FHA Mortgage Loan Basics
The goal of the Federal Housing Administration (“FHA”) is to expand home ownership opportunities. FHA “guarantees” or “insures” loans for home buyers looking to purchase a primary residence. FHA does not make mortgages, they insure them. Lenders are approved by FHA to underwrite loans based on FHA guidelines, and if the borrower defaults, FHA will cover lender losses. The FHA insured mortgage gives MA residents more flexibility than conventional mortgages, but that flexibility does come with additional costs. FHA mortgages have something called M.I.P. (Mortgage Insurance Premium). This M.I.P. is charged both upfront and monthly and will stay on the loan until the borrower has a loan to value of 78% (equity position) and have paid on the monthly M.I.P. for at least 5 years.
A Home Buyer in MA utilizing a FHA insured mortgage will have the following benefits
- More flexible debt to income ratio guidelines – sometimes over 50%
- Only 3.5% down payment required
- Gifts permitted for all or some of the down payment
- No maximum income limits like many 1st time home buyer programs
- Lower credit scores allowed – usually down to 620
- Comparable & usually lower interest rates than conventional loans
- Single Family, 1-4 Multi-Family & FHA Approved Condos allowed
- 30 Year, 15 Year Fixed, and 5/1 ARM’s available
- Non-occupying co-borrowers permitted to help qualify
Each FHA loan has its own individual case number assigned, and the M.I.P. rate is based on when the case number is assigned. Mortgage insurance rates can change every 6 months or so. Currently they look like the following, but will be changing beginning April 1, 2013.
FHA Down Payment Options
One the major benefits a potential home owner in MA will appreciate when utilizing a FHA insured mortgage product are the many options available for the down payment. 3.5% is required, but, unlike conventional loans, FHA down payments can come from many sources.
- Your own funds that have been in your checking, savings account or money market account over 2 months.
- Funds from your 401k/IRA/Retirement fund
- A gift from a family member (see attached FHA GIFT LETTER)
- Employee assistance programs
- FHA approved grant or down payment assistance programs
FHA requires that a “paper trail” be created for the use of all down payment funds including gifts. If you are receiving a down payment gift, be aware, it will need to be thoroughly documented. Lenders will NOT allow cash to be utilized as a down payment option, and will scrutinize your bank statements looking for potential issues. Any deposit that is not a direct payroll deposit will require additional paperwork.
IMPORTANT: Discuss your down payment plans openly with your mortgage officer before looking at properties and DO NOT make any non-direct deposits or transfers without talking to the Mortgage Buddy.
FHA: Loan Limits
Something to always consider when utilizing a FHA insured loan in Mass. are the loan limits. Each county in Mass. has a different maximum lending limit.
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The FHA link for FHA County Limits across the country
Mass. Mortgage Buddy FHA Tips
- A FHA mortgage products is only available for a primary residence, however, you can refinance an investment property that once was your primary residence
- Buyers with a Bankruptcy must wait 2 years after date of discharge, and can NOT have late payments of any type after the bankruptcy
- Buyers with a Foreclosure or Short Sale must wait 3 years from the date of foreclosure or short sale, and can NOT have any late payments
- ALL condominium associations must be approved by FHA in order to obtain an FHA loan on a condominium unit in the complex. Currently approved condo are available here. FHA Approved Condos.
- If buying a bank owned home with a FHA loan keep in mind that FHA is particular about the condition of the property, so fully discuss these issues with the Mortgage Buddy