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FHA Loans – The Basic 203(b) Home Loan

This post will be the first of four brief articles covering the most important aspects of what has become the darling of the real estate market – the venerable FHA home loan.

Established in 1934, the Federal Housing Administration, as stated on its website “….  has served as an economic backstop working hand-in-hand with lenders to provide consumers with access to safe and affordable loans, even during times of tremendous market volatility as with the current subprime situation“.

This post will describe some highlights of the most common type of FHA financing, known as the Section 203(b) loan.

Subsequent posts will detail credit requirements; income and employment;  and finally assets, down payment and cash required to close.

Maximum Loan Amount

The current limit is the same as it was in 2009, varies county-by-county and is the lesser of 125% of the median house price in a given area, or the following amounts:

• Single family unit – $729,750
• Two family unit  – $934,200
• Three family unit  – $1,129,250
• Four family unit   – $1,403,400

Property Types Allowed

As noted above, FHA financing is available for single-family homes, condos and PUDs as well as 2 to 4 family properties provided that they are owner-occupied.  Second homes and investment properties are not allowed.  Condominiums must be FHA approved and HUD recently made it somewhat easier for a lender to initiate the approval process if necessary.

Other Notable Features

• Can be used to purchase or refinance a primary residence
• Minimum allowable down payment is 3.5% of the purchase price (for homebuyers with FICO scores below 580 the minimum down payment will be 10%)
• Down payment can be gifted
• For now the “Upfront Mortgage Insurance Premium” (UFMIP) is 1.75% of the purchase price; however this will be increased to 2.25% April 5, 2010.  FHA still allows this premium to be rolled (financed) into the loan
• Seller can credit up to 6% of the purchase price to closing costs (HUD plans to lower the maximum amount of Seller credit to 3% later this year, the date to be announced)
• No financial reserves required for 1 or 2 units, 3 months reserves for 3 to 4 unit properties
• Allows non-occupant co-borrowers (for example, Mom and Dad can be on the loan to help qualify, even though they will live elsewhere)
• Allows cashout refinancing to 95% of value ($417,000 maximum; 85% over $417,000)
• No prepayment penalties
• A borrower can have only one FHA loan at a time (fairly obvious since these are strictly owner-occupied loans and a person cannot have two “primary” residences.  Exceptions: you are relocating, selling your home to purchase a new home, or a divorce situation
• U.S. citizenship is not required:  the borrower must have a valid Social Security Number, hold Permanent Resident Alien status or be eligible to work in the United States and hold the appropriate work visas.

Watch for the next article in this series to be posted very shortly which will detail the credit requirements for obtaining an FHA home loan.

for more information contact Paul Gonzales, Manager, Countywide Mortgage Inc   (760) 746-7388  or  paulforloans@aol.com