FHA Mortgage Insurance
FHA requires a mortgage insurance premium (MIP) for its homebuying programs. An up-front premium of 1.50% of the loan amount is paid at closing and can be financed into the mortgage amount. In addition, there is a monthly MIP amount included in the PITI of .50%. Condos do not require up front MIP – only monthly MIP.
The mortgage insurance premium paid on an FHA loan is always significantly higher than on a conventional program. On an FHA loan the borrower will be charged a mortgage insurance premium equal to 1.50% of the purchase price of the property and a renewal premium of .500% in subsequent years. By contrast the mortgage insurance premium charged at closing on a conventional program is as low as .500% (with 10% down payment) with renewal rate in subsequent years as low as .300% in subsequent years.
FHA Streamline Refinance
FHA has permitted streamline refinances on insured mortgages since the early 1980’s. The streamline refers only to the amount of documentation and underwriting that needs to be performed by the mortgage company, and does not mean that there are no costs involved in the transaction.
The basic requirements of a streamline refinance are:
- The mortgage to be refinanced must already be FHA insured.
- The mortgage to be refinanced should be current (not delinquent).
- The refinance is to result in a lowering of the borrower’s monthly principal and interest payments.
- No cash may be taken out on mortgages refinanced using the streamline refinance process.
Companies may offer streamline refinances in several ways. Some companies offer “no cost” refinances (actually, no out-of-pocket expenses to the borrower) by charging a higher rate of interest on the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the company pays any closing costs that are incurred on the transaction.
Companies may offer streamline refinances and include the closing costs into the new mortgage amount. This can only be done if there is sufficient equity in the property, as determined by an appraisal. Streamline refinances can also be done without appraisals, but the new loan amount cannot exceed what is currently owed, i.e., closing costs may not be added to the new mortgage with those costs either paid in cash or through the premium rate as described above. Investment properties (properties in which the borrower does not reside in as his or her principal residence) may only be refinanced without an appraisal and, thus, closing costs may not be included in the new mortgage amount.
FHA Loan Limits
FHA has maximum loan amounts, which vary from one county to another. It is critical that the borrower’s loan amount, including financed closing costs, not exceed the maximum set by FHA for the county in which the subject property is located. There are no income limits on FHA loans.
Down Payment Gifts
The down payment can be 100% gift funds. This is one of the key benefits to the FHA program. Verification of the source of gift money is not required. However, it is necessary that the gift funds be deposited in the borrower’s bank or savings account, or in an escrow account, prior to underwriting approval. Proof of deposit is required. Gift donors are restricted primarily to a relative of the borrower. They can also be certain organizations, such as a labor union or charitable organization. Contact your local branch for complete information.
Bankruptcy and Foreclosure
A credit report will be obtained on the borrower and any lates, collections, judgments, foreclosures, bankruptcies, etc. must have a justifiable explanation in writing by the borrower. In the event of a foreclosure, the borrower has three years from the date the claim was paid until he/she is eligible for another FHA loan, unless the foreclosure was the result of extenuating circumstances beyond the borrower’s control and the borrower has since established good credit.
Chapter 7 bankruptcy requires the borrower to wait at least two years from the date of discharge.
Chapter 13 bankruptcy requires the borrower to have been paying on the bankruptcy for at least one year, performance must have been satisfactory and the borrower must also receive court approval to enter into the mortgage transaction.
Refunds on FHA Loans
If you have ever paid off a home loan backed by FHA, you may have money owed to you. And the government wants to pay you back. About 1 in 10 FHA borrowers leave money in their escrow accounts when they pay off their loans. The average refund for each borrower is about $700. Former FHA borrowers who think they might be due a refund can call a toll free number, 800-697-6967, or write HUD at P.O. Box 23669, Washington DC 20026-3699. Or you can look for your name with the HUD Refund Search Form.
Single family mortgage insurance
FHA’s mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages mortgage companies to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, by protecting the mortgage company against loan default on mortgages for properties that meet certain minimum requirements–including manufactured homes, single-family and multifamily properties, and some health-related facilities.
Section 203(b) is the centerpiece of FHA’s single-family insurance programs. It is the successor of the program that helped save homeowners from default in the 1930s, that helped open the suburbs for returning veterans in the 1940s and 1950s, and that helped shape the modern mortgage finance system. Today, FHA One- to Four-Family Mortgage Insurance is still an important tool through which the Federal Government expands homeownership opportunities for first-time homebuyers and other borrowers who would not otherwise qualify for conventional loans on affordable terms, as well as for those who live in underserved areas where mortgages may be harder to get. In FY 1997, FHA insured more than 790,000 homes, valued at almost $60 billion, under this program. FHA currently insures a total of about 7 million loans valued at nearly $400 billion. These obligations are protected by FHA’s Mutual Mortgage Insurance Fund, which is sustained entirely by borrower premiums.
Section 203(b) has several important features:
Downpayment requirements can be low. In contrast to conventional mortgage products, which frequently require downpayments of 10 percent or more of the purchase price of the home, single-family mortgages insured by FHA under Section 203(b) make it possible to reduce downpayments to as little as 3 percent. This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage, in some cases.
Many closing costs can be financed. With most conventional loans, the borrower must pay, at the time of purchase, closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program allows the borrower to finance many of these charges, thus reducing the up-front cost of buying a home. FHA mortgage insurance is not free: borrowers pay an up-front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.
