*Updated as of December 2016 (2017 FHA loan limits increase)
The Federal Housing Administration (FHA) was established in 1934, as a way to help increase U.S. homeownership post the ”Great Depression”.
At the time, only 4 in 10 households owned homes, and people were mostly renting – not a big surprise since you couldn’t get a loan without a 50% down payment!
In 1965, FHA became a part of the Department of Housing and Urban Development (HUD). FHA is the only government agency that operates entirely from self-generated income, and costs the taxpayers nothing – it is funded by the mortgage insurance that FHA homeowners pay.
In order to provide this kind of guarantee, Utah FHA loans require two types of mortgage insurance:
1. An Up Front Mortgage Insurance Premium of 1.75% of the loan balance
For example, on a $250,000 home, your up front mortgage insurance would be $4,375.
The good news is that you don’t have to pay this premium up front. It can be rolled into your principal balance – without affecting your loan to value and minimum required downpayment of 3.5%.
The bad news is that there are no refunds on it, except when refinancing into another FHA mortgage. Even then, the more time passes, the less your refund is, and no refund is due after 5 years. See FHA Streamline Refinance for more details, and this HUD official link.
2. An Annual Mortgage Insurance Premium, paid monthly and added to your payment
The fee schedule is as follows for loan amounts lower than $625,500, and it is expressed as a percentage of your loan amount:
15 year loan terms with loan-to-values over 90% : 0.70%
15 year loan terms with loan-to-values under 90% : 0.45 %
30 year loan terms with loan-to-values over 95% : 0.85%
30 year loan terms with loan-to-values under 95% : 0.80%
For loan amounts higher that $625,500 (allowable in “high cost areas”), the fee schedule is:
30 year loan terms with loan to values over 95% : 1.5%
30 year loan terms with loan to values under 95% : 1%
15 year loan terms with loan to values under 90% : 0.70%
15 year loan terms with loan to values over 90% : 0.95%
Note that the annual FHA mortgage insurance used to get canceled on its own once certain conditions were met:
For all FHA mortgages issued after June 1st, 2013:
However, FHA does impose loan limit restrictions. Below are the Utah 2016 and up coming 2017 FHA loan limits for the different counties. For the most updated FHA loan limits, click here - you only need to select the state and press SEND.
Regardless of the number of units, the minimum downpayment required by an FHA loan is 3.5% of your loan amount.
This feature makes the FHA loan extremely attractive for borrowers who wish to produce side income by renting out any additional units. Keep in mind that FHA loans are only allowed on primary residences, so living in one of the property units is a must.
Also, if you are looking at purchasing a triplex or fourplex, make sure you have enough funds saved up to cover 3 months of full mortgage payments on the property – this is a requirement.
The loan terms currently available on FHA mortgage loans are the 30 and 15 year fixed loans, or the 5 year ARM (Adjustable Rate Mortgage).
I highly recommend considering the lower ARM loan interest if you plan on refinancing out of your FHA loan in the next 5 years.
What about owning more than one FHA property?
Generally, FHA will not insure more than one mortgage for any borrower. But there are exceptions:
Foreclosure / Deed-in-lieu of foreclosure
A 3 year waiting period must be met at the date of the application.
Chapter 7 Bankruptcy – eligible 24 months after the discharge date, on the condition that good credit has been re-established. Less than 24 months, but no less than 12 is also acceptable if extreme circumstances can be proven, and not likely to re-occur.
Chapter 13 Bankruptcy – eligible after 12 months of on-time payment history, and with bankruptcy court approval.
* A history of Foreclosure or Bankruptcy within the past 7 years will get you denied when applying for any high balance FHA mortgage loan. High balance is anything over the conforming loan limits – see my article on Utah Conventional Loans.
A borrower is not eligible to purchase an FHA insured mortgage is the short sale was pursued simply to take advantage of declining market conditions, or to purchase a similar or superior property within commuting distance (at a reduced price compared to current market values).
Immediate eligibility - if the borrower was current on the mortgage payments and installment agreements at the time of the short sale (12 month history prior to short sale will be analyzed).
3 year waiting period – if the borrower was in default on the mortgage payments at the time of the short sale – unless extreme circumstances can be documented and unlikely to re-occur.
Modified / Restructured Loans
A rate/term refinance of a modified/restructured loan is eligible provided that the loan is not delinquent and there is no history of late payments in the past 12 months. The current lender must also provide a letter stating they will not file a deficiency judgement.
Collections / Charge-Offs
All medical collections and charge off accounts are excluded and do not require resolution (yay!).
Collections equaling to or grater than $2,000 will either be required to be paid at closing, or have a repayment plan setup with the minimum payment included in the debt-to-income ratios (underwriter may calculate the monthly payment due using 5% of the outstanding loan balance).
Letters of explanation for unpaid collection accounts are required.
Major Adverse Credit
Judgements must be paid off unless the borrower has an agreement in place with the creditor, requiring on-time monthly payments. Documentation supporting 3 months of payments must be provided, along with a letter of explanation for the judgement.
