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l rules for FHA loans (including those governing maximum loan amounts, the minimum cash investment, sales concessions, secondary financing, and assumption),
l FHA insurance premiums,
l underwriting FHA loans, and
l specialized FHA programs.
Overview of FHA Loans
Federal Housing Administration (FHA) was created in 1934 as part of National Housing Act.
Federal Housing Administration
Overview of FHA Loans
Federal Housing Administration (FHA) was created in 1934 as part of National Housing Act.
Purpose of act was to:
lgenerate new jobs by increasing construction activity,
lstabilize mortgage market, and
lpromote financing, repair, improvement, and sale of real estate.
Federal Housing Administration
Overview of FHA Loans
Today, the FHA is part of the Department of Housing and Urban Development (HUD).
�Primary function is insuring mortgage loans.
�Compensates lenders for losses from borrower default.
�Does not build homes or make loans.
Federal Housing Administration
Overview of FHA Loans
FHA insurance program is called the Mutual Mortgage Insurance Plan.
�Funded by premiums paid by FHA borrowers.
FHA mortgage insurance
Overview of FHA Loans
Prospective FHA borrowers apply to lender, not directly to FHA.
FHA mortgage insurance
Overview of FHA Loans
Prospective FHA borrowers apply to lender, not directly to FHA.
Lenders authorized to make FHA loans either:
lsubmit applications to FHA for approval, or
lunderwrite applications themselves.
FHA mortgage insurance
Overview of FHA Loans
Prospective FHA borrowers apply to lender, not directly to FHA.
Lenders authorized to make FHA loans either:
lsubmit applications to FHA for approval, or
lunderwrite applications themselves.
�Direct endorsement lender: Lender authorized to underwrite its own FHA loans.
FHA mortgage insurance
Overview of FHA Loans
If FHA borrower defaults on loan:
lFHA reimburses lender for full amount of loss.
lBorrower required to repay FHA.
FHA mortgage insurance
Overview of FHA Loans
FHA-insured loan program is intended to help low - and moderate- income home buyers.
Role of FHA loans
Overview of FHA Loans
FHA-insured loan program is intended to help low - and moderate- income home buyers.
�But eligibility isn’t restricted by income.
�Instead, FHA sets maximum loan amounts.
�Maximum generally only enough to buy moderately priced house.
Role of FHA loans
Overview of FHA Loans
FHA-insured loan program is intended to help low - and moderate- income home buyers.
�But eligibility isn’t restricted by income.
�Instead, FHA sets maximum loan amounts.
�Maximum generally only enough to buy moderately priced house.
lFHA also has low downpayment requirements, lenient underwriting standards, etc., to help buyers.
Role of FHA loans
Overview of FHA Loans
FHA loans fell out of favor during subprime boom.
lConventional underwriting standards were loosened and loans were easier to obtain.
lFHA maximum loan amounts were too low to use in some areas.
Role of FHA loans
Overview of FHA Loans
Now, however, low-downpayment conventional loans are harder to get, and FHA maximum loan amounts have been increased.
FHA loans are once again becoming more popular.
Role of FHA loans
Overview of FHA Loans
FHA has many different programs to fit different needs.
Programs are referred to by section numbers taken from provisions of National Housing Act.
FHA loan programs
FHA Loan Programs
Section 203(b) is the standard FHA program.
�Most FHA loans are 203(b) loans.
�Other programs are based on 203(b).
Section 203(b) – standard program
FHA Loan Programs
Section 203(b) is the standard FHA program.
�Most FHA loans are 203(b) loans.
�Other programs are based on 203(b).
203(b) loan can be used for purchase or refinancing of principal residences with up to four units.
Section 203(b) – standard program
FHA Loan Programs
203(k) program insures mortgages used to purchase/refinance and rehabilitate homes.
203(k) loans are discussed in more detail at the end of this lesson.
Section 203(k) – rehabilitation loans
FHA Loan Programs
234(c) program covers purchase or refinancing of unit in condominium approved by FHA.
Section 234(c) – condominium units
FHA Loan Programs
234(c) program covers purchase or refinancing of unit in condominium approved by FHA.
lDeveloper usually applies for FHA approval when project is built or converted.
Section 234(c) – condominium units
FHA Loan Programs
234(c) program covers purchase or refinancing of unit in condominium approved by FHA.
lDeveloper usually applies for FHA approval when project is built or converted.
lSpot loan: Loan for condominium unit in project that isn’t FHA -approved.
Section 234(c) – condominium units
FHA Loan Programs
Section 251 ARM program can be used to purchase or refinance owner-occupied residence with up to four units.
�Must have 30-year loan term.
�After initial fixed-rate period, adjustments occur on an annual basis.
Section 251 – ARMs
FHA Loan Programs
1-year, 3-year, and 5-year ARMs
lAnnual interest rate adjustment limited to 1%
lTotal rate increase over life of loan limited to 5%
Section 251 – ARMs
FHA Loan Programs
1-year, 3-year, and 5-year ARMs
lAnnual interest rate adjustment limited to 1%
lTotal rate increase over life of loan limited to 5%
7-year and 10-year ARMs
lAnnual interest rate adjustment limited to 2%
lTotal rate increase over life of loan limited to 6%
Section 251 – ARMs
FHA Loan Programs
Qualifying rate: Interest rate used to calculate monthly payment when qualifying buyer.
lFor most FHA ARMs:
�qualifying rate is initial interest rate
lFor 1-year ARM with LTV 95% or above:
�qualifying rate is initial interest rate + 1%
Section 251 – ARMs
FHA Loan Programs
Section 255 provides insurance for reverse mortgages, which the FHA calls home equity conversion mortgages (HECMs).
255 loans are discussed in more detail at the end of this lesson.
Section 255 – HECMs
Summary
Overview of FHA Loans
ÄFHAÄHUDÄMutual Mortgage Insurance Plan
ÄDirect endorsement lendersÄ203(b) programÄ234(c) program
Ä251 program
Rules for FHA Loans
When FHA -insured financing is used, transaction must comply with FHA rules regarding:
lowner-occupancy,
lmaximum loan amount,
lminimum cash investment,
lsales concessions,
lsecondary financing,
lproperty flipping, and
lassumption.
Rules for FHA Loans
FHA borrower must intend to occupy home as principal residence.
Owner-occupancy
Rules for FHA Loans
FHA borrower must intend to occupy home as principal residence.
lFHA loan may be used for secondary residence only in limited circumstances involving hardship.
Owner-occupancy
Rules for FHA Loans
FHA borrower must intend to occupy home as principal residence.
lFHA loan may be used for secondary residence only in limited circumstances involving hardship.
lInvestor loans generally not permitted.
�Exception may be made for investor buying property that HUD owns due to foreclosure.
Owner-occupancy
Rules for FHA Loans
FHA sets maximum loan amounts that vary from area to area and are based on local median housing costs.
These limits are tied to the conforming loan limits set annually by the secondary market agencies.
Local maximum loan amounts
FHA Local Maximum Loan Amounts
Currently, the basic maximum for FHA loans is 65% of Freddie Mac’s conforming loan limit.
In 2009, conforming loan limit for one-unit property is $417,000.
lSo 2009 basic maximum FHA loan amount for a one-unit property is $217,050:
$417,000 × .65 = $271,050
Basic maximum – most areas
FHA Local Maximum Loan Amounts
In high-cost areas, the maximum may be increased up to 125% of the area median home price.
lBut maximum loan amount in any area can’t exceed 175% of conforming loan limit.
�In 2009, this “ceiling” is $729,750.
� Higher ceiling applies in AK, HI, Guam, and Virgin Islands.
Maximums in high-cost areas
FHA Local Maximum Loan Amounts
FHA generally sets maximum loan amounts on acounty-by-county basis.
lLimit may be adjusted periodically to reflect changes in the cost of housing.
lCheck with a local lender for the current FHA maximum loan amount in your area.
Adjusted to reflect housing costs
Rules for FHA Loans
Borrower must make minimum cash investment of at least 3.5% of appraised value or sales price, whichever is less.
�So maximum loan-to-value ratio for FHA loans is 96.5%.
In recent years, both rehabilitation loans and reverse mortgages have become increasingly popular with FHA borrowers.
Section 203(k) – FHA Rehab Loans
203(k) program insures mortgages used to purchase/refinance and rehabilitate a residence with up to four units.
Section 203(k) – FHA Rehab Loans
203(k) program insures mortgages used to purchase/refinance and rehabilitate a residence with up to four units.
¡Portion of loan proceeds used to purchase or refinance property.
Section 203(k) – FHA Rehab Loans
203(k) program insures mortgages used to purchase/refinance and rehabilitate a residence with up to four units.
¡Portion of loan proceeds used to purchase or refinance property.
¡Remaining funds deposited in Rehabilitation Escrow Account.
Section 203(k) – FHA Rehab Loans
lHome must be at least one year old to be eligible for 203(k).
lHUD imposes structural and energy-efficiency standards on all rehab work.
lLuxury/temporary improvements are ineligible.
Restrictions
Section 203(k) – FHA Rehab Loans
Most of the same rules used for 203(b) program apply to 203(k).
lException: 203(k) borrower doesn’t have to pay an upfront mortgage insurance premium.
No UFMIP
Section 203(k) – FHA Rehab Loans
For loan amount rules, property’s value is least of:
1. property’s current value, plus costs of rehabilitation;
2. existing debt to be refinanced, plus costs of rehabilitation; or
3. 110% of property’s value after rehabilitation.
Determining maximum loan amount
Section 255 – FHA HECMs
FHA calls its reverse mortgages home equity conversion mortgages (HECMs).
Used by elderly homeowner to convert equity into monthly income or line of credit.
lRepayment not required as long as home remains owner’s primary residence.
Home equity conversion mortgages
Section 255 – FHA HECMs
lHomeowner must be at least 62.
lProperty must be principal residence and owned free and clear (or with only small mortgage balance).
lLoan amount depends on local area maximum, appraised value, current interest rate, and borrower’s age.
lNo income requirements or credit qualifications.