Some fees are limited. FHA rules impose limits on some of the fees that mortgage companies may charge in making a loan. For example, the loan origination fee charged by the mortgage company for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.
HUD sets limits on the amount that may be insured. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage loan.
Single family rehab mortgage program
Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage—or to finance the rehabilitation of their existing home.
Section 203(k) is one of many FHA programs that insure mortgage loans, and thus encourage mortgage companies to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first-time homebuyers) and to residents of disadvantaged neighborhoods (where mortgages may be hard to get).
Section 203(k) fills a unique and important need for homebuyers in another way as well. When buying a house that is need of repair or modernization, homebuyers usually have to follow a complicated and costly process, first obtaining financing to purchase the property, then getting additional financing for the rehabilitation work, and finally finding a permanent mortgage after rehabilitation is completed to pay off the interim loans. The interim acquisition and improvement loans often have relatively high interest rates and short repayment terms.
However, Section 203(k) offers a solution that helps both borrowers and mortgage companies, insuring a single, long-term, fixed- or adjustable-rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money, and also protect mortgage companies by allowing them to have the loan insured even before the condition and value of the property may offer adequate security. Insurance commitments for 17,000 homes were made in FY 1996; the estimated number of homes to be insured under Section 203(k) for FY 1997 is 19,000, and 15,000 for FY 1998. For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD’s Title I Home Improvement Loan program.
The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k)-insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four-unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:
- structural alterations and reconstruction.
- modernization and improvements to the home’s function.
- elimination of health and safety hazards.
- changes that improve appearance and eliminate obsolescence.
- reconditioning or replacing plumbing; installing a well and/or septic system.
- adding or replacing roofing, gutters, and downspouts.
- adding or replacing floors and/or floor treatments.
- major landscape work and site improvements.
- enhancing accessibility for a disabled person.
- making energy conservation improvements.
Single family adjustable rate mortgages
What is the purpose of this program?
Provides mortgage insurance for a person to purchase or refinance a principal residence at a lower initial interest rate. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.
What are the eligibility requirements?
- Borrower must meet standard FHA credit qualifications.
- Borrower is eligible for approximately 97% financing. Borrower is able to finance closing costs and the uppermost mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium.
- ARMS can only be used in conjunction with Sections 203(b), 234(c), and 203(k).
- The index used to determine the interest rate is the U.S. Treasury Security adjusted to a constant maturity of one year.
- Eligible properties are one-to-four unit structures.
Title I improvement loan
The Federal Housing Administration (FHA) makes it easier for consumers to obtain affordable home improvement loans by insuring loans made by private lenders to improve properties that meet certain requirements. This is one of HUD’s most frequently used loan insurance products. By the end of fiscal year (FY) 1996, it had insured almost 35 million loans totaling $43.6 billion.
The Title I program insures loans to finance the light or moderate rehabilitation of properties, as well as the construction of non-residential buildings on the property. This program may be used to insure such loans for up to 20 years on either single- or multi-family properties. The maximum loan amount is $25,000 for improving a single-family home or for improving or building a non-residential structure.
For improving a multi-family structure, the maximum loan amount is $12,000 per family unit, not to exceed a total of $60,000 for the structure. These are fixed rate loans, for which lenders charge interest at market rates. The interest rates are not subsidized by HUD, although some communities participate in local housing rehabilitation programs that provide reduced rate property improvement loans through Title I lenders.
Only lenders approved by HUD specifically for this program can make loans covered by Title I insurance. While most lenders and contractors use this program responsibly, HUD urges consumers to use caution in choosing and supervising home repair contractors conducting Title I repair/renovation work. A recent HUD review of Title I uncovered many instances of “unscrupulous contractors performing shoddy work, falsifying documents, overcharging homeowners, and using deceptive advertising.” HUD encourages homeowners to work directly with their lender in selecting a home repair contractor in order to prevent inflated estimates.
Energy efficient mortgages
What is the purpose of this program? Provides mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.
What are the eligibility requirements? Borrowers are eligible for approximately 97% financing. Borrowers are able to finance closing costs and the up front mortgage insurance premium into the mortgage. Borrowers are also responsible for paying an annual premium.
Eligible properties are one to two existing units and new construction.
The cost of the energy efficient improvements that may be eligible for financing into the mortgage is the greater of 5% percent of the property’s value (not to exceed $8,000) or $4,000.
To be eligible for inclusion in the mortgage, the energy efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.
The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating system (HERS) or energy consultant. Up to $200 of the cost of the energy inspection report may be included in the mortgage.
Reverse mortgage program
Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD’s reverse mortgage program. The program allows homeowners to borrow against the equity in their homes.
Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options.
Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Mortage companies recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the company the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.
The size of reverse mortgage loans is determined by the borrower’s age, the interest rate, and the home’s value. The older a borrower, the larger the percentage of the home’s value that can be borrowed.
For example, based on a loan at an interest rate of 9 percent, a 65-year-old could borrow up to 26 percent of the home’s value, a 75-year-old could borrow up to 39 percent of the home’s value, and an 85-year-old could borrow up to 56 percent of the home’s value.
There are no asset or income limitations on borrowers receiving HUD’s reverse mortgages.
There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs. As a result, owners of higher-priced homes can’t borrow any more than owners of homes valued at the FHA limit.
HUD’s reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home’s value as an up-front payment plus one-half percent on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower’s principal balance.
FHA’s reverse mortgage insurance makes HUD’s program less expensive to borrowers than the smaller reverse mortgage programs run by private companies without FHA insurance.