FHA
General Information:
The reason I want to start here is the fact that this is the “new sub-prime”, but does not have the issues sub-prime has. It has been around since the Housing Act of 1934 created FHA to insure these loans, so lenders would make them. Click Here for FHA’s history or go to the HUD’s FHA history site. It was started as a result of the housing crisis brought on by the Great Depression. FHA is a department of the US Department of Housing and Urban Development. In the limited space of this site, I am going to only be able to give you the basics, but here are the links if you want more detail or if you would like to do further research.
FHA Website: http://www.hud.gov/
FHA homebuyer’s site: http://www.hud.gov/buying/
Credit manual: http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/index.cfm
FHA Circular letters http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/
Both parties have lost. Mr. Smith is mad at his “crooked” loan officer who told him his loan was approved. Mr. Smith can not get his house now, so he is humiliated and upset. Mr. Jones has done a lot of work on a loan he thought he would be paid on (most loan officers are on some form of commission), now he is not going to be paid for his work. Worst of all for the loan officer his name will be “bad mouthed” all over the community, which will hurt later business.
Lessens: For Mr. Smith: (1) he will now take his W-2’s and check stubs to the next loan officer, so his income will be accurate. (2) He lost his appraisal money on the transaction. (3) He paid a high price for this education. For Mr. Jones, the loan officer: (1) he work hard to have a good reputation, but has had that reputation hurt by not making sure that the information was not accurate in the very beginning. (2) He will not be paid on Mr. Smith’s loan. (3) He did a lot of work for nothing. Don’t be disappointed, be prepared!
FHA loans are low down payment loans that are insured from default for the lenders who make them. It allows you to make a 3.5% down payment and you can get down payment assistance from a non-profit down payment assistance organization or from a relative. The below chart has the terms and conditions for the loan. The interest rates on these loans are comparable with Fannie Mae and Freddie Mac conventional loans. The most widely used FHA loan program is the 203b program. It has a fixed interest rate on the 203b is fixed and the terms are generally 10 15, 20 or 30 years. FHA does have an ARM loan also. For the maximum loan amount in your area click: https://entp.hud.gov/idapp/html/hicostlook.cfm.
Advantages:
- Low interest rate
- Low fixed terms and rates
- Easy to refinance (no appraisal or credit qualifying needed)
- No Credit Score and no minimum credit score required (virtually all lenders will not take any loan under a 620 credit score, even if insured by the government).
- Credit problems (except Bankruptcy) over 12 months old are ok, so long as you have had no credit late payments in the past 12 months.
- No time on the job requirement, just that your job probability is stable (not on probation).
- Up front mortgage insurance can be added to your loan amount.
- You can use a non-profit organization to give you all of your down payment and closing cost.
- One of your relatives can give you all of the down payment and/or closing cost as a gift.
Disadvantages:
- Generally takes longer to process the loan.
- Properties have to be in better condition than conventional loan properties (except the FHA 203K loan).
- More paperwork to do for the consumer and loan company.
- Lower loan limits than conventional loans (in most cases). See link for the maximum loan size in your area: https://entp.hud.gov/idapp/html/hicostlook.cfm.
- High mortgage insurance premium paid both up front and monthly (Note: Mortgage insurance premiums are known as MMI Mutual Mortgage Insurance).
Borrowers Documentation for the loan:
FHA loans are called full-doc loans. This means that on the credit application that the employment, down payment, gift (if any), credit and housing payments (or rental payments) have to be verified. The property Title to the property, sales contract (also called an earnest money contract), and appraisal must be obtained and reviewed. There is one major exception to the documents that are obtained. The AUS (automatic underwriting system), the computer loan approval engine, may ask for less documentation for excellent credit borrowers. Full documentation.
IMPORTANT: The information that goes into the AUS is only as good as the information that is put into it. You may have had a loan officer tell you that your loan was approved only to find out that (1) it was not or (2) much more documentation was asked for after the approval, which seemed out of place. Here is probably what happened. You told the loan officer what you made and/or what down payment you could afford. He took the information at face value and got an approval on the information you gave; however your income was different, and this caused a problem (see sidebar).
When you should consider this type of loan?:
