HUD and FHA Mortgage Assistance for Homebuyers
The U.S. Department of Housing and Urban Development (HUD), along with the Federal Housing Administration (FHA), offer a variety of programs to make the dream of owning a home a reality. These programs can help you afford the home of your dreams, reduce costs for mortgage insurance, and even help with renovation costs if you are purchasing an older home. HUD and FHA strive to help millions of Americans afford the home of their dreams.
If you want to purchase a home and you need information about HUD and FHA programs that may be able to assist in making your dream home more affordable, we can help. Contact Consolidated Credit today at 1-800-435-2261 to speak with a HUD-approved housing counselor. Your counselor can provide more information to help you achieve your dream of homeownership.
What is HUD and How Can It Help Me?
The U.S. Department of Housing and Urban Development (HUD, for short) was established in 1965 to develop national policies and programs that address housing needs in the U.S. One of HUD’s primary missions is to create a suitable living environment for all Americans by developing and improving the country’s communities and enforcing fair housing laws.
HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans available for lower- and moderate-income families through its FHA mortgage insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms. HUD also seeks to protect consumers through education, Fair Housing Laws, and housing rehabilitation initiatives.
What is the FHA and How Can It Help Me?
The Federal Housing Administration (FHA) was established in 1934 to advance opportunities for Americans to own homes. It is now an agency under HUD. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy a home.
The FHA works to make homeownership a possibility for more Americans by offering programs to make homeownership more affordable for more consumers. With the FHA, you don’t need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be as little as a few months’ rent. In addition, your monthly payments may not be much more than rent.
Lender claims paid by the FHA mortgage insurance program are drawn from the Mutual Mortgage Insurance fund. This fund is made up of premiums paid by FHA-insured loan borrowers. No tax dollars are used to fund FHA programs.
Understanding FHA Loans and the FHA Lending Process
FHA-insured loans are available to any consumer who meets the credit requirements, can afford the mortgage payments and cash investment and who plan to use the mortgaged property as a primary residence. FHA loan limits vary throughout the country, from $115,200 in low-cost areas to $208,800 in high-cost areas. The loan maximums for multi-unit homes are higher than those for single units and also vary by area. Since the maximum loan amounts are linked to the conforming loan limit and average area home prices, the FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits.
With the exception of a few additional forms, the FHA loan application process is similar to that of getting a conventional loan. With new automation measures, FHA loans may be originated more quickly than before. If you don’t require a face-to-face meeting with your lender, you can apply for an FHA loan via mail, telephone, online or through video conference.
There is no minimum income requirement, but you must prove steady income for at least three years, and demonstrate that you’ve consistently paid your bills on time. Income can come from permanent or seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by family. Part-time pay, overtime, and bonus pay also count, as long as they are steady. Special savings plans, such as those set up by a church or community association, qualify, too. Income type is not as important as income steadiness when it comes to securing an FHA-insured loan.
The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt. With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing and other debt. Short-term debt doesn’t count as long as it can be paid off within 10 months. In addition, some regular expenses, like child care costs, are not considered debt. Talk to your lender or real estate agent about meeting the FHA debt-to-income ratio.
You may qualify to exceed the debt-to-income ratio limits if you have:
- A large down payment
- A demonstrated ability to pay more toward your housing expenses
- Substantial cash reserves
- Your net worth is enough to repay the mortgage, regardless of your income
- You can provide evidence of an acceptable credit history with limited credit use
- You have less-than-maximum mortgage terms
- You have funds provided by an organization
- You have a decrease in monthly housing expenses
In general, you must have a down payment of at least 3% of the purchase price of the home to qualify for an FHA-insured loan. Most affordable loan programs offered by private lenders require between a 3%-5% down payment, with a minimum of 3% coming directly from the borrower’s own funds. Besides your own funds, you may use cash gifts or money from a private savings club to make the down payment for an FHA loan. If you can do certain repairs and improvements yourself, your labor may be used as part of a down payment (called “sweat equity”). If you are doing a lease purchase, paying extra rent to the seller may also be considered the same as accumulating cash.
