FHA
FHA • Conventional • Rural Development • VA
THE FHA INSURANCE PLAN
The Federal Housing Administration (FHA) was created by Congress in 1934 as part of the National Housing Act. The purpose of the act, and of the FHA, was to generate new jobs through increased construction activity, to exert a stabilizing influence on the mortgage market, and to promote the financing, repair, improvement, and sale of real estate nationwide.
Today the FHA is part of the Department of Housing and Urban Development (HUD). Its primary function is insuring mortgage loans; the FHA compensates lenders who make loans through its programs for any losses that result from borrower default. The FHA does not build homes or make loans.
In effect, the FHA is a giant mortgage insurance agency. Its insurance program, known as the Mutual Mortgage Insurance Plan, is funded with premiums paid by FHA borrowers.
CHARACTERISTICS OF FHA LOANS
The typical FHA loan has a 30-year term, although the borrower usually has the option of a shorter term (15 years or less). Recently FHA adjustable mortgages became available. The FHA requires all the loans it insures to have first lien position.
The FHA used to set a maximum interest rate for FHA loans, but now the rate for each loan is freely negotiated between the borrower and the lender. As a result, interest rates for FHA loans are determined by market forces, in the same way that the rates for conventional loans are determined.
The lender will charge a 1% origination fee on an FHA loan, and may also charge a discount fee (points). The points can be paid by the borrower or by another party, such as the seller. Borrowers do have the option to pay no origination or discount points.
FHA loans have a number of features that distinguish them from conventional loans. Here is a list of the most significant differences:
Less stringent qualifying standards. It’s easier to qualify for an FHA loan than for a conventional loan.
Low down payments. The down payment required for an FHA loan (referred to as the minimum cash investment) is often considerably less than it would be for a comparable conventional loan.
Secondary financing restrictions. The borrower may not use the secondary financing from the seller or a lender to make up any part of the required cash investment. (Secondary financing from a family member is allowed for the minimum cash investment, however).
Borrower may finance the closing costs. An FHA borrower can finance the closing costs along with the sales price. This is not ordinarily permitted with a conventional loan.
Mortgage insurance is required on all loans. Regardless of the size of the down payment, mortgage insurance is required on all FHA loans for at least the first five years. (By contrast, private mortgage insurance is ordinarily only required for a conventional loan while the loan-to-value is higher than 80%). Mortgage Insurance will drop off after the owner’s loan-to-value reaches 78% and they have had the loan for five years.
No prepayment charges. Some conventional loans provide that the lender may impose a substantial penalty if the borrower pays off the loan within the first few years of its term. FHA loans may be paid off at any time without additional charges. (Lenders may require FHA borrowers to make any pre-payment on a regular installment due date, and for loans made before August 1985, to give 30 days written notice of their intention to prepay.)
The home must be owner-occupied primary residence. FHA borrower must intend to occupy the property they’re buying. The property must be used as the borrower’s primary residence, not as a second home (except in special cases involving hardship).
Almost every new FHA-insured loan has the characteristics listed above. Other features of the loan are determined by the particular FHA program through which it is insured.
Current FHA loan limits for a single-family home in the greater Portland area is $417,000.
Big River Mortgage
10121 SE Sunnyside Road
Suite 170
Clackamas, OR 97015
P::503-496-4940
F::503-496-4941
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