FHA loans - Don't call it a comeback!

FHA Mortgages, here we come!

With our current mortgage crises, people with good jobs and little cash on hand are having a tough time buying houses. But fear not, you have an option – FHA Mortgage. FHA mortgages are not actual loans, but a method of protecting mortgage lenders by the government against losses that result from defaults on home mortgages. The whole purpose is to help people buy homes with as little as 3% down These loans became unpopular with the real estate boom because loan terms did not keep up with the transient market. Now the market has changed and ready for action. However, the rules were modified and now you can take advantage of them.

The basic rules are (in no particular order):

1. The mortgage must follow FHA loan limits:

a. 1 unit: $729,750

b. 2 units: $934,200

c. 3 units: $1,129,250

d. 4 units: $1,403,400

2. Borrower must have 3% in cash for closing/down payment, and must put 2.25% of it towards the down payment. For example, if the loan amount is $100,000, then the borrower must have $3,000 in cash and $2,250 of the cash has to go towards the down payment. So, the new loan amount is $97,750. The remaining cash has to go towards closing. The trick, however, is that the sellers have to pay for most of the closing costs, up to 6%. This shouldn’t be too big of a problem since it will just be part of the negotiation – ask your Realtor about it.

a. However, if your house is in a “Declining Market” as designated by the FHA (there are multiple definitions of a “Declining Market”…..more to come on this later), then you are required to put down an additional 5%. And that puts us at 8% cash in hand. Fear not (yet) though. According to the FHA DC is not considered a declining market…but could change soon.

3. Appraisal must be performed by certified FHA loan appraisers. However, my years of experience tell me this is one of those tricky areas since appraisals are subjective and can cause problems.

4. Borrowers are required to pay mortgage insurance of 1.5% of the loan price at closing, and an additional 0.5% in insurance fees annually.

5. For condos:

a. Incomplete condos can be purchased through a “spot” loan. FHA allows only one “spot” loan per lender (Bank of America, Wachovia, etc.)

b. For non-“spot” loans, the condo has to be fully completed for a full year, provide proof of hazard insurance, 90% sold, 50% owner occupancy, 10% maximum single owner, and one of the following:

i. If more than 30 units, then maximum of 10% of the units can be financed by FHA.

ii. If less than 30 units, then maximum of 25% FHA financing.

6. Currently there are no credit score requirements for FHA loans, but this could change

7. Home must be owner occupied.

8. A borrower can have up to two FHA loans at one time based on loan amounts.

9. Other notes:

a. Cost is 1% loan origination fee

b. Assume 45-60 days to close

c. Assume 3 weeks to schedule an appraisal

Quite a list huh? By now you’re probably wondering one of two things:
1) Why would anyone go through the trouble to get such a loan? and
2) At what point does this loan make sense for the regular consumer?

Well, first, this loan is best for those who don’t have a lot of money to put down. Otherwise it doesn’t make sense. Most people who take this loan, takes it for the maximum loan amount. Then, what about the regular consumer who has the money and think he can make 11% on the stock market by putting down as less as possible. It sounds perfect! Well, not really. I did the numbers for 30 years and the annual 0.5% insurance cost is what ends up killing you. So, it’s basically not worth it to go this route. If you don’t believe me, then do the calcs yourself.