FHA-Insured Loans Overview

Seller contributions, such as closing costs, prepaid expenses, or mortgage interest, are limited to 6% of the sales price. Amounts exceeding 6% are considered inducements to purchase.

Inducements to purchase, like decorating funds, repairs, moving expenses, or buyer's agent fees, are deducted from the sales price, lowering the allowable loan amount.

Secondary financing, like a loan from a family member, can be used for FHA borrowers if it doesn't exceed the maximum loan amount and the borrower qualifies for the combined payments.

FHA has specific rules for sellers to prevent abusive property flipping, involving rapid sale and resale with substantial profit.

A creditworthy buyer can assume an FHA loan if they intend to occupy the property as their primary residence. The original borrower is automatically released from liability.

The upfront mortgage insurance premium (UFMIP) for FHA loans is 1.75% of the base loan amount and can be paid in cash at closing or financed. A financed UFMIP is not included in the base loan amount used to calculate the maximum loan amount.

The annual mortgage insurance premium (MIP) for FHA loans varies between 0.45% and 1.05% of the loan balance. The exact percentage depends on loan term, LTV, and base loan amount. For loans closed after June 2, 2013, the annual MIP is paid for the entire loan term if the LTV is over 90%. For loans with 90% or lower LTV, the annual MIP is canceled after 11 years.

FHA underwriting standards generally require less strict requirements compared to conventional loans.

Even a mediocre credit score does not automatically disqualify an applicant for an FHA loan. However, a credit score of 500 or lower is not permitted. If there are multiple credit scores, the middle (or lower of two) is used. If two or more people are applying, the lowest score is used. FHA even allows manual underwriting for applicants with limited credit history.

FHA considers the applicant's effective income, fixed payments, and proposed housing expense for loan underwriting. Effective income is income expected to continue for the first three years of the loan. Fixed payments include housing expenses like principal, interest, property taxes, insurance, MIP, and HOA dues, as well as recurring debt payments. FHA requires the debt-to-income ratio (DTI) to be 43% or less and the housing expense-to-income ratio (HETI) to be 31% or less.

An FHA borrower must have enough cash to cover closing costs, including the minimum cash investment, prepaid expenses, borrower-paid discount points, upfront MIP, and other closing costs not financed or paid by the seller.

An FHA loan may still be approved, even if income ratios exceed limits, if the applicant shows compensating factors, like minimal increase over the previous housing expense, substantial reserves, no discretionary debt, significant additional income outside of 'effective income', and adequate residual income.

FHA Section 203(k) insures mortgages used to purchase or refinance one-to-four-unit properties, as long as the rehabilitation work meets HUD standards and proceeds are kept in a HUD-approved escrow account.

An FHA Section 255 loan, or 'reverse mortgage', allows homeowners 62 years or older to convert their home equity into income or a line of credit. The homeowner doesn't have to pay it back while they live there.

Allowable sources for FHA closing cash include gift funds from family, friends, employers, charities, or government agencies; secondary financing complying with specific rules; unsecured loans from family members; and loans from third parties not involved in the transaction, as long as it's not secured by the home being purchased.

The maximum FHA loan amount for a one-unit property in most areas. It is subject to change annually.

In high-cost areas, the maximum FHA loan amount can exceed the basic amount and reach a higher ceiling, which varies depending on the location. This ceiling applies to areas with high housing costs like Alaska, Hawaii, and certain parts of Guam and the Virgin Islands. For 2018, the "ceiling" was $679,650.

The maximum loan amount is determined on a county-by-county basis, considering local housing costs. This means that the maximum loan amount can vary depending on the location within a state.

The minimum cash investment required for an FHA loan is 3.5% of the appraised value or sale price, whichever is lower. This means the borrower needs to provide at least 3.5% of the purchase price as a down payment.

The seller can contribute a maximum of 6% of the sales price towards closing costs, prepaid expenses, discount points, temporary or permanent buydown, buyer's mortgage interest, or upfront premium for mortgage insurance. These contributions must be reasonable and cannot be used to bypass FHA's LTV and minimum cash investment rules.

The seller may pay some closing costs, but contribution is limited to 6% of the sales price. Any amount exceeding 6% is considered an inducement to purchase, which lowers the allowed loan amount.

Secondary financing can be used to supplement the borrower's own funds, but it doesn't have to be from a traditional lender. A parent, relative, or even a charitable organization can provide additional funds.

The maximum debt-to-income ratio (DTI) allowed for FHA loans is 43%, and the housing expense to income ratio (HETI) is 31%. However, these limits can be exceeded with compensating factors, such as low median housing prices, no discretionary debt, or large reserves.

An upfront mortgage insurance premium (UFMIP) is required for FHA loans and can be paid in cash at closing or financed. The financed UFMIP is not added to the base loan amount and doesn't affect the maximum loan amount.

The FHA will cover any difference between the loan amount and the sale proceeds when the property is sold.

The FHA HECM (Home Equity Conversion Mortgage) allows homeowners 62 years or older to convert their home equity into income or a line of credit. The homeowner doesn't have to repay the loan while they live in the house.

FHA loan amounts are capped by county-specific limits based on housing costs, with higher limits for expensive areas.

The loan amount is determined by the FHA ceiling, appraised value, interest rate, and borrower's age.

FHA loans can be used to purchase one- to four-unit properties as a principal residence.

The loan amount is capped based on the median housing prices in the area, ensuring FHA loans are targeted towards low- and moderate-income borrowers.

The loan-to-value ratio (LTV) ensures that the loan amount doesn't exceed a certain percentage of the property's value, minimizing the lender's risk in case of foreclosure.

The minimum cash investment, typically 3.5% of the purchase price, aims to reduce the risk of default. It demonstrates the borrower's personal commitment to the property.

A seller contribution is any financial assistance provided by the seller towards closing costs, prepaid expenses, or mortgage interest. It is limited to 6% of the sales price for FHA loans.

An inducement to purchase is any financial benefit provided by the seller beyond the 6% contribution limit. It reduces the allowable loan amount for FHA financing.

The borrower's minimum down payment required for an FHA loan, generally 3.5% of the property's appraised value.

These are payments made by the seller to cover some of the buyer's closing costs. For FHA loans, the seller's contribution is limited to 6% of the sales price.

This refers to a situation where the seller offers financial incentives beyond the 6% contribution limit to encourage a buyer. Such inducements lower the allowable loan amount for FHA financing.