FHA Loans Lower Fees and Raise Acceptance

Gary Carraghan

FHA mortgage insurance programs assist low and moderate income families become homeowners by lowering some of the costs of their mortgage loans. FHA loans encourage mortgage companies to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements by protecting the mortgage company against loan default on mortgages for properties that meet certain minimum requirements.

Today’s FHA program is the adaptation of the very same program which has helped save homeowners from default since the 1930s. Today, One to Four Family Mortgage Insurance is still an important tool allowed by the federal government to expand home ownership opportunities for first time homebuyers and other borrowers who would not otherwise qualify for conventional loans on affordable terms.

Several amendments have been made to the FHS in the nearly eighty years it has been a part of United States federal policy. Most notable to these changes is evident in the 203(b) clause added in the 1980s which allows numerous advantages to the first time and disadvantaged home buyer.

In contrast to conventional mortgage products, which frequently require down payments of 10% or more of the purchase price of the home, single family mortgages insured by FHA under Section 203(b) make it possible to reduce down payments to as little as 3% . This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage, in some cases.

With most conventional loans, the borrower must pay, at the time of purchase, closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program allows the borrower to finance many of these charges, thus reducing the up front cost of buying a home. FHA mortgage insurance is not free: borrowers pay an up front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.

Finally, FHA rules impose limits on some of the fees that mortgage companies may charge in making a loan. For example, the loan origination fee charged by the mortgage company for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.

Along with a renovation of the FHA regulations during the 1980s to accommodate for an ever-evolving real estate market, the federal government adapted what’s known as a ‘streamline’ refinancing program. This refers only to the amount of documentation and underwriting that needs to be performed by the mortgage company, and does not mean that there are no costs involved in the transaction.

There are a few basic requirements to qualify for the streamline option. The mortgage must already be insured by FHA, the mortgage to be renewed must be current and paid on time to date, the refinance is to result in a lowering of the borrower’s monthly principal and interest payments, and no cash may be taken out on mortgages refinanced using the streamline refinance process.

Companies may offer streamline refinances in several ways. Some offer “no cost” refinances (actually, no out of pocket expenses to the borrower) by charging a higher rate of interest on the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the company pays any closing costs that are incurred on the transaction.

Also, companies may offer streamline refinances and include the closing costs into the new mortgage amount. This can only be done if there is sufficient equity in the property, as determined by an appraisal. Streamline refinances can also be done without appraisals, but the new loan amount cannot exceed what is currently owed, i.e., closing costs may not be added to the new mortgage with those costs either paid in cash or through the premium rate as described above. Investment properties (properties in which the borrower does not reside in as his or her principal residence) may only be refinanced without an appraisal and, thus, closing costs may not be included in the new mortgage amount.

Once you do, or if you have ever fully paid off a home backed by FHA, you may be owed back compensation from the government. About 1 in 10 FHA borrowers leave money in their escrow accounts when they pay off their loans. The average refund for each borrower is about $700.

In addition to the more standard mortgages available in this program, the federal government has also allowed for more creative forms of home owners who could qualify, at least in part, from FHA funding. For example, FHA’s energy efficient mortgage program provides mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.

One of the most enjoyed benefits of the FHA, though, is that the down payment for an FHA mortgage can be 100% gift funds. Verification of the source of gift money is not required to benefit from this particular aspect of the legislation. However, it is necessary that the gift funds be deposited in the borrower's bank or savings account, or in an escrow account, prior to underwriting approval. Gift donors are restricted primarily to a relative of the borrower. They can also be certain organizations, such as a labor union or charitable organization. Contact your local branch for complete information. Additionally, proof of initial deposit is required.

The Federal Housing Administration is one of the most successful government programs in American history and over the decades during which the program has been in existence, thousands upon thousands of home owners have been able to procure the home of their dreams when it may not have been possible otherwise.

About The Author

Gary Carraghan is a successful author and regular contributor to www.super-mortgages.com who provides money-saving tips on mortgages. More of his relevant work may be found at http://super-mortgages.com/First-Time-Home-Buyer and http://super-mortgages.com/Residential-Mortgage-Loans where he discusses several viable options for future homeowners including first time home buyers.

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