FHA mortgage loans are very popular with first time home buyers, but FHA loans are not just available to rookies in real estate. FHA stands for Federal Housing Administration, a United States government agency that insures certain mortgage loans. There are several popular types of FHA loan programs, including the following five popular FHA mortgage loans.
1. FHA Home Loan with a 3.5% Down-payment
The FHA home loan with a 3.5 % down-payment is a mortgage product available to borrowers. The qualifications for an FHA home loan with a 3.5% down-payment are less stringent than those of conventional mortgage products. The 3.5% down-payment is the lowest possible down-payment for an FHA mortgage. Borrowers will have to pay mortgage premium insurance for FHA home loan with a 3.5% down-payment.
2. FHA Streamline Refinance
The FHA streamline refinance is a refinance product for those who want to lower their interest rate or change the loan term. The FHA streamline is available for people who have a current FHA mortgage. FHA streamline makes refinancing simple for those who have paid their FHA mortgage on time for the past twelve months. This rate and term FHA refinance often has fewer fees and less red tape than other refinance options, such as no appraisal and no income documentation.
3. Rate and Term FHA Mortgage Refinance
The rate and term FHA refinance product is available for people with or without a current FHA mortgage who need to change the interest rate or term of their loan in order to lower monthly payments.
4. Cash Out Refinance
If a rate and term FHA refinance is not for you, FHA cash out refinance may be precisely what you need. The FHA cash out refinance is designed for people who are refinancing to accomplish other goals instead of or in addition to changing the rates and terms of the contract. FHA cash out refinance products can be used to increase the value of the home through improvements or consolidate debts (often high interest, revolving debt) into a lower, fixed rate loan. If you own your home outright, a (HECM) Home Equity conversion mortgage may be the answer.
5. (HECM) Home Equity Conversion Mortgage
The FHA (HECM) Home Equity Conversion Mortgage is a reverse mortgage product available to home owners over the age of 62 who own their homes outright or have a low outstanding balance on the home. The money from (HECM) Home Equity conversion mortgage can be dispersed as a lump sum, in monthly payments, or as a home equity line of credit.
Chances are that if you have bad credit or lack the means to document your income, you will be considering FHA loans and subprime mortgages. Just a few years ago, there was a subprime loan programs for almost every situation, but the foreclosure crisis settled in and most of the subprime lending vanished. Many consumers and lending professionals migrated towards the FHA loan programs for refinancing and home buying because FHA was not credit score driven like the traditional mortgages.
Have FHA Loan Programs Taken Over for Subprime Lending?
One question many people have when looking into FHA home loans is how they compare to subprime mortgages. There are a few key differences, and knowing how the Federal Housing Administration’s practices differ from subprime lending practices is important when you are considering buying a home. If you are looking into buying a home and do not have the starting capital necessary for a down payment or a standard private mortgage insurance plan, then knowing how the FHA stacks up against subprime loans is a good way to decide which is right for you. Here, we’ll go over some information on the FHA vs. subprime loans.
Many people believe that the FHA mortgage is a subtype of a subprime mortgage. However, while both FHA mortgages and subprime lending are designed to help those that could not normally afford a home get on the market for one (such as those with poor credit), there are important differences that should be considered. One of the key differences between FHA loans and standard subprime loans is that FHA loans are technically federally assisted. This means that, to some extent, the government will assist those that would have trouble paying off a standard mortgage from a private mortgage insurance company.
FHA insured loans are not given out by the government itself. Rather, the loans are given out by FHA approved lenders, which work with the Federal Housing Administration to provide a loan that the borrower can pay back. Getting mortgage insurance from the FHA involves an MIP, or mortgage insurance premium, being financed by the lender and paid to the FHA on behalf of the borrower. This MIP is equal to a percentage of the loan at closing. Some loans will have monthly premiums, depending on the nature of the loan and the ratio of the loan to the value of the home.
FHA home refinancing has expanded their suite of loan options significantly over the last 5 years. In an effort to make up for the lack of subprime loans in the market-place, FHA has introduced several mortgage relief initiatives in addition to the popular FHA streamline refinance program.
