FHA Mortgage Insurance Program

Buying a home in Orange County is an expensive endeavor that can put a serious strain on your finances. At Money Lender Loans, we aim at relieving you of this pressure by helping you access the best loans to buy your home. One of the loan programs we can help you with is the FHA loan. We are an FHA-approved lender who understands your need to buy a home even without the perfect credit scores and high down payments required for conventional loans.

What Is the FHA Mortgage Program?

The Great Depression saw many people foreclose on their properties and default on their loans. The government, through the US Department of Housing and Urban Development, established the FHA insurance program to help people buy homes while insuring the risk lenders take to loan such persons.

The program works by insuring FHA-approved lenders against the loss of principle in case borrowers fail to meet the terms and conditions of the lender.

The FHA mortgage program seeks to empower low and moderate-income earners to buy homes. This group of earners is often unable to raise the high amounts of down payments required by conventional lenders. However, this does not lock out borrowers outside these earning brackets.

The only time FHA considers your income is when determining whether you can repay the mortgage, particularly within the first three years of the loan. Your income can be taken to include salaries, wages, and income from non-employment sources like pension, alimony, and disability benefits.

The FHA mortgage insurance program also accommodates borrowers with conventionally lower credit scores. Conventional lenders avoid lending people with bad credit scores due to the risk they pose in defaulting on their loans. FHA, however, is more open to borrowers with credit scores ranging from 500 onwards. Credit scores below 500 do not qualify for the FHA program.

Normally, the program finances owner-occupied primary residences. These may include manufactured homes and one-to-four-unit family dwellings.

The FHA requires the borrower to look for an FHA-approved appraiser to determine whether the property meets the minimum property standards for safety, durability, and soundness. The minimum standards for property usually are more stringent since the FHA will require the property as collateral in case you default.

The FHA does not handle repairs, nor does it finance them. Therefore, the seller has to take care of any repairs and correct deficiencies in the building before the FHA can finance it. You may also decide to finance the repairs, where you will be required to finance a separate escrow account. You can also apply for an FHA 203k loan for repairs, especially where the property is in an old community.

While FHA mortgages have less stringent requirements, you will still need to meet a set of minimum standards such as:

• You must have a credit score of between 500 and 579, and a down payment of at least 10% or a credit score of 580 or more and a down payment of at least 3.5%. With a credit score of 580 and above, you can access maximum FHA financing

• You must be at least 18 years of age

• You must have a valid social security number and be a lawful citizen of the US

• You must have a front-end debt ratio of not more than 31% of your gross monthly income. Some lenders do approve individuals with more, up to 40% front-end debt ratio where they feel the risk is acceptable. In such a case, they have to justify to the FHA why they think the risk is justified

• You must have a back-end ratio not exceeding 43% of your gross monthly income. In some cases, your lender can still consider you for an FHA loan with a back-end debt ratio of 50%

• At least two years must have passed since you experienced a bankruptcy and you must have re-established a good credit score

• At least three years must have passed since you had a foreclosure

• The property you intend to purchase must be a primary residence

• You must have a steady employment history or have worked for the same employer for at least two years

• You can verify your salary through federal tax returns, bank statements and pay stubs

• If you are self-employed, you should have at least two years of successful self-employment history, which can be proved by your tax returns, a balance sheet, and a profit and loss statement

Residents of California must also meet additional guidelines provided in the CalHFA FHA guidelines including:

• A mandatory Homebuyer Education for first-time homebuyers

• You must meet the income limit for your state ($174,200 for Orange County)

• You must meet additional requirements set by your lender and mortgage insurer

• You must have a debt-income ratio not exceeding 45%

• Your credit score must be at least 640

FHA Requirements for Properties

As mentioned before, FHA is strict on the condition of the property since it will be used as collateral once you take the loan. The minimum property guidelines set by the FHA are meant to protect both the lender and the borrower.

The lender is insured against the risk of losing in case the borrower defaults. A property that meets the minimum standards will often command higher prices and be easier to sell. These guidelines also protect the buyer from the high costs associated with repairing and maintaining the property.

