What the heck is an FHA Mortgage and what's the deal with it? (xpost) : personalfinance

What the heck is an FHA Mortgage and what’s the deal with it? (xpost) : personalfinance

Fast facts about FHA…

  • 3.5% down is the minimum, not the maximum.

  • Very flexible on credit and income standards, because it is a….

  • …Government insured mortgage. There is monthly mortgage insurance which for SFRs @ 3.5% down is priced at 0.85% regardless of your credit. You can put 50% down if you wish, FHA will still have monthly mortgage insurance. PMI is Private Mortgage Insurance, and FHA insurance is not private, so technically it’s not PMI (but don’t bite anyone’s head off if they call it PMI, I’ve even heard industry insiders call FHA mortgage insurance PMI). FHA mortgage insurance is there for the life of the loan, PMI drops off at 20% equity and once XYZ and requirements are met.

  • The above means that for good credit scenarios, if you can swing 5% down, Fannie Mae / Freddie Mac with PMI will often be a better deal because PMI rewards good credit whereas FHA mortgage insurance is 0.85% if you have an 800 FICO or if you have a 642 FICO. Conversely, there are bruised credit scenarios with 5% or 10% down where FHA is a better deal. On one that just closed, a bruised credit scenario, FHA was about $271/month better.

  • FHA will always have a lower note rate than Fannie/Freddie because it’s government insured (virtually no risk), but you need to add that 0.85% to the note rate to determine an approximation for your “effective” note rate. Mortgage APR is a wonky number that doesn’t intuitively make sense the way it does for credit card APR, but when comparing FHA v Conventional APRs, you will note that FHA will in 99.99% of cases be substantively higher.

  • Not just for first-time homebuyers and no income limits, but FHA is just for owner occupants. In almost all scenarios however, you can only have one FHA mortgage at once. If you want to keep buying up real estate at 3.5% down, you must generally first uphold your promise to live there for a year, then refinance, which frees up your FHA eligibility again. Do not commit mortgage fraud and purchase a property you don’t intend to live in using FHA financing.

  • FHA has loan limits. They are not always the same as Fannie/Freddie loan limits. To find out your max purchase price with only 3.5% down, divide the local loan limit, which you can find here, by .965. For example if your local FHA loan limit is $400k, you can go $400k / .965 = $414,507. Anything above that, which you certainly can do, you’re coming up with cash for the difference. For high cost of living areas (like my beloved Bay Area) with a max loan limit above $417k, that range between $417k and the upper limit is the “high balance” range. Your interest rate will be a tad higher in this range. If you happen to be in this range and only $2k away from a $417k loan amount, it’s often much better to make your down payment be 3.5% + $2000 just to get to that $417k number for the better rate (this is better than discount points because it’s equity, whereas discount points are just money that vanishes and you never see again).

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  • You can buy 2-4 unit properties using FHA 3.5% down, but it’s very hard to get offers accepted in a hot market. Increased loan limits for 2-4 unit properties.

  • There are currently no federal first-time home buyer programs. There are however local programs you can stack on top of FHA. Many of these programs will delay a normal closing, which every real estate agent knows, which makes it very hard to use them in a hot market. For Californians, one FTHB program I’m a huge fan of, in no small part specifically because you can still close fast with it, and because it has so few strings compared to many FTHB programs, is the CalHFA MCC. Any public agency can offer an MCC, for example some areas near me you can get an MCC through the county, through the Golden State Finance Agency, or through CalHFA. In my experience, CalHFA is the best combination of the deal and timeliness and the county MCC programs are giant piles of crap in terms of organization, etc. I suspect that it’s probably the same in the other 49 states, where the counties are one thing in terms of reliability, and there are a couple state-wide agencies that are another. Note that almost all FTHB programs, which don’t just consist of the MCC that I love, but down payment assistance too in the form of grants or 2nd mortgages, are income capped either by census tract or zip code.

  • FHA loans are assumable. In theory if rates skyrocket, this could end up being a selling point for your house. I can’t predict the future, but I wouldn’t suggest going FHA for this reason alone.