FHA mortgages are an excellent tool for those that are looking for a home but cannot afford one under normal circumstances. After the subprime lending crisis in 2007, FHA loans are in fact one of the only ways to obtain subprime lending, as many lending practices were cut off as a result of the housing bubble. A subprime mortgage can definitely help those who want a home afford one, but one of the only subprime loan techniques still in practice is the FHA approved loan, although it is certainly a safer practice.
As the home finance industry continues to consolidate the value of FHA mortgage loan programs has become evident than ever before. Just last month, FHA rates fell to 50 year lows. Thousands of borrowers were blessed with fixed rate 30-year mortgage loans as low as 4.25%. The 15-year fixed FHA mortgage was available at 3.75% for the select few that could qualify for this dream home loan option.
Imagine a $1,400 a month payment for a $300,000 Loan!
With all of the good news on rates, the reality was that very few American borrowers were eligible for these low rate mortgages. Conforming and FHA guidelines did tighten in 2010, but many insiders are optimistic that consumers will see more flexibility with FHA loan programs later this year. FHA continues to be a popular choice for borrowers seeking home financing or loan refinancing. According to Colorado lender Shawn Downs, “Consumers are learning that even if they were rejected in the past that FHA likes to extend second chances with borrowers that can demonstrate a strong ability to afford FHA mortgage products.”
Popular FHA Loan Programs to Watch in 2011
First Time Homebuyer Loan – New home buyers only need a 3.5% down-payment to qualify for FHA financing.
FHA Refinance Loan – This is a rate and term loan that enable borrowers to get approved for a FHA refinance option up to 96.5%.
FHA Streamline – For borrowers who currently have a FHA loan, the FHA streamline refinance is the most sought after refinance loan because no appraisal or income documentation is needed.
203B Cash Out Refinancing - HUD lowered the LTV restrictions from 95% to 85% for borrowers that want to receive money back when in a refinance transaction.
203K Home Rehabilitation- The 203K loan is similar to a home improvement loan for the rehabilitation of single family homes that meets HUD’s requirements. Finance to 115%.
The Federal Housing Administration has been steadfast with regards to FHA mortgage assistance and foreclosure prevention programs. For the last few years, the one loan program that struggling homeowners could turn to was the FHA home loan. With the approval of Congress, both the Bush and Obama Administration have extended financial aid in the form of FHA mortgage relief.
HUD, Fannie Mae and Freddie Mac have come together to create targeted loan relief to borrowers who financial hardships, like a loss of home equity, employment issues and even bad credit. FHA loan requirements have tightened somewhat in the last few years, but there are still significant opportunities for homeowners to receive financial assistance with FHA home refinancing. FHA confirmed a new program, the FHA short refinance and it will go live on September 7th. This refinance program will actually enable homeowners who are underwater to refinance into a lower mortgage balance. To qualify, homeowners must be current on a non-FHA loan to refinance into an FHA mortgage when their lender agrees to write off at least 10% of their principal.
US Government Continues to Fund FHA Mortgage Relief Programs Listed below are the unique conventional and FHA loan programs created to provide mortgage relief:
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FHA Secure
Hope for Homeowners
Home Affordable Refinance Program
Home Affordable Modification Program
Second Mortgage Modification Program
FHA Short Refinance
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US Government Continues to Fund FHA Mortgage Relief Programs
Today FHA mortgage rates have fallen to record levels. Qualified borrowers can lock a 30-year fixed loan with a rate of 4.125% and the 15-year loan features a rate 3.875%. Don’t miss out on these once in a lifetime home financing opportunities.
FHA has made several moves recently in an effort to raise the standards and FHA loan requirements for FHA lenders offering single-family home loans. Most insiders believed that the Federal Housing Administration had targeted single family homes because of the FHA loan defaults. However, for the first time in nearly forty years, FHA announced they would be tightening FHA guidelines for multifamily home loans. Menzo Case, the president and chief executive of Seneca Falls Savings Bank in upstate New York said, “We’re not surprised by anything nowadays.” Among the new FHA requirements, the government agency is poised to elevate the debt service coverage ratios while reducing the loan-to-value and loan-to-cost ratios.
Will FHA Loosen Loan Requirements for Borrowers?
According to George Kaganovich, a mortgage banker from iServe Lending in California, “Each time FHA tightens the guidelines it seems to pinch consumers as fewer borrowers have the opportunity to refinance into a better loan.” Kaganovich continued, “Many homeowners have come to depend on FHA for fixed rate refinancing so hopefully things will get easier for them soon.
