| When I first started in the mortgage business, at least | | | | down payment. The FHA allows this and works with |
| one in four of all of my buyers got an FHA loan. The | | | | these companies. You have likely heard of a |
| rates were fantastic, the down payment requirements | | | | Nehemiah. Nehemiah is a DAP. If you do a |
| minimal, and the credit requirements were close to | | | | conventional loan, this is not allowed. |
| meaningless. Most first - time home buyers got an | | | | You can have less than perfect credit. In fact, your |
| FHA loan. | | | | credit can be pretty bad. FHA is far less concerned |
| In the last three years, over 600 families have trusted | | | | about your credit score than they are your history |
| me with their home loan needs. Of those 600, I did a | | | | over the last two years in paying your bills on time. |
| total of two FHA loans over that time. One in 300. | | | | They will often ignore previous financial troubles and |
| I wasn't alone. FHA guaranteed less than 5,000 loans in | | | | other blemishes on your credit report. |
| California last year. In 2003, they did over 100,000. A | | | | There are no "set" guidelines about credit. There is |
| 95% decrease in demand. Nationally, FHA loans are | | | | much more flexibility at the underwriting level. |
| down 50% from a few years ago. | | | | For example, I recently had an FHA loan where the |
| FHA loans lost their popularity in the past few years | | | | borrower was putting down his own 3% and not using |
| for numerous reasons. Loan limits were too low for | | | | a DAP, he was employed for over two years, and he |
| the fast-appreciating real estate market, income | | | | has no late payments for the past two years. He also |
| documentation guidelines were too strict, and appraisal | | | | had four months reserves. His credit score was under |
| restrictions were very difficult. | | | | 550, his debt to income ratio was 47%, and he only |
| Subprime lenders, with looser guidelines, capitalized and | | | | had one current trade line. The loan was approved. |
| met this demand. | | | | The FHA rate at the time was 6.125%. |
| Home values increased more than FHA lending limits | | | | As opposed to most conventional lenders, which have |
| did. The average home in Las Vegas was around | | | | strict guidelines, FHA underwriters have some |
| $300,000. The FHA loan limit was around $270,000. | | | | discretion to look at the overall strength of the file and |
| Subprime lenders would go over $1 million. | | | | make a decision. For example, even though it is |
| FHA requires full documentation of your income and a | | | | commonly thought your debt to income ratio must be |
| 3% down payment. Subprime lenders were doing | | | | 41% or less to qualify; I have seen FHA loans |
| 100% loans with stated income with scores as low as | | | | approved with debt to income ratios over 50%. |
| 600. | | | | Some of the FHA guidelines are more strict. You do |
| Although sometimes flexible, FHA guidelines limit your | | | | have to be two years out of bankruptcy from the |
| debt-to-income ratio to 41%. Many subprime banks | | | | date of discharge and you must have some good |
| were letting borrowers go to 55%. | | | | re-established credit to get an FHA loan. |
| With rising sale prices, more borrowers went with | | | | If you had a foreclosure you likely need to wait at |
| stated income loans. FHA wouldn't allow this. Subprime | | | | least three years for an FHA loan and your credit |
| did. | | | | should be pretty clean after that date. |
| The FHA appraisal requirements were much more | | | | If you can prove the foreclosure occurred because of |
| strict and this also turned off many sellers. Subprime | | | | extenuating circumstances like the death of a spouse |
| lenders had no additional requirements. | | | | or a serious illness that prevented you from working, |
| The FHA loan was, quite frankly, a last resort. | | | | they will sometimes make an exception to this as well. |
| Subprime had taken its place. | | | | The FHA has many different choices of loan |
| Today, that has changed. With all of the recent | | | | programs like 30-year fixed, 15-year fixed, 1, 3, 5, 7, and |
| guideline changes, the subprime loan is nearly dead | | | | 10 year ARM's too. Interest only is not available. |
| with anything less than 5-20% down. Many subprime | | | | The rates are excellent as I discussed above. The |
| banks have gone out of business. Many more will. | | | | fees are controlled by FHA so you usually pay less for |
| FHA is back!! Once again, borrowers are looking at this | | | | the mortgage too. |
| as a primary option, especially first time homebuyers. | | | | In today's market, there is a lot of bank-owned on the |
| There are two types of mortgage loans; government | | | | properties that are in need of pretty substantial repair. |
| loans like FHA and VA, and then there are the rest, | | | | The FHA has a program that allows owner-occupied |
| which are called conventional loans. | | | | borrowers to finance up to $35,000 in the mortgage to |
| 100% financing on conventional loans is not as readily | | | | make these repairs. |
| available as it was, particularly for those with marginal | | | | In a conventional loan, these repairs need to be made |
| credit. FHA has not changed. 97% financing was and is | | | | before the close of escrow. In many cases, the seller |
| available regardless of credit score. In the last three | | | | doesn't want to make these repairs and offers the |
| months, I have closed five FHA loans. | | | | property "as is." The buyer can't afford to make the |
| FHA recognized their business was getting hurt by | | | | repairs and certainly doesn't want to make them |
| increasing home values so they dramatically increased | | | | before they own the house. This usually kills the deal |
| their loan limits. | | | | after the home inspection or appraisal. |
| In Las Vegas today, the FHA loan limit is $304,000. | | | | The FHA has a plan for this. The program is called a |