Some of the guidelines for properties that are eligible under the FHA mortgage insurance program include:

• The property must either be a detached or semi-detached residence, a multiplex, a row house or an individual condo unit. The condo unit should be part of a condominium complex listed on the FHA-approved condo list

• The property should be free of hazards or adverse conditions such as insufficient drainage, toxic chemicals, flooding, erosion, excessive noise, groundwater problems, and hazardous materials

• Where the property has a septic system, it should be operating properly

• The soil around the property should be free of hazardous materials and contamination

• The property should have proper grading all-round for proper drainage (water should drain away from the property)

• The property should have sufficient water supply including hot water, safe drinking water, and safe sewage disposal

• Where a well is used, it must provide enough water flowing through the fixtures and be fully operational

• Houses on the ground level or those made from wood that is in direct contact with the ground should pass the termite inspections

• Leaking pipes, structural weaknesses, standing water, defective construction, and other defective conditions must be corrected before the property is approved

• Attics and crawl spaces should have sufficient airflow to prevent the accumulation of heat and moisture. Also, crawl spaces should be free of obstructions including standing water

• The foundation of the building should be in a stable state of repair

• The roof should be reliable and free from decay

• Mechanical systems such as furnaces, heat pumps and air conditioning should be safe to operate

• The heating system in the property should be sufficient for a healthful and comfortable living

• The property should have adequate electricity for house lighting and other systems installed in the home

In addition to the federal requirements, properties that qualify for the FHA program in California must meet the following conditions:

• Must be a single family, one unit property

• Can be a condo, accessory dwelling or a manufactured home

• The lot size should not exceed five acres

• The property must be in California, and be the borrower's primary residence until it is either sold or refinanced

• The sales price should not exceed $705,000

Calculating Your Debt to Income Ratio (DTI)

Before you are approved for an FHA mortgage insurance program, your debt to income ratio is taken into consideration. Your debt to income ratio is the percentage derived from dividing your monthly debt payments by your gross monthly income. The DTI ratio indicates your ability to manage debts and repay a loan.

When determining your eligibility for an FHA loan, your debt to income ratio is looked at based on two components: the front-end debt ratio and the back-end debt ratio.

The front-end debt ratio (housing ratio) is calculated as all the expenses incurred as part of housing expenses. These expenses include property taxes, homeowners insurance, and monthly mortgage payments. Expenses such as groceries, utilities, insurance premiums, and healthcare are not factored in when calculating your debt ratio.

The back end ratio reflects the portion of your income that goes towards fulfilling your debt obligations. These obligations include car loans, credit card bills, student loans, and debts that reflect on your credit reports. Housing expenses and mortgage payments are also taken into account when calculating the back-end debt ratio.

The FHA mortgage insurance program allows borrowers with back-end debt ratios of up to 50% to take an FHA loan.

When your income ratio is above 50%, you can work on reducing it to acceptable levels by:

• Increasing your debt repayment by reducing unnecessary spending

• Refraining from taking more debts, and

• Making your debts more affordable by consolidating your high-interest loans into loans with low-interest rates

FHA Down Payments

The down payment required for FHA loans is one of the most outstanding features of the FHA mortgage insurance program. FHA features considerably lower down payments compared to conventional loans. You only have to raise a down payment of at least 3.5% to secure the maximum FHA financing.

You can source the down payment from several FHA-approved sources such as

• Cash

• Savings/checking account funds

• Investment funds

• Gifts

• Funds from the sale of property

• Loans and grants

• Funds from your employer (employer assistance where the employer provides accommodation for employees)

Mortgage Insurance Premium

A mortgage insurance premium (MIP) is an insurance policy attached to FHA loans. It is used when you make a down payment of less than 20%, which is common in FHA loans. When evaluating your loan, the FHA will either require you to pay an upfront MIP or annual MIP paid in 12 equal monthly installments.

