FHA Programs

The most popular FHA home loan program nationwide is the 30 yr fixed FHA home loan (see below) that only requires a minimum of 3% from the borrower and permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.

The main advantage to a FHA home loan is that the credit criteria for a borrower are not as strict as Fannie Mae or Freddie Mac. Someone who may have had a few credit problems should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan. In addition, the seller must pay for part of the "traditional" closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan. 100% of the down payment and closing costs can be gifted.

The following are highlights of this program:

Down payment requirements: Since this mortgage is insured by HUD, the minimum down payment required is 3% of the sales price. Furthermore, the down payment can be a gift from a family member, the government, or a non-profit agency designed to help first-time and low/moderate income home buyers. No cash reserves are required.

Income and employment: There are no limitations placed upon income requirements. As for employment, there are no limitations on a specific length of time at a particular job. However, a 2 year history is required, preferably in the same line of work (education can be counted towards this 2 year history if it is for the same profession the borrower is currently in).

Eligible properties and occupancy requirements: FHA loans are restricted to 1 to 4 unit single family residences that are new, under construction, or existing (i.e. resale properties), condominiums, and town-homes. Homes located in a PUD (planned urban development) must be approved by FHA or VA. Also, mobile homes with a permanent foundation, taxed as real property, and built after June 16, 1976 are eligible. All FHA insured properties must be owner-occupied.

Closing Costs: HUD has created a list of allowable and non-allowable closing costs that may be charged to the home buyer. Non-allowable closing costs generally are referred to as "garbage fees" or "junk fees" and include costs such as the lender's tax service or document preparation fees.

Qualifying ratios: HUD limits a borrower's monthly payment not to exceed 29% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit)  However, debt ratios as high as 50% are often approved.

Mortgage Insurance Premium: There is a 1.50% fee for a 30 or 15 year mortgage, assessed at the time of originating a FHA mortgage that is paid to HUD that can be wrapped into the loan. This fee goes towards maintaining the FHA insurance program. Furthermore, the borrower will pay 0.5% per year MIP renewal premium for the life of the loan. This is paid monthly. It is important to note that condominiums are exempt from the upfront mortgage insurance premium, but a borrower would still be required to pay the monthly renewal premium.

Assumability: Yes. The person assuming the loan must credit qualify for the mortgage and the seller is automatically released from liability with the approval of the lender.

Down payment requirements: Since this mortgage is insured by HUD, the minimum down payment required is 3% of the sales price. Furthermore, the down payment can be a gift from a family member, the government, or a non-profit agency designed to help first-time and low/moderate income home buyers.

Eligible properties and occupancy requirements: FHA loans are restricted to 1 to 4 unit single family residences that are new, under construction, or existing (i.e. resale properties), condominiums, and town-homes. Homes located in a PUD (planned urban development) must be approved by FHA or VA. Also, mobile homes with a permanent foundation, taxed as real property, and built after June 16, 1976 are eligible. All FHA insured properties must be owner-occupied.

Closing Costs: HUD has created a list of allowable and non-allowable closing costs that may be charged to the home buyer. Non-allowable closing costs generally are referred to as "garbage fees" or "junk fees" and include costs such as the lender's tax service or document preparation fees.

Qualifying ratios: HUD limits a borrower's monthly payment not to exceed 29% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 50% of their gross monthly income.

This 2-1 buy down should not be confused with a permanent buy down. A permanent buy down is when the borrower pays points to lower the interest rate on the mortgage over the life of the loan. Therefore, if you permanently buy down the note rate from 7% to 6.5% on a 30 year mortgage, your note rate will always be 6.5% for the next 30 years.

With a 2-1 buy down, if you were to "temporarily" lower the rate on a 7% 30 year mortgage, the interest rate the first year would be 5%, the next year would be 6%, and it would return back to 7% the third year and every year thereafter.