Tag: FHA loan

The Benefits of the FHA Loan – and Why It’s a Popular Choice Right Now

November 13, 2023 / Tom Bonetto

FHA (Federal Housing Administration) loans can be a great choice for many looking to purchase a primary residence, and not just first-time homebuyers. These loans offer several advantages that make home ownership more accessible.

One of the key benefits of the FHA loan is the lower down payment requirement, making it easier for individuals with limited savings to enter the housing market.

Lower Down Payment

One of the standout features of FHA loans is the reduced down payment requirement. While conventional mortgages often demand a larger down payment, sometimes around 20%, FHA loans typically require only 3.5% down.

This lower upfront cost opens doors for prospective buyers who may struggle to come up with a significant down payment, providing a more attainable path to home ownership.

Gifts for Down Payments

Receiving FHA gift funds can make it easier to qualify for an FHA loan…but borrowers must follow a particular process for eligibility. First, the money can’t be a loan – it has to be a gift with no scheduled repayment. Secondly, it must be a family member, a charitable organization, an employer, or a governmental agency assisting families or first time buyers.

FHA guidelines for gift funds include:

Gift funds must be from an acceptable source such as savings accounts, stocks, or savings bonds
Gift funds must be verified entering into a borrower’s bank account and leaving the donor’s bank account
Documentation showing proof funds are not a collateralized loan such as an FHA gift letter

Borrowers may have to provide additional supporting documentation, as well.

Mortgage Insurance

Mortgage insurance premium (MIP) is a type of mortgage insurance that is required of homeowners who take out loans backed by the FHA. For most borrowers that bring in a 3.5% down payment, the fee is .55 of the loan amount.

So, if you have a $300,000 FHA loan, your monthly mortgage insurance would cost $137.50 per month. In many cases, this mortgage insurance is MUCH less expensive than that of conventional loans and private mortgage insurance (PMI).

You can learn more about mortgage insurance here…

Accessible Credit Requirements

FHA loans are also known for being more forgiving when it comes to credit requirements.

Conventional mortgages may be challenging for individuals with less-than-perfect credit scores, but FHA loans are designed to accommodate a broader range of credit profiles. Most investors will lend with a credit score of 580 or better.

This enables people with lower credit scores to qualify for a home loan, giving greater opportunities for those who may have faced obstacles in the conventional mortgage market.

Flexible Qualification Criteria

FHA loans offer flexibility in qualifying criteria, considering factors beyond traditional income and credit scores.

Lenders can take into account compensating factors, such as a history of timely rent payments or utility bills, making it easier for individuals with unique financial situations to secure a mortgage. This flexibility allows the consideration for a more diverse set of borrowers in the homebuying process.

Government Backing and Stability

FHA loans are backed by the federal government, providing an additional layer of security for both lenders and borrowers.

This backing makes lenders more willing to approve loans for individuals who may not meet the stringent criteria of conventional mortgages. The government support also helps stabilize the housing market by providing a reliable option for financing, even during economic downturns.

In Conclusion

FHA loans provide a range of benefits that contribute to making homeownership more accessible for a diverse group of borrowers. From lower down payment requirements, to the use of gift funds, to flexible credit criteria and government backing, these loans play a crucial role in expanding opportunities for prospective homebuyers.

Do reach out to me for more regarding these FHA programs, as it would be my pleasure to help in any way possible!

Big and Welcomed Changes Here For New FHA Loans

February 25, 2023 / Tom Bonetto

FHA mortgages have long provided first-time homebuyers and those with less-than-stellar credit an affordable way to achieve home ownership. But one of the main drawbacks of these mortgages has been that their mortgage insurance costs are relatively high.

Reduced mortgage insurance rates go into effect today for many FHA borrowers. The typical borrower will pay 0.55% of their loan amount annually in mortgage insurance costs (as opposed to the .85% rate previously) – a decrease of 30%!

The White House announced Wednesday that the US Department of Housing and Urban Development (HUD) will lower annual mortgage insurance premiums (MIP) on FHA mortgages. These loans are insured by HUD’s Federal Housing Administration.

Mortgage insurance is required on all FHA loans (regardless of down payment size) to allow for more flexible qualification requirements, like a lower credit score.

FHA mortgages are used for primary residences, not 2^nd homes or investment properties.

Overview of the Changes

Mortgage insurance is paid as a percentage of the borrower’s loan amount, and how much an individual pays depends on how much they borrowed, their down payment, and the loan term. Currently, most borrowers pay an annual mortgage insurance rate of 0.85%.