For an FHA loan, you will need to pay an upfront premium of 1.75% of the loan amount. The upfront mortgage payment is put in an escrow account with the US treasury to protect the government, in case you default on your loan. You can roll over the premium into the financed loan.

The annual mortgage insurance premium is paid in monthly installments. It is usually 0.45% to 1.05% depending on the loan-to-value ratio, and the loan term (whether it is 15 or 30 years).

Types of Loans Under The FHA Mortgage Insurance Program

The standard type of FHA loan is the traditional mortgage that is directed towards financing a primary residence. FHA also insures lenders for other types of loans such as:

1. Home Equity Conversion Mortgage

   The mortgage targets senior homeowners aged 62 and above. It allows such borrowers to convert the equity on their homes into income. To qualify for a HECM program, the borrower must

   • Be at least 62 years. Where there is a cosigner, the age is determined based on the youngest co-signer

   • The borrower should get consumer counseling and education

   • The property should be the primary residence of the borrower

   The credit and income of the borrower are not taken into account in HECM loans. However, the amount you receive is based on the appraisal value of your property. The home must conform to all the minimum FHA standards for a property.

   The borrower can receive the funds as a lump sum, as a credit line or as monthly tenure payments depending on the borrower’s preferences.

   HECM loans place no obligation on the borrower to repay the loan as long as they are alive and continue living in the property. When the borrower dies or moves to another residence, the lender will sell the house to recover the loan amount.

   During the loan period, the borrower is expected to pay property taxes, maintain the property and homeowners insurance. In addition, they are supposed to inform any other residents in the home of the requirement to vacate the house in case the borrower dies or vacates the house permanently.

2. FHA 203k Improvement Loan

   An FHA 203(k) loan is a mortgage meant for home purchase and renovation. Low to moderate income earners who intend to buy a home that requires extensive repairs can apply for this loan as it includes the price of the home, the renovation costs including labor and materials. The loan can be taken as a fixed or adjustable-rate mortgage. The loan is cost effective as it saves you from having to apply for two separate loans.

3. FHA’s Energy Efficient Mortgage Program

   An FHA mortgage loan differs from a 203k loan in that the latter is meant for improvements that will make the home more energy efficient. These improvements could include the installation of energy efficient systems such as solar power and wind power. The FHA has first to assess whether these installations will save more over time. The amount of savings made should exceed the implementation costs for the improvements.

4. Section 245(a) Loans

   Section 245a loans are offered to individuals who expect their income to increase. The loans feature low payments for the first few years. The payments typically increase after the first five to ten years.

How to Apply For an FHA Loan

FHA has a list of approved lenders who are authorized to finance FHA loans. Once you find an authorized FHA lender, you will provide basic information that includes:

• Your address for the past two years

• Your social security number

• Your employment information for the past two years and payment verification documents for the recent month

• Your banking statement for the last three months

• Federal W2 and tax returns for the past two years

• Balance sheets and income statements for the last two years for self-employed borrowers

• Veterans should provide a certificate of eligibility and DD-214

• Provide payment for FHA property appraisal and a credit report

Your lender can help you determine whether you qualify for the loan, by helping you calculate your credit score and your debt-to-income ratio. You can then get a preapproval letter and then start the house hunting process.

The maximum financing offered for FHA loans is usually 96.5%, which means that you will need to save up at least 3.5% of the total purchase price. The 3.5% will be used for the down payment. The down payment rate can be higher depending on your credit score.

In addition to the down payment, you need to prepare for upfront costs such as closing fees and MIP. Closing fees are usually paid to the lender for servicing the loan.

Find an FHA-Approved Lender Near Me

Applying for an FHA loan may require the help of an experienced and FHA-approved lender. At Money Lender Loans, we specialize in real estate loans including FHA loans. We will evaluate your credit scores and eligibility for an FHA-loan, pre-approve you before you go house hunting, and advise you on the best course of action and repayment plan that will suit your income and needs. If you are in Orange County, you can call our hard money loan lender at 949-409-4372 for a free consultation.