The FHA is generally more flexible than conventional lenders in its qualifying credit guidelines. In fact, the FHA allows you to reestablish credit if:
- Two years have passed since a bankruptcy was discharged
- All judgments have been paid
- Any outstanding tax liens have been satisfied or appropriate arrangements have been made to establish a repayment plan with the IRS or State Department of Revenue
- Three years have passed since a foreclosure or a deed-in-lieu has been resolved
You can even qualify for an FHA loan if you have no credit history. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.
Except for the addition of an FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan. The FHA requires a single, upfront mortgage insurance premium equal to 2.25% of the mortgage to be paid at closing (or 1.75% if you complete the HELP program). This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will be responsible for an annual premium that is paid monthly if your mortgage term is more than 15 years or if you have a 15-year loan with an LTV greater than 90%. It’s important to note that closing costs can’t be rolled into an FHA loan; however, you may be able to use the amount you pay for closing costs to help satisfy the down payment requirement. Ask your lender for details.
Assuming an FHA Loan
You can assume an existing FHA-insured loan, or, if you are the one selling a property with an FHA loan, you can allow the buyer to assume yours. Assuming an FHA-insured loan can be very beneficial, since the process is streamlined and less expensive compared to the process for securing a new loan. Also, assuming a loan can often result in a lower interest rate. The application process basically consists of a credit check and no property appraisal is required. You must also demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.
FHA Loan Products
The following provides a list of types of FHA loans you can receive with a brief description of each type of loan:
- 203(b) loan: This is the most commonly used FHA program. It offers a low down payment, flexible qualifying guidelines, limited lender’s fees, and a maximum loan amount.
- 203(k) loan: This is a loan that enables the homebuyer to finance both the purchase and rehabilitation of a home through a single mortgage. A portion of the loan is used to pay off the seller’s existing mortgage and the remainder is placed in an escrow account and released as rehabilitation is completed. Basic guidelines for 203(k) loans are as follows:
- The home must be at least one year old
- The cost of rehabilitation must be at least $5,000, but the total property value – including the cost of repairs – must fall within the FHA maximum mortgage limit
- The 203(k) loan must follow many of the 203(b) eligibility requirements
- Talk to your lender about specific improvement, energy efficiency and structural guidelines
- Energy Efficient Mortgage (EEM): An Energy Efficient Mortgage allows a homebuyer to save future money on utility bills. This is done by financing the cost of adding energy-efficiency features to a new or existing home as part of an FHA-insured home purchase. The EEM can be used with both 203(b) and 203(k) loans. Basic guidelines for EEMs are as follows:
- The cost of improvements must be determined by a Home Energy Rating System or by an energy consultant. This cost must be less than the anticipated savings from the improvements.
- One- and two-unit new or existing homes are eligible; condos are not
- The improvements financed may be 5% of property value or $4,000, which ever amount is greater. The total must fall within the FHA loan limit.
- Title I Loan: A Title I loan is given by a lender and insured by the FHA. It is used to make non-luxury renovations and repairs to a home. It offers a manageable interest rate and repayment schedule. Loans are limited to between $5,000 and $20,000. If the loan amount is under $7,500, no lien is required against your home. Ask your lender for details.
The FHA also insures loans for the purchase or rehabilitation of manufactured housing, condominiums, and cooperatives. It also has special programs for urban areas, disaster victims, and members of the armed forces. Insurance for ARMS is also available from the FHA.
To obtain an FHA-insured loan, contact an FHA-approved lender, such as a participating mortgage company, bank, savings and loan association, or thrift. For more information on the FHA and how you can obtain an FHA loan, visit the FHA section of the HUD website or call a HUD-approved counseling agency at 1-800-569-42871-800-569-4287 or TDD: 1-800-877-83391-800-877-8339. For more information about HUD, visit the HUD website or look in the phone book “blue pages” for a listing of the HUD office near you.