FHA

Government – FHA

The Federal Housing Administration (FHA) was created by Congress in 1934 as part of the National Housing Act.  The purpose of the act, and of the FHA, was to generate new jobs through increased construction activity, to exert a stabilizing influence on the mortgage market, and to promote the financing, repair, improvement, and sale of real estate nationwide. Today the FHA is part of the Department of Housing and Urban Development (HUD) .  Its primary function is insuring mortgage loans; the FHA compensates lenders who make loans through its programs for any losses that result from borrower default.  The FHA does not build homes or make loans. In effect, the FHA is a giant mortgage insurance agency.  Its insurance program, known as the Mutual Mortgage Insurance Plan, is funded with premiums paid by FHA borrowers.

Characteristics of FHA Loans

The typical FHA loan has a 30-year term, although the borrower usually has the option of a shorter term (15 years or less).  The FHA requires all the loans it insures to have first lien position. The FHA used to set a maximum interest rate for FHA loans, but now the rate for each loan is freely negotiated between the borrower and the lender.  As a result, interest rates for FHA loans are determined by market forces, in the same way that the rates for conventional loans are determined. FHA loans have a number of features that distinguish them from conventional loans.  Here is a list of the most significant differences:

1)  Less stringent qualifying standards. It’s easier to qualify for an FHA loan than for a conventional loan.

2)  Low down payments. The down payment required for an FHA loan (referred to as the minimum cash investment) is often considerably less than it would be for a comparable conventional loan. 3.5% is the minimum contribution.

3)  Secondary financing restrictions. The borrower may not use secondary financing from the seller or a lender to make up any part of the required minimum cash investment. (Secondary financing from a family member is allowed for the minimum cash investment, however.)

4)  Mortgage insurance is required on all loans. Regardless of the size of the down payment, mortgage insurance is required on all FHA loans for the duration of their terms.  (By contrast, private mortgage insurance is ordinarily only required for a conventional loan while the loan-to-value ratio is higher than 80 %.) Mortgage insurance is charged to the homeowner each month at the rate of .5% per year of the total loan amount. FHA also charges an upfront mortgage insurance premium of 1.5%.

FHA’s monthly mortgage insurance payments will be automatically terminated when these conditions occur:

• For mortgages with terms 15 years or less and with Loan to Value ratios 90% and greater, annual premiums will be canceled when Loan to Value ratio reaches 78% regardless of the amount of time the mortgagor has paid premiums.
• For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be cancelled when the Loan to Value ratio reaches 78%, provided the mortgagor has paid the annual premium for at least 5 years.
• Mortgages with terms 15 years or less and with Loan to Value ratios of 89.99% and less will not be charged annual mortgage insurance premiums.

5)  No prepayment penalty. Some conventional loans provide that the lender may impose a substantial penalty if the borrower pays off the loan within the first few years of its term.  FHA loans may be paid off at any time without additional charges.  (Lenders may require FHA borrowers to make any pre-payment on a regular installment due date, and for loans made before August 1985, to give 30 days written notice of their intention to prepay.)

6)  The home must be owner-occupied primary residence. FHA borrowers must intend to occupy the property they’re buying.  The property must be used as the borrower’s primary residence, not as a second home (except in special cases involving hardship).

Almost every new FHA-insured loan has the characteristics listed above.  Other features of the loan are determined by the particular FHA program through which it is insured.