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FHA Loans (Housing and Urban Development)

Federal Housing Administration Loans (otherwise known as FHA loans) are those that follow the guidelines set by The US Department of Housing and Urban Development (otherwise known as HUD).  These loans have expanded guidelines that allow for lower down payments, lower income requirements, and lower credit requirements.  They will also allow for cash out of equity or consolidation loans up to 85% of the value out to 30 years in term, which is better than the 65% and 20 year max of conforming loans.  In the event you are already in an FHA loan and wish to reduce the term, reduce the rate, or move from an adjustable rate mortgage to a fixed rate, you may be eligible for an FHA streamline refinance, which has reduced documentation requirements and requires NO appraisal.  Although they allow many borrowers to qualify for a mortgage that wouldn't otherwise qualify for a conforming or VA loan, FHA loans come with steep mortgage insurance requirements and more stringent property inspection requirements. 

All FHA loans require a 1.75% (of the loan amount) up-front mortgage insurance premium (UFMIP) which is similar to the VA's funding fee or USDA's guarantee fee.  This up-front fee is financed into the transaction and gets tacked on to your final loan amount.  In addition to this up-front mortgage insurance premium, FHA also has a monthly mortgage insurance premium (MIP) requirement.  The monthly premium gets tacked on to your monthly payments and is typically slightly higher than mortgage insurance premiums on conforming loans.

In all cases other than a streamline refinance, an appraisal will be required.  In addition to the appraisal, a foundation certificate will be required.  A foundation cert entails an engineer visiting the property, walking around the perimeter of the home and certifying that the foundation meets HUD's safety standards.  Generally, at a minimum that requires the axles and tongue be removed and the home to rest on blocks or pillars.  Skirting must be in place around the perimeter of the home and the home must be anchored to the ground by either tie downs or concrete anchoring.  In the event any repairs/upgrades are required by the engineer, the cost for those, as well as the cost for the foundation certificate, can be invoiced into a refinance transaction to avoid any out of pocket expense.

A minimum credit score of 580 is required and a minimum down payment or equity position of 3.5% is required in all cases with the exception of a streamline refinance.  For a streamline refinance, there is no equity requirement because there is no appraisal required, so if you owe more than your home is worth and you are currently in an FHA loan, a streamline refi would be a great way for you to refinance into a better position.  FHA guidelines are more forgiving than conforming loans when it comes to wait periods after derogatory credit events such as foreclosures (3 year wait) or short sales and bankruptcies (2 year wait period).  With a Chapter 13 bankruptcy, you can qualify for an FHA mortgage with as little as one year of on time payments.  Debt-to-income ratio requirements are also expanded with FHA loans, so borrowers with a lot of consumer debt or lower income whom may not have been eligible for other mortgage products, may be eligible for an FHA loan.  For streamline refinances, there is no income requirement at all!

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