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.
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.
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 (Monthly Mortgage Insurance) is collected monthly on FHA loan. This portion of the mortgage 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 the loan amount that applies to all FHA loans. This fee can be 100% financed and added to the base loan.
The maximum FHA loan amount varies by county.
There are two types of programs available. The first is a fixed rate mortgage. The most popular option is the 30-year fixed/level payment where the monthly principle and interest payment remains the same for the life of the loan. However, you may also obtain a 15, 20 or 25 year fixed rate term.
The second type of FHA program is the 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. However, the adjustable phase of the loan does not occur until after the fixed rate period has expired – either after the first 5 or 7 years, depending on the program.
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 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.
FHA allows a borrower to use a non-occupying cosigner 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.
The down payment must be paid from the buyer's own funds or can be from a non-repayable gift from a relative. The closing costs, and any impounds required for closing may be paid by the seller, the lender, the realtors or by additional gift funds. However, seller or other 3rd party contributions are limited to no more than 6% of the purchase price.