Category: Low Down-Payment

History

In 1934, the Federal Housing Administration (FHA) was formed as a part of the National Housing Act.  The objective of the FHA was to increase home construction, reduce unemployment, and operate various loan insurance programs.  (It’s important to note here that the FHA DOES NOT directly lend money for FHA loans.  They only provide the insurance that protects lenders against losses from making FHA loans.  The FHA’s insurance makes the origination of FHA loans more attractive for lenders and reduces the rate of interest which is charged on these loans.)

 

Since its inception the rules and regulations that guide FHA loans have been modified several times however the main purpose has remained relatively consistent- to enable low to moderate income Americans to buy homes that they would unlikely qualify for under conventional loan programs.

 

FHA loans have become more prominently used in the recent few months because of the various underwriting flexibilities that conventional loans do not have.  Many of these flexibilities used to be found in ALT-A & subprime mortgage programs but because of the credit collapse these loans are no longer available.  

 

FHA Loan Limits- (As of August 7, 2008 for Portland/ Metro area)

 

1-unit: $418,750

2-unit: $536,050

3-unit: $648,000

4-unit: $805,300

5-unit+: not available

*Loan amounts above $362,790 will likely carry interest rates that are .25%-.50% higher than FHA loan amounts below this level.

*Click here to be taken to the HUD webpage to see other areas.

 

Down Payments

Traditionally FHA loans have required a minimum down payment of 3% on the part of a home-buyer.  Here are a few facts about the down payment you would want to be aware of:

 

→2008 Housing Bill: As a part of the 2008 housing bill that recently passed into law FHA minimum down payment requirements will increase from 3.00% to 3.50% (effective January 1, 2009). 

→Gifts: The home-buyer may receive a gift from a relative or non-profit organization to satisfy their down payment requirement (most conventional programs require at least 5% to come from the borrower’s own funds).

→Seller Financed Down Payment Assistance:  Up until October 1, 2008 home buyers were able to have the seller indirectly “gift” the minimum 3% down payment to the buyer using a loophole in the FHA underwriting guidelines which effectively created 0% down financing (the “non-profit” organizations behind this loophole were Ameri-dream, Nehemiah, etc.).  However, do to the poor performance of these loans the 2008 housing bill eliminated this loophole.  (At the current time a group of congressman are trying to reinstate seller financed “DPA”s through HR Bill 6694 but according to my sources passage of this bill is doubtfull.)

 

FHA Modernization

Over the last year significant improvements have been made to the “usability” of FHA loans.  Here are a few of the highlights that real estate professionals should be aware of:

→Inspections: It used to be that bank underwriters would require pest & dry rot reports, well-flow tests (when applicable), and septic reports (when applicable) for ALL FHA loans.  However, these are no long needed UNLESS the earnest money agreement specifically states that these inspections will be done during the inspection process.

→Appraisals:  FHA loans used to have their own appraisal format which was much more detailed and cumbersome than conventional appraisal requirements.  For example, under the old appraisal guidelines plants and shrubs had to be trimmed back from the dwelling by 6 inches or more.  However, bank underwriters now only require the standard appraisal (AKA “1004” or “form 70”) with a little bit more information. 

→“Junk Fees”: It used to be that there were certain standard closing costs that the FHA deemed “junk fees” and would not allow the home buyer to pay.  These requirements have been eliminated however the loan originator may not charge more than 1% origination fee.

 

Miscellaneous Benefits & Features of FHA loans

→Seller concessions: With FHA loans the seller may pay up to 6% of the sales price towards the home-buyers settlement charges (conventional programs where the buyer is putting <10% down only allow for 3%).  The additional contribution can be used to by down the home-buyer’s interest rate among other items.

→Minimum down payment on multi-family:  FHA is one of the only programs I am aware of that will allow for up to 97% financing on 2,3, and 4 unit properties so long as the home-buyer is going to occupy one of the units as their primary residence.  (Conventional loan programs typically require 25% down on owner-occupied 3 & 4-unit properties.)

→Non-occupying co-borrower: Even with the relatively flexible underwriting guidelines that FHA allows many borrowers will not qualify.  In this case a home-buyer may call upon a “co-signer” to apply for the loan so long as the person is a relative.

→No credit history: Even borrowers with no credit history MAY still qualify for FHA financing through the creation of a “non-traditional” credit report.

 

Paperwork

Even though the FHA loan program has improved significantly over the past few months there is still an overwhelming amount of time-sensitive disclosure paperwork which needs to signed by various parties in the transaction.  It’s important that you work with an experienced loan originator who has a handle on all the disclosures and when they need to be signed to avoid any pesky delays in the funding of the loan.

 

The real estate professional really needs only to be aware of one FHA disclosure.  This is the Amendatory Clause & Real Estate Certification which MUST be signed by the buyer(s), seller(s), listing agent, and selling agent ON THE SAME DATE as the earnest money agreement is signed. 

 

For a copy of a blank Amendatory Clause & Real Estate Certification form email myself or google the term and you will likely find one.