellation of annual MIP Under FHA rules, annual MIP for loans closed on or after January 1, 2001 is cancelled automatically once certain conditions are met.

Annual Premium Cancellation of annual MIP Loan term exceeds 15 years Once LTV reaches 78%, the annual premium is cancelled, as long as premiums have been paid for at least 5 years.

Annual Premium Cancellation of annual MIP Loan term of 15 years or less Once LTV reaches 78%, annual premium is cancelled, regardless of how many years premium has been paid. Only applies to loans with original LTV of Only applies to loans with original LTV of 90% or higher.

Annual Premium Cancellation of annual MIP FHA determines when borrower has reached 78% threshold based on amortization schedule of loan. If borrower prepays loan, he can request p p y, q cancellation of annual MIP.

Sales Concessions FHA places certain restrictions on sales concessions. Purpose is to prevent parties from using contributions to defeat FHA s loan-to-value rules.

Sales Concessions Seller contributions FHA considers it to be a seller contribution if seller (or other interested party) pays for all or part of: buyer s y closing costs; buyer s prepaid expenses; any discount points; temporary or permanent buydown; buyer s mortgage interest; or upfront f t MIP.

Sales Concessions Seller contributions Seller contributions are limited to 6% of sales price. Excess contributions are treated as inducements to purchase. D d t d f l i i l t Deducted from sales price in loan amount calculations.

Sales Concessions Seller contributions Seller contributions are limited to 6% of sales price. Excess contributions are treated as inducements to purchase. Deducted D d t d from sales price in loan amount calculations. 6% limit only applies to contributions paid for by seller or another interested party.

Sales Concessions Inducements to purchase FHA considers it to be an inducement to purchase if seller (or other interested party): gives g buyer a decorating allowance;

Sales Concessions Inducements to purchase FHA considers it to be an inducement to purchase if seller (or other interested party): gives g buyer a decorating allowance; gives buyer a repair allowance;

Sales Concessions Inducements to purchase FHA considers it to be an inducement to purchase if seller (or other interested party): gives g buyer a decorating allowance; gives buyer a repair allowance; pays for buyer s moving expenses;

Sales Concessions Inducements to purchase FHA considers it to be an inducement to purchase if seller (or other interested t party): gives buyer a decorating allowance; gives buyer a repair allowance; pays for buyer s moving expenses; pay real estate agent s sales commission on sale of buyer s current home; or gives buyer personal property not customarily included in sale of home.

Sales Concessions Inducements to purchase Value of inducements are subtracted from property s sale price before LTV ratio is applied. Reduces amount of mortgage available to g g FHA borrower.

Secondary Financing FHA rules regarding use of secondary financing depend on whether financing is being used for minimum cash investment or as supplement to make up permitted base loan amount.

Secondary Financing Cash investment Generally, borrower not allowed to use secondary financing from seller, another interested party, or institutional lender to pay: minimum cash investment, closing costs, or other expenses.

Secondary Financing Cash investment If secondary financing is a family member, total financing can t exceed property s value or sales price plus closing costs, prepaids, and discount points. Combined payments can t exceed buyer s ability to pay.

Secondary Financing Cash investment FHA borrower who is 60 years or older may borrow money from: relative, close friend with clearly defined interest in borrower, employer, or charitable organization.

Secondary Financing Base loan FHA allows second mortgages from anyone with FHA-insured loan. Following conditions must be met: 1. Both loans together can t exceed FHA maximum mortgage amount. 2. Combined total of payments may not exceed borrower s ability to pay.

If second loan has periodic installment t payments, they must be collected on a monthly basis. Payment amounts should be substantially the same. Second mortgage may not have balloon payment due less than 10 years after closing. S Second mortgage may not impose prepayment penalty.

Summary Insurance, Concessions & Secondary Financing UFMIP OTMIP Annual premium Seller contributions Inducements to purchase Secondary financing

Assumption of FHA Loans FHA loans closed before December 15, 1989 can be assumed by: any y buyer, without FHA or lender approval, by b an investor (non-occupant).

Assumption of FHA Loans For FHA loans closed after December 15, 1989, buyer assuming loan must: pass p creditworthiness review, and occupy home.

Assumption of FHA Loans For FHA loans closed on or after January 27, 1991, home must be buyer s primary residence. May y not be a second home.

Assumption of FHA Loans For FHA loans closed between February 5, 1988 and January 27, 1991, if: original g borrower was owner occupant; and buyer is purchasing property as a second home; then loan must be paid down to 85% LTV ratio.

Assumption of FHA Loans Assumption charges Interest rate on fixed-rate FHA-insured loan normally isn t raised after assumption. Lender allowed to charge $500 g assumption fee if loan originated after December 15, 1989.

FHA Underwriting FHA underwriting standards aren t as strict as Fannie Mae/Freddie Mac standards. Involves analysis of applicant s income, net y pp, worth, and credit history.

FHA Underwriting Income analysis FHA underwriter determines applicant s monthly effective income. Effective income Gross income from all sources expected to continue for first 3 years of loan term.

FHA Underwriting Income analysis Underwriter also applies income ratios to determine adequacy of effective income: fixed payment to income ratio (generally 43%), and housing expense to income ratio housing expense to income ratio (generally 31%).

FHA Underwriting Income analysis Fixed payments include proposed monthly housing expense and all recurring charges. Housing expense: principal and interest, property t taxes, hazard insurance, on-twelfth of FHA annual premium, and any homeowners dues.

FHA Underwriting Income analysis Recurring charges: monthly payments on debt with 10 or more remaining gpayments, alimony and child support payments, installment i t t debt payments, and payments on revolving credit accounts.

FHA Underwriting Income analysis If income ratios exceed 43% and/or 31% limits, applicant won t qualify for loan unless there are compensating factors that reduce risk of default.

FHA Underwriting Income analysis Compensating factors include: 1. Paid housing expenses at least equal to proposed p expenses for last 12-24 months.

FHA Underwriting Income analysis Compensating factors include: 1. Paid housing expenses at least equal to proposed p expenses for last 12-24 months. 2. Plans to make large downpayment (10%).

FHA Underwriting Income analysis Compensating factors include: 1. Paid housing expenses at least equal to proposed p expenses for last 12-24 months. 2. Plans to make large downpayment (10%). 3 D t t d bilit t l t i 3. Demonstrated ability to accumulate savings and conservative attitude toward use of credit.

FHA Underwriting Income analysis Compensating factors include: 1. Paid housing expenses at least equal to proposed p expenses for last 12-24 months. 2. Plans to make large downpayment (10%). 3. Demonstrated t ability to accumulate savings and conservative attitude toward use of credit. 4. Able to devote greater portion of income to housing expenses.

5 R i i t t d ff ti 5. Receives income not counted as effective income, but directly affects ability to pay.

5. Receives income not counted as effective income, but directly affects ability to pay. 6. Proposed housing expense only a small increase (10% or less) of current housing expense.

5. Receives income not counted as effective income, but directly affects ability to pay. 6. Proposed housing expense only a small increase (10% or less) of current housing expense. 7. Will have substantial reserves after closing (at least 3 mortgage payments).

FHA Underwriting Income analysis If home is an energy-efficient home, income ratios can be exceeded by 2%.

FHA Underwriting Income analysis Temporary buydowns are allowed if buyer qualifies at note rate. So if buydown brings interest rate down from 9% to 7%, buyer must qualify for loan at 9%.

FHA Underwriting Assets for closing At closing, borrower needs enough cash to cover: minimum cash investment; prepaids; any discount points; upfront MIP (if not financed); any closing costs repair costs or other any closing costs, repair costs, or other expenses not financed.

FHA Underwriting Assets for closing Generally, borrower not required to have reserves for FHA loan. But reserves may be a compensating factor if y p g income ratios exceed limits.

FHA Underwriting Assets for closing May also borrow money required for closing from someone other than relative, if loan is secured by collateral other than home being purchased.

Other Closing Requirements FHA has several requirements related to inspection of properties used to secure FHA-insured loans.

Other Closing Requirements First, buyers must receive HUD-provided disclosure form titled For Your Protection: Get a Home Inspection. Explains importance of home inspections. Distinguishes them from appraisals. By signing form, buyers acknowledge that FHA will not perform home inspection or guarantee property s price or condition.

Other Closing Requirements Second, buyers must receive disclosure form titled Notice to the Homebuyer. Summarizes conditions noted by FHA- approved appraiser preventing approval of property. Must be provided at least 5 days before closing.

Summary Assumption and Underwriting Assumption Income analysis Effective income Recurring charges Assets for closing Mandatory FHA disclosures