To show the monetary value of this change, a borrower in a $265,000 home would save about $800 per year. A borrower with a $467,700 home – the national median home price in December 2022 – would save more than $1,400 annually, according to the HUD press release.

By reducing the costs for this type of loan, more people may be able to afford owning a home.

This is especially true for low-income and first-time home buyers, who tend to benefit from FHA loans the most.

This change is a welcome reprieve for Americans who, in the last year, have experienced higher home prices, housing costs and mortgage rates.

The Bottom Line

By reducing the costs associated with getting an FHA mortgage, HUD aims to make home ownership more affordable.

Nearly 84% of FHA mortgage borrowers are first-time homebuyers, and 43% of FHA borrowers are low income, according to HUD.

Also, FHA mortgage rates are generally lower than conventional rates. So, it will be in buyers’ best interest to have a mortgage pro who can work with them to figure out which loan program would be the best for their current situation. It wouldn’t surprise me to see conventional loan originations drop because of these FHA changes.

Where Can I Get More Information?

Contact me directly to discuss your current situation and how you might be able to take advantage of today’s FHA changes. It would be my pleasure to help you!

FHA and Conventional Mortgage Options – Which is Better?

October 21, 2018 / Tom Bonetto

I’m often asked about the different types of loans available for those with a limited down payment. The main options are Fannie Mae and Freddie Mac conventional mortgages or FHA loans. But which one is best?

The FHA versus conventional analysis involves taking a look at your credit score, your available down payment, and your long-term financial goals.

Let’s take a look at all 3 issues:

1. Credit score – buyers with low-to-average credit scores may be better off with an FHA loan. FHA mortgage rates are generally slightly lower than conventional ones for applicants with lower credit, and FHA loans allow credit scores down to 580.

2. Down payment – borrowers can come in with a lower down payment with conventional products, at just 3% down. FHA requires 3.5% percent down.

3. Long-term goals – conventional mortgage insurance can be cancelled when the home achieves 20% equity. FHA mortgage insurance is payable for the life of the loan and can only be canceled with a refinance. Buyers who plan to stay in the home five to ten years may opt for conventional, as the FHA mortgage insurance can add up over time.

For a more, I’d invite you to visit the source at The Mortgage Reports and Dan Green’s post.

FHA Or Conventional – Which is Superior?

There are a multitude of low-down payment options for today’s home buyers but most will choose between the FHA 3.5% down payment program and conventional options such as HomeReady, Home Possible, and Conventional 97.

So, which loan is better? That will depend on your circumstance.

For example, in deciding between an FHA loan and a conventional option, the borrower’s individual credit score matters greatly. This is because the credit score determines whether the borrower is program-eligible; and, it affects the monthly mortgage payment, too.

FHA loans are available with credit scores of 580 or better. The conventional options, by contrast, require a minimum credit score of 620.

Therefore, if your credit score is between 580 and 620, the FHA loan is essentially the only available option.

As your credit score increases, though, the conventional options become more attractive. Your mortgage rate drops due to the lower score and your mortgage insurance costs do, too. This is different from how FHA loans work.

You can find out much more about mortgage insurance here….

With an FHA loan, your mortgage rate and MIP cost the same no matter what your FICO score.

Therefore, over the long-term, borrowers with above-average credit score will typically find conventional loans more economical relative to FHA ones.

In the short-term, though, FHA loans generally win out.

A Second Thought

One main consideration has to be the length of time you would expect to “keep” this mortgage.

Borrowers should take into consideration that FHA MIP is forever but conventional mortgage insurance goes away at 80% loan-to-value. This means that, over time, your conventional option can become a better value — especially for borrowers with high credit scores.

It’s hard to know for how long you’ll hold a loan, though. Sometimes, we expect to live in a home for the rest of our lives and then our circumstances change. Or, sometimes mortgage rates drop and we’ve given the opportunity to refinance.

As a general rule, though, in rising-value housing market, if you plan to stay in the same home with the same mortgage for longer than six years, the conventional 97 may be your better long-term fit.

One other thing to consider is upfront charges.

The FHA charges a separate mortgage insurance premium at the time of closing known as Upfront MIP. Upfront MIP costs 1.75% of your loan size, is generally added to your balance, and is non-recoverable except via the FHA Streamline Refinance.

Upfront MIP is a cost. The conventional versions do not charge a fee.

FHA vs Conventional Infographic

Image Courtesy of The Mortgage Reports

You can find out much, much more about low-down payment options, as well as the specifics of these loans here.

