Six features first-timers should know about FHA

Because they are government-backed, Federal Housing Administration (FHA) home loans have attractive interest rates and less stringent qualifications. Loan applicants must meet credit-score and down-payment requirements, and show proof of employment and a steady income. An appraisal of the home by an FHA-approved appraiser is also required.  Following are five features of FHA loans first-time homebuyers should consider while weighing their financing options.

More flexible credit guidelines give more purchase power 

• Low Down Payment - as little as 3.5% down on single family residence, 2-4 units and FHA approved condominiums 
• 100% gift allowable for down payment 
• Lower credit requirements. 580 minimum FICO credit score. 
• Competitive market rates 
• No income restrictions 
• Limited tradelines needed 
• Higher debt-to-income ratios approval 
• Shorter waiting period for major credit events like bankruptcy

FHA loans are Transferable to potential buyers 

This means that a home buyer who finances a purchase with an FHA-insured loan and who sells the house later, when interest rates are higher, will be able to offer a potential buyer the right to assume his or her low-rate FHA loan.  In the current raising interest rate environment this is a huge advantage to FHA loans versus conventional loans.

Borrow cash for home repairs with FHA 203(k) Programs

• Full and Streamline programs available, allowed repairs/improvements vary based on program
• Low down payment
• 640 credit score
• Owner occupied only
• All rehab work must be completed by licensed and insured contractors
• FHA/HUD consultant oversees project to protect borrower

Qualifiying FHA Property Types

• 1-4 unit properties
• FHA approved condominiums (two types):
• HUD Review Approval Process (HRAP)
• Direct Endorsement Approval Process (DELRAP): Some lenders like Guaranteed Rate offer the DELRAP method, which is an “in-house” underwriting department that can review and approve FHA condo projects which means faster turn times
• Locate FHA approved condo projects 
• Planned Unit Development (PUDs): These are a community of homes that could look like single family residences, townhomes or condos, and can include both residential and commercial units, but they’re most similar to condos. 
• Modular homes
• New construction

FHA Back to Work Program

• Available to borrowers who suffered financial hardship due to reduced income or job loss
• Shortens the waiting period to obtain FHA financing to as little as one year after bankruptcy, foreclosure, deed in lieu of foreclosure or short sale.
• Program eligibility
• Must meet FHA loan requirements
• Mortgage or credit problems that resulted from a financial hardship are documented
• Client must have re-established a responsible credit history for a period of 12 months prior to application
• Client completed HUD-approved housing counseling 30 days prior to loan application

Two types of mortgage insurance premiums to pay

• Upfront premium: .75% of the loan amount, paid when the borrower gets the loan which can be rolled into the financed loan amount.
• Annual premium: .45% to 1.05%, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.

Here is a great breakdown of loan feature comparison between FHA and Conventional Loans: