Understanding FHA Loans

Are you looking your new home but don’t have a big down payment saved up? Currently, FHA loan programs are a great way to help buyers afford homes. These should go a long way in helping people obtain mortgages.

The two best features of FHA loans are:

1) Minimum down payment is 3-1/2% (not including closing costs).

2) Gifts are permitted for the entire 3-1/2% borrower investment and do not need to be “seasoned.”

 

Here are some other advantages to FHA loans:

  • The loan limits for a single family residence in L.A. and O.C. are up to $729,900.
  • Loan limits for 2 units are $934,200.
  • The interest rate is 4.35% as of this writing; however, there is mortgage insurance (see below).
  • NO MINIMUM FICO REQUIREMENT (this is huge)
  • Must be full documentation loan. No stated income loans.
  • No income limits.
  • The seller can contribute to closing costs, although the seller does not have to pay the closing costs.
  • There can be non-occupant co-signers on the loan.
  • You do not have to be a first-time buyer.
  • The down payment can be a gift from family members, employers and non-profit organizations.
  • Down payment assistance programs are permitted, such as city first-time buyer housing programs.

 

Here are some of the disadvantages:

  • When a loan is less than 20% down, there is mortgage insurance. It equals either 0.5% point per month, or 1.5% points up front. The up-front payment is deductible from your taxes during the year that you buy.
  • There are stricter appraisal requirements for 1 to 4 units (although rehabilitation loans are available as well through the 203(k) program:
    • Any operable or useful element in the subject property must have at least 2 or more years of useful life or it must be replaced.
    • The appraiser must be FHA-approved.
    • The appraiser can require a separate inspection upon any “visible” defect or if he/she has knowledge of any existing problem.
    • The property must be structurally sound.
    • The property cannot have code violations.
    • Each living unit much contain domestic hot water, sanitary facilities and a safe method of sewage disposal. Connection to public systems is required if available.
    • Heating systems must be adequate for healthful and comfortable living conditions.
  • Condo projects must be pre-approved, which is not easy. Also, over 50% of a new condo development’s units must already be sold.
    • Condo projects must have sufficient reserve funds.