For today’s low down payment home buyers, there are scenarios in which the FHA loan is what’s best for financing and there are others in which the conventional option is the clear winner. Rates for both products should be reviewed and evaluated.

It would be my pleasure to help you find the version that’s most optimal for your situation, so please do contact me for more details!

April 15, 2018 / Tom Bonetto

Seller Paid Closing Costs – FHA Loans

FHA loans are a popular mortgage option among homebuyers, especially first-time purchasers and those with limited funds for a down payment.

See the video above for more….

One of the fantastic benefits of this program is that it allows the seller to contribute money toward the buyer’s closing costs. These are called “concessions” and they used to attract buyers and offers, making their property more attractive for purchases.

Under current HUD guidelines, sellers can pay money toward a homebuyer’s closing costs, when an FHA loan is being used. These seller contributions are typically limited to 6% of the purchase price.

You might wonder why any buyer would ask a home seller to pay a closing cost credit for the buyer. The first thought that crosses a seller’s mind is “doesn’t the buyer have any money?” – and if the buyer doesn’t have any money, “why should the seller subsidize the buyer’s home purchase?”

However, it is common for sellers to pay a closing cost credit for some buyers in certain situations.

Here’s a brief look at the rules and requirements when a seller pays for some of or all of the buyer’s closing costs…

Seller Concessions and FHA Loans

Because this is a federal program, the US Department of Housing and Urban Development (HUD) sets the rules for seller contributions toward closing costs for FHA loans. It is their Single Family Housing Policy Handbook (HUD Handbook 4000.1) that outlines the regulations for the FHA loan program.

Their handbook further states that “interested parties” (seller, builders, etc.) can contribute money “toward the Borrower’s origination fees, other closing costs and discount points.” These contributions are generally limited to 6% of the sales price.

Believe it or not, seller contributions that exceed 6% do not happen very often. In most cases, these contributions fall at or below the 6% cap.

How Does It Work?

The number one way many buyers get the sellers to pay a closing cost credit is by increasing the sales price to cover the additional expense. For example, let’s say the sales price is $200,000, and the buyers need 3 percent of the purchase price. If you were to divide the sales price by .965 (a 3.5% down payment), that would equal $207,254. If you take $207,245 X 3.5% and deduct it from the sales price, the seller is still netting that same $200,000.

The drawback to this approach is what happens if the home does not appraise by the buyer’s lender at $207,245? If there is no provision for this in the purchase contract, the seller could be stuck paying a credit from a lower sales price and netting much less than the seller anticipated.

The Down Payment Portion

Homebuyers who use an FHA loan to buy a house must make a down payment of at least 3.5% of the purchase price or appraised value.

The FHA handbook states that “Interested Party Contributions may not be used for the Borrower’s [down payment].”

This means that the seller cannot contribute money to the home buyer’s down payment, when an FHA is used to finance the purchase.

It’s the responsibility of the buyer to produce the entire down payment.

Offer a Trade Off for a Closing Cost Credit

Sellers will often agree to pay a closing cost credit if they get everything they want. Sellers want qualified buyers who will close escrow and not cause any problems during the escrow period.

In other words, offer to buy the home in its AS IS condition and assure the seller the buyer will take care of any home inspection issues after closing.

Too many sellers, it is worth it to give a little discount on the price upfront in return for assurance the escrow will close on time without hassles. Some sellers work a little flexibility into the sales price to begin with, so it’s not a hardship to offer a closing cost credit.

In Conclusion

It’s important to distinguish that HUD allows home sellers to contribute toward the buyer’s FHA closing costs — but they do not require it. Seller concessions and contributions are typically agreed upon during the negotiation process, prior to closing.

Generally speaking, sellers tend to be more willing to pay buyer closing costs in a slower real estate market, and less inclined to do so in a hot market with competing offers.

In fact, in a sluggish market you’ll often see real estate yard signs that say things like “seller pays closing costs.” This is an enticement to attract more offers, which might be necessary in a buyer’s market.

In an active and highly competitive housing market, however, this kind of offer is less common. That doesn’t mean buyers can’t ask for the seller to pay some or all of their closing costs. It just means that the current state of the market will affect their willingness to do so. So when it doubt, rely on your real estate agent’s advice.

FHA Loans – Closing Costs and Down Payments

October 16, 2017 / Tom Bonetto

One of the reason FHA home loans are so popular is their low down payment requirement. As long as your credit score exceeds 599, you are eligible for 96.5 percent financing, with a 3.5 percent down payment.

The big question is….how much will your down payment and closing costs be?