FHA is also requiring additional verification of a property’s financial performance, an expanded review of the borrower’s credit and the pre-screening of certain mortgage applications to prevent certain loans that may not make ever close, but would create a bottle-neck in the processing departments. Many FHA loan companies see these guideline changes as major obstacles for struggling borrowers, but they understand why FHA has raised the standards.
Americans continue to be supported by FHA home loan programs for refinancing and new home buying. FHA loan programs are aggressive with little equity required for FHA refinancing. FHA finance programs have opened up many home buying opportunities because borrowers only need a 3.5% down-payment to become homeowners. FHA credit requirements are considerably more flexible than conventional lending allows. In 2010 FHA guidelines have tightened but FHA loan limits remain robust and underwriters are still able to approve loans based on the borrower’s history rather than just their credit score. FHA refinance loan programs have made an effort to reach out to distressed homeowners seeking a lower fixed rate mortgage payment to help prevent foreclosures.
- FHA Home Loans
- FHA Mortgage Refinance
- FHA Streamline
- FHA 203b for Cash Out
- FHA 203K for Home Rehabilitation
According to Jeff Moran, a FHA loan specialist with Bank of America Home Loans in Orange County, “The Federal Housing Administration continues to reinvent themselves and consumers are benefitting because they can get financed cost effectively with low rate FHA mortgages.”
FHA mortgage rates are available at 4.75% on fixed 30-year loan terms. There is no pre-payment penalty for early pay-off and if the FHA rates drop, you can always utilize the FHA streamline for rate and term refinancing. What are you waiting for? FHA loan programs are more appealing and more affordable than ever.
The FHA loan defaults have been rising the last few years and the FHA reserves have dipped to dangerous levels. The FHA refinance loans continue to play a major role in helping borrowers with adjustable rate mortgages convert to a fixed interest rate loan that provides a more affordable monthly payment. A lot of work has been done to improve FHA home loan programs and reduce the FHA foreclosures. The Federal Housing Administration have worked with FHA lenders and it appears they have made the necessary changes in the FHA loan programs to reduce the risky FHA mortgage loans and get back on the path for a healthier financial outlook for this government run mortgage program. Last fall industry analysts had forecasted weak performance for FHA loans in 2010, but the portfolio performance has been much better. The Housing and Urban Development Secretary Shaun Donovan made these comments as the Obama administration renewed their commitment to stabilize the housing market.
Notable Changes to FHA Loan Programs
- FHA Streamline Refinance – FHA changed the streamline guidelines to not allow borrowers to refinance lender closing costs. If borrowers want the FHA streamline, they will have to pay for closing costs out of their pocket.
- FHA Home Loan – FHA increased the down-payment requirements from 3% to 3.5%.
- FHA Cash Out Refinance –FHA reduced the LTV from 95% to 85%, so borrowers who want to receive cash in their refinance must have at least 15% home equity left after the refinance loan.
- FHA 203K – Home Improvement Financing has been expanded for home rehabilitation and energy efficient initiatives.
Delinquencies on FHA-backed loans did increase to 12.4% in May from 11.7% in April, but were lower than the13.6% from the previous year. Donovan said, “Overall FHA loan performance is somewhat better than was predicted when the actuarial review was completed” in the fall of 2009.” However, the Home Affordable Modification Program (HAMP), offers incentives to FHA lenders to modify loans for distressed homeowners, has been widely criticized because the results have been so poor. The recent HAMP statistics released Monday show that slightly more than 10% of eligible borrowers received a loan modification that became permanent.
Have you heard of the “Green Mortgage Loans” that FHA is offering borrowers? FHA offers an energy efficient home loan that enables borrowers to finance home improvements in an effort to promote environmentally friendly appliances and energy systems in the home. These loans also can be used in conjunction with the FHA 203k rehabilitation loan insured by FHA. These energy efficient mortgages encourage home buyers or homeowners seeking a refinance to modernize their house by financing the improvements into their home loan.