Federal tax liens may remain unpaid provided any IRS tax lien on the property is subordinated to the FHA-insured mortgage.
Current mortgages must have a history of on time payments for the past 12 months.
Re-entering the workplace
If a borrower has an employment gap larger than 6 months in the past two years, then they must have at least 6 months on the current job.
If the borrower is returning to work after an extended absence, his/her income is considered effective if they have been employed at that job for more than 6 months prior, or if the prolonged absence was due to raising children.
Rental income is acceptable if shown on the prior two years tax returns. If the property was acquired since the last tax return filing, a current lease or rental agreement must be provided.
Income from overtime, commission and tips
Borrower must have a two year history of receiving this type of income.
Part time income
A two year history of receiving it is required to show stability. If seasonal income, two year history plus some documentation that the borrower reasonably expects to be rehired next season (usually provided by employer).
Part time income can get complicated when borrowers have multiple part time jobs and no full time employment. It is common for nurses to work part time for two different hospitals for example, in which case having at least a 1 year history with each employer helps show stability, and a recent job change can be a deal breaker.
Self employment income
Must be supported by at least two years of tax returns and will be averaged out.
*Because income guidelines are often subject to the underwriters discretion, I will not go into details in this article. Please contact me at firstname.lastname@example.org if you have questions on specific situations.
FHA qualifying ratios are generally 31/43 – with 31 representing the percentage of your gross monthly income that should be allocated to the new mortgage payment, and 43 being the percentage of total debt reported on your credit (new house payment included).
If compensating factors are present, your total amount of debt can be as high as 55% and still allow you to get an approval. Compensating factors can be various factors. A few examples are: your ability to save and be conservative in using credit, having a larger downpayment, or having significant assets. A minimal increase from current housing expenses can also be a compensating factor.
Residual income guidelines can also be used to justify a higher debt to income ratio. VA loans are already successfully using this method in getting borrowers approved – see my article on VA loans for more information on the residual income.
Non-occupant co-borrowers are allowed on FHA purchase and rate/term refinance transactions on 1 unit properties. If the property has more than 1 unit, then the maximum loan to value is 75% (meaning a 25% down payment is required) unless the non-occupant co-borrower is related by blood, marriage or law.
Non-occupant co-borrowers or co-signer cannot be added on a cash-out transaction.
Gift funds are allowed as long as proper documentation can be provided. The entire borrower downpayment can come from a gift.
Gifted equity is allowed only from family members.
Download my gift letter sample below:
Non-arms length transactions
A non-arms length transaction or Identity of Interest transaction is defined as a direct relationship between any of the parties to the transaction, including: buyer, seller, employer, lender, broker, appraiser etc.
Under no circumstance will a non-arms length transaction be allowed on a short sale.
Otherwise, the maximum loan to value is 85% with the minimum downpayment coming from the borrowers own funds. Maximum financing is allowed with the following exceptions:
- the subject property is currently occupied by a family member of the borrower
- the borrower has been renting the subject property from the family member for at least 6 months and can provide written evidence
- an employee of the builder is purchasing a new home or model home as a principal residence
- corporate transfer (involving the employer provided housing).
* Note that if the only relationship between the seller and the buyer is a landlord/tenant relationship, the transaction would not be considered identity of interest, and maximum financing is permitted.
A non-arms length transaction may not be used to bail out a family member or any other owner with an established relationship to the borrower from a delinquent mortgage.
Interested party contributions
Seller/Interested party contributions exceeding 6% must be subtracted from the sales price.
You should get an FHA loan if:
- you are unable to qualify for a different type of loan, whether it’s because of your debt to income ratio, or specific information in your credit history
- you are looking at purchasing a multi unit property, but have a limited down payment available
You shouldn’t get an FHA mortgage if:
- you only have the 3.5% available down payment – check your USDA loan eligibility for 100% financing, or try to save up a little extra and get a Conventional loan (3% down payment options now available for first time homebuyers)
- your loan officer told you the up front mortgage insurance is refundable when you refinance! Unfortunately, there are many people that are misinformed. This official HUD link explains the circumstances in which a refund is issued.
FHA mortgage loans have good things going for them, such as the lower interest rate and easy streamline refinance option. While the FHA adds the cost of the up front mortgage insurance to the bill, the annual mortgage insurance will usually favor borrowers with credit scores under 680 (the private mortgage insurance required on Conventional loans is generally higher as the credit score is lower).
Weight your options carefully. Analyze if you should act now, or if you’re better off improving your financial and credit situation first (which will in turn open up new opportunities).
Please send all FHA mortgage loan program questions to email@example.com, or contact me by phone/text at (801) 473-3154. And while you’re at it, don’t forget to ask about the no-closing cost FHA interest rate option!
Apply online to get started with a secure application, and find out how much home you can qualify for! I can issue a Pre-Qualification letter within hours, including on the weekends if you need to make a quick offer on a home that just listed.