  • Interest rate pricing for FHA purchases: The moment you close on your house, move in, and hit the six month mark, you will be BOMBARDED with junk mail from people wanting to streamline FHA refinance your FHA mortgage and lower your interest rate. For various reasons (mostly relating to costs), outfits that only do FHA streamline refinances (link to HUD, not to any private company) will always have the absolute best FHA interest rate pricing on the entire planet on any given day (but they aren’t really equipped for purchases, see above about costs). If you wish to go this route, I’d suggest that to keep your life as BS free as possible, don’t just pick the lowest interest rate on all these mailers. Call the three lowest, and work with whoever seems the least mentally challenged (FHA streamline call center cubicle sweatshops don’t exactly attract the talent of my industry). A significant chunk of your FHA upfront mortgage insurance premium will be refunded and applied towards the new FHA upfront mortgage insurance premium. FHA streamline refinances have very minimal underwriting requirements, probably about 75% less paperwork and whatnot than what your purchase mortgage involved.

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  • Fun fact: 203k are FHA loans, and always have a higher interest rate than vanilla (203b) FHA financing. But guess what? It’s still FHA. That means you can streamline refinance it as described above. I’m not going to talk a lot about 203k because it’s tough to get the offer accepted in a hot market.

  • FHA has slightly higher property standards than Fannie/Freddie, but not nearly as much higher as most real estate agents (at least local to me) seem to think. Local to me in the SF Bay Area our housing stock is old, and we do FHA on century old fixer uppers all the time. Sometimes the lender (me), the agent, and the buyers, go out to the property to identify the things that need to be patched up once we have it tied up in contract. If the list of things is minimal and low cost, no biggie just go do the things (with seller’s permission, which if it’s a 100 year old house, or otherwise in neglect, they will generally agree to). For example we recently identified a below-grade un-permitted basement bathroom with a jenky pump lifting the toilet waist up to ground level and into the sewer system that was all sorts of a hot mess, no way anything about that bathroom is up to code. We tore the toilet out, put a sanitary cover over the hole, took off a shower head, tore off the shower door, put both the toilet and shower head on the shower floor, placed an upside down box on top of both hiding them, randomly put the shower door in another room in the house, threw a bunch of other boxes and crap in there, and I suggested that the agent use the term “storage closet” as he opened the door for the appraiser. Appraisal came back “as is” and issue free, documenting the room as “[the room] was once a bath room. There is a sink, BUT no toilet or shower. The room is NOT a functional bath room. It is now a storage room. The subject property meets FHA minimum building guidelines” (exact quote, the CAPS are from appraiser, not from me… he writes “was once” like it was 10 years ago, not 2 days ago, muahaha). It’s not my business, nor do I care, if they put that toilet back in 30 seconds after closing. 108 year old house, FHA and HUD and income taxes didn’t even exist when it was built. If it turns out it’s just way too beat up to go FHA because the roof is imploding, foundation visibly collapsing, etc, then invoke inspection contingency and back out.

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  • Normally, if your spouse has poor credit you can attempt to qualify for the mortgage alone. In Community Property states, such as California, however, your spouse’s debt obligations must be included in FHA debt-to-income calculations (but not Fannie/Freddie). FICO score can be ignored, but the spouse’s car payment cannot be.

  • Conversely, you do not need to be married, or even in a romantic relationship of any sort, to purchase a home with someone else using FHA financing. Local to me as millennials struggle to make it in the Area that Builds the World, this is becoming more common. However, because you are not married in this scenario, our society does not have a built-in mechanism to dispose of the house in the event of a falling out (eg, there is no divorce court if not married). For this reason, it is highly advisable to speak with a lawyer and talk about what you need to do in order to establish a one-off custom mechanism for handling any falling out that may occur. This is absolutely not my area of expertise, so I will not comment further on it.

  • Saving up 20% down will generally be the best strategy there is, period, from a numerical perspective. This is for folks that want to get into a home that they own quicker than that. Ultimately what will make you and your family happy should (ought to?) trump what the hyper-conservative PF/DaveRamsey/etc “gurus” have to say. You can’t put a dollar value on happiness. Again, saving up 20% and renting for another twenty thousand five hundred and fifty seven years is always the best from that perspective. I do not deny that for a moment.

  • You can’t hold title as an LLC or anything else fancy using FHA financing because, as one of our other posters recently put it, obviously a corporation cannot owner occupy a property and FHA loans are for owner occupants only.

  • I don’t really know what else to include in this post. One of our mods [EDIT: a mod from another subreddit, actually] just asked me to write up a quick primer, and here it is.

  • Holy crap that stream of consciousness turned into a giant wall of text. Not so “fast” after all. Sorry!