Source: The Mortgage Reports – Gina Pogol

FHA Down Payment: Higher Is Better For Bad Credit

If your credit score is 600 or higher, your minimum down payment for FHA financing is 3.5 percent.

Keep in mind that being eligible for financing is not the same as being approved for financing. You can apply, but very few people with the minimum scores get approved for FHA home loans. So if your credit score is marginal, consider coming in with a higher-than-required down payment.

With that said, with credit scores over 640, buyers should generally be OK regarding credit and FHA loans.

Down Payment Gifts

With FHA homes loans, you can get your entire down payment as a gift from friends or family. Your employer, church or other approved organization may also gift you down payment funds.

Gift funds must come with no expectation of repayment. The loan applicant must show that the giver intends the funds to be a gift, that the giver has the money to give, that the money has been transferred to the applicant, and that the funds did not come from an unapproved source.

If you’re lucky enough to be getting a gifted down payment, you’ll need to do the following:

Get a signed “gift letter” from the giver, indicating the amount of the gift, and that it is a gift with no expectation of repayment.
Document the transfer of funds into your account — a deposit receipt or account statement is good.
Get a copy of the most recent statement from the giver’s account, showing that there was money to give you.

The reason for all this documentation is making sure that the gift does not come from the seller, real estate agent, or anyone else who would benefit from your home purchase.

Help From Sellers

As noted above, you can’t get a down payment gift or loan from the home seller, or anyone else who might benefit from the transaction. However, you can get help with your closing costs from a motivated seller.

FHA loans allow sellers to cover closing costs up to six percent of your purchase price. That can mean lender fees, property taxes, homeowners insurance, escrow fees, and title insurance.

Naturally, this kind of help from sellers is not really free. If you want six percent of the sales price in concessions, you’ll have to pay six percent more than the price the buyer is willing to accept.

That’s okay, as long as the property will appraise at the higher price.

FHA Closing Costs

Closing costs for FHA loans are about the same as they are for conventional loans, with a couple exceptions.

The FHA home appraisal is a little more complicated than the standard appraisal, and it often costs about $50 more.
FHA requires an upfront mortgage insurance premium (MIP) of 1.75 percent of your loan amount. However, most borrowers wrap that charge into their loan amount.

If you wrap your FHA insurance into your loan amount, your mortgage starting balance looks like this:

$200,000 purchase with 3.5% down = $193,000 loan with $7,000 down
Add 1.75 percent of $193,000 = $3,378
Total loan amount: $196,378

Note that you can wrap the FHA MIP into your new loan amount, but not your other closing costs. When you refinance, if you have enough equity, you can wrap all your costs into the new loan.

Help From Your Lender

If your seller isn’t interested in covering your closing costs, your lender might be. Here’s how that works.

There are many ways to price a mortgage. For instance, here’s what you might see on a rate sheet for a 30-year fixed mortgage:

The rates with negative numbers have what’s called rebate pricing. That’s money that can be rebated to the borrower and used for things like closing costs.

So if you have a $100,000 loan with a three percent rebate (the 4.125 percent rate in the chart above), you get $3,000 from the lender to cover your closing costs.

How can lenders do this? They do it by offering you a higher interest rate in exchange for an upfront payment now. So, you’d get 3.75 percent if you paid the normal closing costs, while 4.125 percent would get you a three percent rebate. If you only keep your loan for a few years, you can come out ahead with rebate pricing.

Contact me to find out more about FHA pricing and options – it would be my privilege to help!

Photo Credit: Cafe Credit via Flickr, under the Creative Commons License

Tag: FHA loan

The Benefits of the FHA Loan – and Why It’s a Popular Choice Right Now

Lower Down Payment

Gifts for Down Payments

Mortgage Insurance

Accessible Credit Requirements

Flexible Qualification Criteria

Government Backing and Stability

In Conclusion

Big and Welcomed Changes Here For New FHA Loans

Overview of the Changes

The Bottom Line

Where Can I Get More Information?

FHA and Conventional Mortgage Options – Which is Better?

FHA Or Conventional – Which is Superior?

A Second Thought

FHA vs Conventional Infographic

Seller Paid Closing Costs – FHA Loans

Seller Concessions and FHA Loans

How Does It Work?

The Down Payment Portion

Offer a Trade Off for a Closing Cost Credit

In Conclusion

FHA Loans – Closing Costs and Down Payments

FHA Down Payment: Higher Is Better For Bad Credit

Down Payment Gifts

Help From Sellers

FHA Closing Costs

Help From Your Lender

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