The energy efficient home mortgage loan is available to borrowers who don’t necessarily need to refinance, but just need help financing some repairs in the home. HUD insures the FHA loan for loss on any improvements the homeowner makes. This unique FHA mortgage can be as small as $7,500, or as large as $25,000. While this home improvement financing option is helpful to many Americans, it is not for everyone. These FHA loan programs pose a higher risk to the FHA lender, so in most cases they will require a higher credit score than other FHA home loan products.
FHA home loans have been an icon for first time home buying since 1934. This government home financing initiative has been bolstering homeownership for decades with low FHA mortgage rates and fair lending criteria for all Americans. The Wall Street Journal reported that the Federal Housing Administration is in serious talks with HUD to raise the insurance premium in an effort to raise the dwindling FHA loan reserves. After FHA loan defaults have dropped for three straight months for FHA mortgage loans. If that trend holds, the agency could avoid burning through the FHA reserves, which are estimated to fall sharply over the coming years. Still, the FHA’s commissioner, David Stevens, says “there’s plenty of room for caution.” Clearly, FHA mortgage financing has not recovered enough to not be concerned about it’s future.
Are FHA Loan Programs at Risk?
As the economy continues to weaken, FHA will likely see more FHA defaults that could drain the FHA reserves even more. I would expect FHA loan requirements to continue the trend of tightening. This will limit the number of eligible borrowers to qualify for a FHA refinance that would lower their monthly mortgage payment and prevent home foreclosures for thousands of distressed homeowners.
Most industry insiders are forecasting additional losses because it has a much bigger exposure to housing today than it did when the housing market tanked three years ago. Even if the HUD continues to amend FHA loan guidelines to stem the FHA defaults, it is likely that the annual audit will uncover the fact that that the Federal Housing Administration continues to operate on low reserves. Let’s face it, if this great loan program was managed by the private sector the FHA loan program would be shut down. One bright spot is that the FHA’s finances are performing better than anticipated. In the last six months, FHA reserves have covered $6 billion that came from the loan defaults, but they had forecasted to pay $8.7 billion for loan defaults. Should we cheer because the FHA loan program is preforming better than anticipated or be critical of a federal loan program that is failing in a failing economy?
A frequent question from loan officers and mortgage brokers is in regards to the longevity of the FHA mortgage product. I received an email just yesterday from a FHA lender asking me the following, “Do you believe that HUD will pull the FHA loan programs for borrowers looking to refinance their home?” Since the subprime crash of 2006, there are still thousands of FHA mortgage brokers who rely heavily on FHA home refinancing. I wanted to address this in this article, because I believe that FHA lending is in jeopardy. FHA loan defaults have been climbing like the rest of the mortgage industry. FHA is a government home loan program and our government is in serious debt. The US government owns nearly 97% of all mortgage securities, so if the homes continue to be foreclosed upon because borrowers are not making their monthly loan payments, then it is safe to say that yes the future of FHA financing is cloudy at best.
Let’s take a look at the FHA loan programs at risk.
FHA 203B – This FHA loan program enables borrowers to get cash out up to 85%. FHA reduced it 10% from 95% cash out refinancing last year. It will be interesting to see if the 10% reduction helped reduce FHA loan defaults for borrowers who took cash out when they refinanced their home.
FHA Streamline – This legendary refinance loan is only for existing FHA borrowers seeking a rate and term refinance. HUD tightened the FHA guidelines by not allowing borrowers to finance the lender closing costs. FHA streamlines do not allow cash out and this new rule has significantly reduced the number of FHA streamline refinances in 2010. My guess is that the streamline program will survive if FHA survives.
FHA Home Loans – FHA goes hand in hand with first time home buying loans so it’s hard to imagine FHA would eliminate their flagship mortgage product, but if FHA loan defaults continue anything is possible. In 2009 FHA loan reserves dipped to dangerously low levels, so funding the FHA program must continue to pass through Congress. Last year FHA increased the down-payment requirements from 3% to 3.5%. I would anticipate that this will go to 5% sooner rather than later.
To HUD’s credit, FHA loan requirements for FHA lenders have increased dramatically. These changes were made to further solidify lending and weed out the shady or uncommitted lenders. As mentioned earlier HUD also mandated significant changes to FHA guidelines. Down-payment, home equity and cash out requirements were all tightened in 2009 and 2010. It is my contention that the FHA loan product will survive, but I believe we the tightening of guidelines is far from over.
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