Question of the week: What property and other limitations are there using FHA financing to buy our home?
Answer: Many people have many misconceptions regarding FHA financing to purchase a home that there are several hurdles and restrictions to surpass. FHA guidelines do have some property requirements that are more detailed than those on conventional mortgages, but otherwise FHA has fewer limitations than Fannie Mae and Freddie Mac and enable more families seeking home ownership the opportunity to purchase a home.
Here are some comparisons between FHA and conventional mortgages:
Property: The FHA appraisal includes a somewhat more detailed inspection than conventional. FHA appraisers will call out items that require repair before a loan can be funded, typical items are interior or exterior paint that is chipping, peeling or scaling that must be scraped and repainted, water heaters that are not properly vented above rooflines, have earthquake straps and/or are sitting on the ground, heating systems must be functional and adequate for the size of the property, any cracked windows must be replaced. Other items such as holes in the wall, missing floor coverings, missing sinks, would need to be repaired for either FHA or conventional mortgages. The basic rule for FHA and property requirements is any issue with the property that is considered a health or safety issue must be corrected.
Condominiums: Many condominium buyers are perfect candidates for FHA financing, but many condominiums are not FHA eligible. FHA maintains a list of approved condo homeowners associations (to see if a condo is approved or not go to the HUD condo website). In 2010 FHA tightened condo criteria and removed thousands of HOAs from the approval list requiring them to get reapproved. Conventional loans also have requirements for condos but they are a bit less stringent.
Loan limits: Some counties enjoy a higher loan limit for FHA than for conventional loans with a maximum single family loan up to $729,750 as opposed to the conforming limit of $625,500.
Down payment: The minimum down payment for FHA is only 3.5%.
Income qualifying: FHA allows non-occupant co-borrowers that are family members and use what are known as “blended ratios,” meaning that the income to debt ratios of the primary applicant who will occupy the home do not matter as long as the total ratios fit the guidelines.
Gift funds: FHA and conventional mortgages allow gift funds for down payment and closing costs to come from a relative or employer.
First time buyer: FHA financing is not limited to first time buyers, any qualified applicant can use FHA financing to purchase a home regardless of whether it is their first home or fifth.
Occupancy: FHA financing cannot be used to purchase investment property or second homes.
Location: FHA is not restricted to any geographic location, the only restrictions based on the property location is the maximum loan amount for the county where the property is situated.
Mortgage Insurance: Required on all FHA mortgages regardless of loan to value.
Credit scores: FHA guidelines require a credit score of 580 or greater for maximum loan to value, however many (most) lenders have an overlay on the credit score to require a score of 620 or greater.
FHA financing has more paperwork to sign than a conventional mortgage but otherwise is generally an easier qualification process.
More changes are coming to FHA that impact the total cost of FHA mortgages in the future, I will cover that next week.
Major news in the mortgage industry was the announcement that Fannie Mae and Bank of America have severed their relationship—BofA announcing it decided not to renew their agreement to sell mortgages to Fannie Mae and Fannie Mae announcing it had cut off BofA. Regardless of who broke up with who the end result is the same and that is BofA will no longer be originating or funding Fannie Mae mortgages. The core of the dispute is BofA’s failure to buy back about $1 billion in as requested by Fannie Mae under their seller agreement. A significant portion, vast majority?, of the bad mortgages that BofA has had to buy back from Fannie Mae in recent years were funded and sold to Fannie by Countrywide, who BofA took over in 2009. With the severing of the relationship BofA’s significant conventional mortgage volume will be directed solely to Freddie Mac. Historically Freddie Mac has higher rates for borrowers, with the tremendous influx in new volume to Freddie it will be interesting to see how or if the cost of Freddie mortgages improve.
Bank of America has announced previously to its retail loan originators that it would no longer fund cash-out refinances and in anticipation of being flooded with inquiries for refinances under the new HARP guidelines set to go into effect later this month has instructed their branches that they will be setting up hotlines for clients to call to make appointments to discuss their situation with a loan office and anticipate up to ninety days for appointments and processing of the applications.
In other major lender announcements Provident Mortgage announced it will no longer accept applications for conventional financing for condos due to the costs the lender incurs to process and approve condominium documents as well as the extra burden placed on lenders for guaranteeing the insurance coverage for the HOA. Provident is not a household name like BofA to most consumers but is well known in the industry and a very big wholesale lender. Their decision caused the industry to take note and you can bet other lenders are looking at the decision themselves. If more lenders follow Provident’s lead combined with the diminished number of condo complexes that are eligible for FHA financing then condo financing will be more difficult to come by which will have a tremendous impact on condo values.
A busy news week for the mortgage and rate markets. Existing and pending home sales increased in January, while the S&P/Case-Shiller index that tracks home prices released on Tuesday showed housing prices in major markets it tracks hit new lows in December. On the plus side for values is that the amount of homes on the market for sale is decreasing in many markets reducing supply. Whether this trend will continue depends on how lenders will bring their foreclosures to market, it are those properties that have had the biggest impact on home values. Today retail sales for February were released and consumers opened the wallets and slapped down the credit cards pushing sales up 4.3% over January. Credit card debt rose $21 billion in February, but we’ll pay that down/off later….
Rates for Friday March 3, 2012: After a strong start to the week mortgages got hit pretty hard on Wednesday and opened higher yesterday. There has been some gains made towards lower rates through the day yesterday and so far today (as of 11:00 a.m. Pacific) but not enough to overcome the losses earlier in the week. Rates are up on conventional from last Friday and down a bit on FHA.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.625% Up 0.125%
30 year high-balance conforming 4.00% Up 0.125%
30 year FHA 3.375% Down 0.125
30 year FHA high-balance* 3.75% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
* Current rates include credit towards closing costs, call for quote on rate and credit.
In elementary school, first in Tulsa, Oklahoma and then outside of Philadelphia, every March we would decorate the class with lions and lambs as we wondered if March would come in like a lion and go out like a lamb bringing Spring or tease us coming in like a lamb and hitting us with more Mr. Winter as it left like a lion. Looking at the weather yesterday and today and what is expected through the weekend and recalling Marches past I have come to realize there is no lion in Southern California.
My condolences to all the women out there of my generation whose first heartthrob crush was Davey Jones, I know my big sister had the Monkees lunchbox, personally I was bigger fan of Mickey Dolan.
A great weekend to buy a home, give me a call if I can be of service to you running numbers for your new home purchase or calculating savings for a refinance.
Have a great week,
Dennis C. Smith, California Dept. of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166
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