Requirements
Section 255 – FHA HECMs
Lender recovers principal and interest when property is sold.
Any excess sale proceeds to go seller (or heirs).
Sale of property
Section 255 – FHA HECMs
Proceeds from FHA HECM can be used to purchase a 1- to 4-unit principal residence.
HECM can’t be used to buy:
lSecond home
lInvestment property
lCooperative units
lSome manufactured homes
HECMs for purchase
Section 255 – FHA HECMs
Borrower must occupy purchased property within 60 days of closing.
Any difference between HECM loan amount and purchase price must come from borrower’s own funds.
�Can’t use bridge loan or any other type of financing to make up the difference.
HECMs for purchase
Summary
FHA Rehab Loans & Reverse Mortgages
Ä203(k) programÄRehabilitation loanÄSection 255 program
ÄHome equity conversion mortgageÄHECM for purchase
Real Estate Finance Lesson 11 Cumulative Quiz
1. Which of the following is NOT a characteristic of FHA loans?
A. Maximum loan amount which varies from area to area B. Minimum cash investment of 3.5% C. Mortgage insurance is required D. No downpayment is required
2. The primary function of the Federal Housing Administration is to:
A. build homes B. insure loans C. originate loans D. purchase loans
3. An FHA loan would be appropriate for:
A. a commercial space B. a vacation home C. an investment property D. an owner-occupied primary residence
4. Which of the following is true regarding the maximum loan amount for an FHA loan?
A. The maximum loan amount changes in response to changing interest rates B. The maximum loan amount depends on the borrower's income C. The maximum loan amount varies according to area housing prices D. There is no maximum loan amount
5. In a high-cost area, the maximum FHA loan amount is:
A. 65% of the general conforming loan limit B. 65% of the median housing price in the area C. 125% of the general conforming loan limit D. 125% of the median housing price in the area
6. Which of the following will be counted toward a borrower's minimum cash investment?
A. Closing costs B. Discount points C. Prepaid expenses D. None of the above
7. Which FHA loan program provides mortgage insurance for reverse equity mortgages?
A. Section 255 B. Section 203(k) C. Section 223(e) D. Section 234(c)
8. An FHA buyer would apply for a Section 203(k) loan to:
A. buy a property in an older, declining neighborhood B. purchase and rehabilitate a property C. use a graduated payment mortgage D. use an adjustable-rate mortgage
9. To obtain FHA insurance for an adjustable-rate loan, a borrower would use a:
A. Section 203(k) loan B. Section 234(c) loan C. Section 245 loan D. Section 251 loan
10. The upfront mortgage insurance premium for FHA loans is _____ of the loan balance.
A. 0.25% B. 0.50% C. 1.0% D. 1.75%
11. A borrower obtains a 30-year FHA loan with an LTV of 90% and a balance of $100,000. What will the annual mortgage insurance premium be for the loan's first year?
A. $250 B. $500 C. $1,000 D. $1,500
12. For 30-year loans, annual FHA mortgage insurance premiums are canceled:
A. when the LTV reaches 78%, regardless of how long the borrower has paid the premium B. when the LTV reaches 78%, as long as the borrower has paid the premium for at least five years C. when the LTV reaches 80%, as long as the borrower has paid the premium for at least five years D. Mortgages with a 30-year term are not charged an annual MIP
13. A buyer buys a house for $100,000, using an FHA loan. The seller offers to pay $4,000 in discount points on the buyer's behalf. What contributions would be considered to be inducements to purchase rather than seller contributions?
A. $0 B. $1,000 C. $2,000 D. $4,000
14. Which of the following would be considered an inducement to purchase, if a seller paid for part or all of it?
A. Closing costs B. Discount points C. Moving expenses D. Upfront MIP
15. Who may provide secondary financing to cover the minimum cash investment for an FHA borrower?
A. A borrower's parent B. A real estate agent C. An institutional lender D. The seller
16. Which of the following is a rule the FHA uses to prevent abusive property flipping?
A. The resale price must not be more than 10% over the original sales price B. The sale must be an arm's length transaction C. The sales price must not exceed the median home price for the area D. More than 90 days must have passed since the seller bought the property
17. An FHA borrower generally may not exceed a _____ fixed payment to income ratio and a _____ housing expense to income ratio.
A. 43%; 31% B. 43%; 28% C. 36%; 31% D. 36%; 28%
18. Which of the following would not be considered a compensating factor which would allow the borrower to exceed maximum income ratios?
A. Applicant lives in an area with low median housing prices B. Applicant's education indicates potential for greater earnings C. Large downpayment D. Proposed housing expense is only a small increase over current housing expense
19. An FHA borrower will not need to have cash available at closing for:
A. prepaid expenses B. reserves C. the minimum cash investment D. upfront MIP (if it's not being financed)
20. Which of the following is not a way for an FHA borrower to cover the minimum cash investment?
A. Use a loan secured by collateral other than the home B. Use gift funds from a charitable organization C. Use gift funds from his real estate agent D. Use secondary financing from a relative