New Improved FHA

Although I bought my first two houses with Federal Housing Administration (FHA) mortgages, as a real estate broker, I have never enjoyed working with government-insured loans. FHA insures mortgages so that people with little-or-no down payment, high debt-to-income ratios or marginal credit can buy houses. FHA used to be the only mortgage option for people in those circumstances.

FHA sounded good to the first-time buyer, because the seller was required to pay some of the buyer's closing costs. Of course, for this very reason, it sounded very bad to the seller. Then the seller learned that he would be required to provide a two-year roof warranty, which often resulted in providing a new roof. A "clear termite report" was required, which usually meant the seller paid for termite treatment and often repairs due to damage by termites, water or mold. Sometimes the appraiser appraised the house below the sale price. Result: no sale. The appraiser would always present the seller with a list of arbitrary and unpredictable repair requirements. Closing the sale would take at least six weeks instead of the usual four weeks needed for a conventional mortgage.

During the seller's market of 2003 to 2006, sellers would laugh if a buyer made an offer with FHA financing. There were plenty of investors with deep pockets, conventional financing or cash, and the FHA buyers were out of luck.

FHA was not such a great deal for the buyer, either. When a buyer puts less than 20% down on a house, the lender considers the loan risky. The lender wants to be compensated for the risk, and charges a mortgage insurance premium (MIP) that in effect adds about 0.5% to the interest rate. With a conventional mortgage, the buyer can stop paying the MIP once he has 20% equity in the house, either through appreciation or paying down the mortgage. With FHA, the MIP is for the life of the loan. I wasted $34 per month on MIP on a house I bought with FHA financing, even ten years after I bought the house and I had 70% equity. The risk of default was non-existent, but I had to pay this useless MIP until I refinanced.

All the wild and crazy lending practices of the last several years created new and better loan programs in the conventional, or non-government-insured, mortgage market. No savings, no credit, lots of debt? No problem! Buyers were no longer interested in FHA and its byzantine complexities.

FHA's share of the market dwindled to almost nothing.

Then, as we all know, all those wild and crazy mortgages came home to roost. The sub-prime conventional mortgage industry is history. Fortunately, the mortgage melt down occurred just as FHA decided that maybe they should stop making it so difficult to use FHA loans.

Last week, Jane Penttinen with Sunstreet Mortgage sent me these glad tidings regarding FHA.

The new and improved FHA guidelines may be the answer for buyers with limited cash to close, a less than stellar credit history, or both.

Maximum loan amount for Pima County is $239,850. Congress is considering raising this to $417,000.
Minimum down payment is 2.85%
Seller contributions up to 6% allowed. Buyer must have 3% of purchase price invested in the transaction
Debt ratios of 31/43 allowed (possible to go higher with strong compensating factors).
Non-occupant co-borrowers allowed (family members).
No cash reserves required.
Lenient credit standards.
No minimum credit score required.
Two-year minimum wait after discharge of a bankruptcy (three years if foreclosure involved).
Gift funds (from family) allowed for entire down payment and closing costs.
No clear termite report required unless appraiser calls for it.
No two-year roof certification unless appraiser calls for it.
No mandatory seller-paid closing costs.
Cash-out refinance allowed up to 95% of value provided borrower has occupied the property as a primary residence for at least the last 12 months (less than 12 months limited to 85%).
Condos must be on the FHA-approved list and must have 51% owner occupancy.
Nehemiah and Ameridream no longer allowed!
MIP can be dropped after five years if the buyer has 22% equity in the property, based on the original purchase price.

FHA: no longer a bureaucratic nightmare!

For more information, contact loan wizard Jane Penttinen at Sunstreet Mortgage. 520-237-8430 or 888-634-6399 or jpenttinen@sunstreetmortgage.com