What is an FHA loan?

An FHA loan is a government backed security which allows an entire spectrum of borrowers to get into their primary home for less than 20% down.

Contrary to popular belief, an FHA loan is NOT just for low income housing projects, buyers with bad credit, or borrowers who make very little money.

In fact, you can still take advantage of an FHA loan regardless of the amount of money you make, where you are going to live, or what your credit score is.  I’ve done FHA loans for clients with 640 credit scores and 820 credit scores.  I’ve done FHA loan for individuals living on a fixed social security income of $1,700 a month, and I’ve done FHA loans for investment bankers making $40,000 a month.  Although the current FHA structure only allows for a max loan amount (in Los Angeles County) of $729,750.00,  I’ve done FHA loans for clients in both Compton and and Beverly Hills.

An FHA backed loan is truly is a great product for any client seeking to put down less than 20%… The absolute minimum for purchasing a singe family residence with an FHA loan is 3.50%; however, if clients can come up with at least 5.10% down, the process is more streamlined and less costly.

Many clients in our current market who have access to 20% down are looking for alternatives and do not want to part with that much cash.  For example, on a $760,000 purchase price, one would traditionally have to come up with a $152,000 down payment.  By doing an FHA loan, a client could get into the same home for 5.1% down and only have to part with $38,000 of their cash.  This leaves the client over $110,000 in cash to invest in the stock market, save for a rainy day, or use for other property investment opportunities.

The only down fall of an FHA loan (and any other loan with less than 20% down) is the addition of Mortgage Insurance, called MI or PMI.  MI is a monthly fee that clients will pay for between 2 and 5 years.  The math on correctly calculating MI is a little confusing.  However, if you decide FHA financing is right for you, keep in mind that MI will be a fee that adds anywhere from $150 – $400 a month in costs to your loan.  This fee is derived from your loan amount, credit score, and amount of down payment.  Check with your lender or contact me about the specifics of MI.  The silver lining is that a bill introduced by George Bush in 2007 made this fee tax deductable, whereas before 2007 it was a completely sunk cost.

Some important factors and benefits to keep in mind while trying to discover if your transaction qualifies for FHA financing and if a FHA loan is right for you:

• An FHA loan can only be obtained on your primary residence-  If you already own property, an FHA loan is not impossible to obtain, but definitely more tricky
• An FHA will be full underwritten and require full income documentation- FHA approved underwriters review files with an extra level of scrutiny.  Full income and asset documentation will be required
• FHA underwriters will only allow your total debt load to equal a maximum of 45% of your income.  Your debt load is derived from the minimum credit car, student loan, and car payments captured from your credit report in addition to the cost of buying your new home.  When calculating your debt-to-income ratio, underwriters do not take into consideration other expenses like car insurance and cell phone bills
• You can apply with most lenders for an FHA loan- a common misconception is that the FHA originates and funds loans for borrowers themselves.  This is not true, an FHA loan is applied for through a lender like myself.  A specially trained underwriter within my bank approves the file, the bank funds the loan and closes out the deal, and then sells the loan to the FHA (who now takes on the risk of that loan and possible default)
• The entire down payment can be a gift-  On FHA financing your entire down payment (3.50% – 19.99%) can be a gift.  Gift funds, and the gift letter which must accompany it can be a tricky procedure.  It is best to game-plan with your realtor and lender prior to writing a purchase contract if you know you will be accessing gift funds for the down payment
• You can buy a multi-unit property with an FHA loan- With FHA financing, buyers can purchase a single family residence (SFR) or a 2–4 unit property.  Some of the advantages of buying a multi-unit with an FHA loan is increased loan limits, and the ability to use the rental income on the new property to help you get approved
• Sellers can provide large credit to buyers- Although it is not guaranteed, and has to be part of the purchase contract, sellers are allowed to credit borrowers a closing cost discount of up to 6% of the purchase price.  To be honest, 6% is a little aggressive, and regardless of the credit amount, clients still have to fund their own down payment.  However, consider this.  If you can get a 2% credit on a $500,000 loan, that is $10,000 in free money, credited by the seller, which will cover all your closing costs and pre-paid items (like up front interest and taxes).  This can be an amazing tool if you are looking to get into a property with the lowest possible cash out-lay

Common misconceptions about FHA financing:

• FHA loans are just for low income buyers – False.  If Bill Gates wanted to get a $700K loan on his primary residence, he would be eligible for an FHA backed loan
• FHA loan are only for first time buyers – False.  FHA loans can be used by first time buyers, repeat buyers, buyers with additional properties, and as a refinance vehicle.  As long as the property being purchased a going to be legitimately owner occupied, FHA financing is available
• FHA loans cost more – False and true.  Inherently if you are putting down less money, your monthly payment is going to be higher.  Additionally, the penalty for not putting down 20% is a fee of a couple hundred dollars per month called mortgage insurance.  However, as of now, the interest rate you pay on the money borrowed is in line with conventional bank loans
• Realtors won’t accept an offer from an FHA buyer – False and true.  Some Realtors are still in the mindset of the 1980′s when FHA buyers meant trouble.  That simply is not the case any longer.  It is up to blogs like this and lenders like myself to help change the perception that surrounds FHA financing
• You cannot have a co-signer on an FHA loan -  False.  On single family residences (not multi-units), you can have a co-signer assist you in qualifying for the loan
• Properties on FHA loans have to be brand new – False.  An FHA appraisal will have to note that the property has a certain level of health and safety standards.  Unfortunately, the exact “health and safety” standard are somewhat nebulous and up to the interpretation of the appraiser.  Certain things MUST be done such as hot water heaters being properly secured, doors and windows in proper working order, no evidence of water damage, and a property which is  structurally sound.  However, FHA appraisals can also stipulate that chipped paint be sanded away and repainted, wood not be completely exposed, and may call for additional inspections or letters of opinion by specialists (such as roofer or structural engineer)

As you can tell, I could go on for hours about FHA financing.

As always, if you need information on starting a new loan for the purchase or refinance of your home, contact me at  TrustYourLender@gmail.com