| This is right in line with our average sales price. The | | | | 203(K) and it allows for the appraiser to consider the |
| timing could not be better and, as a result, FHA loans | | | | value of the home after all of the repairs and |
| are back as a very viable loan option. | | | | renovation is made. You get to buy the home, fix it up |
| If you have very little or no money available for a | | | | to be livable, and then you get to include all these costs |
| down payment, bad-to-fair credit and feel like you | | | | in one easy loan. And you still only have to put 3% |
| have way too many bills, FHA may be your key to | | | | down. No other loan program allows for this. |
| homeownership today. | | | | When the loan is closed, the repair/renovation money |
| FHA does not loan money, they insure loans. You don't | | | | is withheld in escrow, as well as additional reserve |
| go to the FHA to get a loan. You go to a mortgage | | | | funds of 10-20%, to pay for these improvements and |
| company that has been approved with the FHA. | | | | any overages that may occur that weren't factored at |
| These companies have special permission to | | | | the time. |
| underwrite and close the loan. | | | | The contractors go in, fix the house, and then they get |
| You can buy a single family home, a duplex, triplex, or | | | | paid through the withhold account and reserves. The |
| 4-plex. FHA will even insure loans on manufactured | | | | biggest catch here is, once again, the home has to be |
| mobile homes. | | | | owner-occupied. This program is not available for |
| As an approved FHA lender, when we do an FHA | | | | investors or second home buyers. |
| loan, it is insured by FHA. If the loan goes into default, | | | | In today's market, the only negatives to an FHA are |
| they guarantee it. This means the loan has very little | | | | loan are loan limits, which are $304,000 and that unless |
| risk to the lender. As a result, the rates are nearly | | | | you put down 20%, which most people don't, your |
| equal to that of a conventional loan, even though the | | | | FHA loan will require mortgage insurance. |
| credit scores may be way worse. | | | | Mortgage insurance (MI) is handled a little differently |
| Rates on conventional loans are usually based on | | | | than you are used to with a conventional loan. For one, |
| credit score. The better your score, the better your | | | | it's usually a bit cheaper. FHA mortgage insurance is |
| rate. This is not so with FHA. Everyone, regardless of | | | | not based on credit score like conventional loan MI is. It |
| score, gets a great rate. | | | | runs 0.5% of the loan amount and is broken down |
| FHA was started in the 1930's to assist first-time | | | | over your monthly payments. |
| homebuyers. The goal was to help families with lower | | | | FHA also has an upfront insurance premium that is |
| and moderate income get home financing. The | | | | 1.5% of the loan amount. That premium is due at the |
| program was geared for minorities as well. | | | | close of escrow and can either be paid in full at close |
| Many lenders in today's subprime mess are pointing | | | | or added to the loan amount. As most FHA borrowers |
| the fingers at each other. They believe that countless | | | | have very little money to put down, this premium is |
| numbers of the homes going into default today are | | | | usually financed into the loan. |
| because of high subprime rates. They believe these | | | | The good news here is that mortgage insurance, as of |
| homes would not be in jeopardy with an FHA loan | | | | January 1, 2007, was made tax-deductible, so that |
| with a much lower rate. | | | | helps as well. |
| For example, last week I closed a borrower on an | | | | And how about this? FHA loans are assumable!! If you |
| FHA loan. His credit score is 611 with limited trade lines | | | | want to sell your home, you can simply transfer it over |
| and 3% down. His interest rate is 6.250% on a 30 year | | | | to your buyer and he doesn't have to go out and get a |
| fixed, which he will never have to refinance if he | | | | new loan. The buyer does have to meet the FHA |
| doesn't want to. | | | | credit standards, but as I have already touched on, |
| Last year, because of the loan amount, this loan would | | | | those are very reasonable. |
| have probably gone subprime with an interest rate of | | | | The bottom line is if you are a first-time homebuyer or |
| closer to 8.000% on a 2 year fixed rate, that would | | | | you are a bit more credit-challenged and your lender |
| have likely forced a refinance in 24 months. | | | | suggests a subprime loan you should ask for FHA as |
| And he doesn't have a prepayment penalty!! FHA | | | | an option. |
| doesn't have prepayment penalties. As you know, | | | | In addition, if you are being quoted more than the "going |
| most subprime loans have prepayment penalties and if | | | | rate" for a loan, you believe you can support your |
| you want it waived plan on the rate going up by 1-2%. | | | | income with paycheck stubs and W-2's, and the loan |
| The program works and provides incredible options for | | | | amount is $304,000 or under in Las Vegas, you will |
| borrowers whose only choices in the last few years | | | | also want to ask about an FHA option. |
| have mostly been awful. | | | | If your preferred lender says FHA is not for you for |
| There are many advantages to an FHA loan. | | | | any other reason other than loan amount or income |
| You are only required to put down a 3% down | | | | documentation, and suggests a subprime loan, you |
| payment and the lender can help you get it. It can also | | | | may want to get information from a different lender. |
| be gifted from a close friend, a relative or a non-profit | | | | Not all lenders are permitted to do FHA loans. You |
| organization that provides financial assistance. | | | | want to make sure the reason why you are being |
| There are many private down payment assistance | | | | steered away is not simply because they can't do the |
| companies (DAPs) that can help you with the 3% | | | | loan. |