Federal Housing Administration Mortgages (FHA)

What Is an FHA Loan?

The FHA does not make loans. It insures, in the event of a default, mortgage loans made by approved lending institutions. FHA's analysis of the transaction takes into consideration the applicant's income, past credit history, work history and ability to save and manage financial affairs. Each applicant is considered individually as no two families have exactly the same situation. Family obligations, responsibilities, future prospects, motivation and spending patterns all differ widely.

Advantages of FHA Loans

  • Low down payment
  • Less cash from borrower than a conventional loan
  • Less stringent loan underwriting guidelines
  • Fully assumable (with qualifying)
  • No prepayment penalty

Eligibility Requirements

FHA financing may be by any qualified person, whether a U.S. citizen or not. However, the property must be the occupying borrower's principal residence. The borrower must also have a social security number. 

FHA Mortgage Insurance

Mortgage insurance is required on all FHA loans. The insurance is collected by the lender and paid to FHA, who in turn reimburses lenders in the event of loan defaults.

MMI & MIP are the two existing types of FHA insurance. 

MMI (Mutual Mortgage Insurance) is collected monthly on approved Condominiums. Insurance is paid on the remaining balance of the loan only, therefore the payments will decrease gradually over the life of the loan.

MIP (Mortgage Insurance Premium) is a one-time premium calculated as a percentage of of the loan amount that applies to Single Family Residences (SFR) and Planned Unit Developments (PUD). This fee can be 100% financed and added to the base loan.

FHA Loan Programs And Amounts

The maximum FHA loan amount varies by county. 

The three programs available are the 30-year fixed/level payment where the monthly principle and interest payment remains the same for the life of the loan, the one-year ARM (Adjustable Rate Mortgage) which can fluctuate based on the index (1-year Treasury Bill) and has a 1% annual cap and a 5% lifetime cap, and the GPM (Graduated Payment Mortgage) which allows the borrower to qualify at a lower rate but requires a down payment and has negative amortization.

Interest Rates

FHA does not set interest rates. Rates reflect current market conditions. Discount points need not be paid by anyone, but discount points to obtain a lower than market rate can be paid by either the buyer or the seller. 

FHA Appraisals

FHA uses the same appraisals for all programs. The appraisals (or Conditional Commitments) are done by FHA assigned/approved appraisers and set forth FHA's estimate of value. If the appraisal is at a value lower than requested, a reconsideration of value may be requested by sending FHA recent comparables indicating a higher value, or the buyer may pay the additional difference. 

Co-Signers

FHA allows a borrower to use a non-occupying co-signer for purposes of qualifying for the loan. The co-signer's income, assets, liabilities and credit history are included in the determination of credit worthiness. The co-signer must be a blood relative, or for unrelated individual, documented evidence of a family-type, long-standing and substantial
relationship not arising out of the loan transaction. 

Buyer's Costs

  • Down Payment
  • Loan Origination Fee (1% of base loan amount)
  • Escrow Fee
  • Appraisal Fee
  • Credit Report Fee
  • Recording Fees
  • ALTA. Lenders Title Insurance Policy
  • Property Tax Proration and Reserves
  • MMI Impounds (2 months)
  • MIP (can be 100% financed and added to base loan)
  • Hazard Insurance and Reserves
  • Per Diem interest on new loan, based on closing date

Seller's Costs

  • Escrow Fees
  • Sub-Escrow Fee*
  • Tax Service Fee*
  • Revenue Tax Stamps ($15.00 per $1000 sale price, if applicable)
  • Standard Owner's Title Insurance Policy
  • Proration of Property Taxes
  • Payment of assessments, etc.
  • Structural Pest Control Inspection and Repairs
  • Pay Off Existing Trust Deed and Liens
  • Broker fees
  • Association Transfer Fees*
  • Buyers' Loan Processing Fee*
  • Buyers' Loan Document Fee*

And Don't Forget...

Down payment, closing costs and impounds required for closing must be paid from the buyer's own funds or can be a non-repayable gift from a relative. FHA does not allow the buyer to pay certain costs and therefore those costs must be paid by the seller (see * items under Seller Costs above). If any other costs, other than those FHA non-allowable costs, are paid by the seller on behalf of the buyer, FHA requires that the buyer's loan be reduced by a corresponding amount, saving the buyer very little money, because their down payment is increased.