FHA-Insured Loans Overview

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Questions and Answers

Sales concessions are classified as seller contributions or as inducements to purchase.

True (A)

Seller contributions are limited to 8% of the sales price.

False (B)

Inducements to purchase are added to the property’s sales price when calculating the LTV.

False (B)

Secondary financing can always be used for the borrower’s minimum cash investment.

False (B) Signup and view all the answers

An FHA loan can only be assumed by a not creditworthy buyer who intends to occupy the property primarily.

False (B) Signup and view all the answers

What is the standard percentage for the upfront mortgage insurance premium (UFMIP) on most FHA loans?

1.75% (A) Signup and view all the answers

What is the maximum allowable debt-to-income ratio for FHA loan applicants?

43% (D) Signup and view all the answers

Which credit score is typically used when applying for an FHA loan with multiple applicants?

The lowest score (D) Signup and view all the answers

What is a key requirement for the use of loan proceeds in an FHA Section 203(k) rehabilitation loan?

They must be put into an escrow account and released as the work progresses. (C) Signup and view all the answers

What is the minimum age requirement for a homeowner to be eligible for a Section 255 Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage?

62 years old (A) Signup and view all the answers

Which of these statements is TRUE regarding FHA Section 255 (reverse) mortgages?

Repayment is not required as long as the property remains the owner’s primary residence. (B) Signup and view all the answers

When can an FHA loan be assumed?

By any buyer, regardless of whether they intend to occupy the property. (D) Signup and view all the answers

What is the typical maximum housing expense to income ratio for an FHA borrower?

31% (D) Signup and view all the answers

What is the maximum loan-to-value (LTV) for an FHA loan?

96.5% (B) Signup and view all the answers

What is the maximum percentage of the sales price that a seller can contribute to a buyer's transaction in an FHA loan?

6% (D) Signup and view all the answers

What is a primary condition regarding property ownership for a FHA HECM?

The property must be owned free and clear, or have a small remaining mortgage balance. (D) Signup and view all the answers

How does the lender recover the borrowed amount and interest in a FHA HECM?

When the property is sold, with the FHA covering any shortfall. (B) Signup and view all the answers

What is a key purpose of the local loan ceiling in FHA financing?

To support low- and moderate-income borrowers. (B) Signup and view all the answers

Which of these is a common closing cost associated with FHA loans?

Discount points (C) Signup and view all the answers

Under what condition, may an existing FHA loan be assumed by a new buyer?

By any buyer, regardless of whether he intends to occupy the property (A) Signup and view all the answers

Study Notes

FHA-Insured Loans - Learning Objectives

Discuss the purpose of the FHA-insured loan program
Identify key rules governing FHA-insured loans
List the different types of FHA loan programs
Understand how maximum loan amounts vary by location
Explain how a borrower meets the minimum cash investment requirement
Calculate upfront and annual mortgage insurance premiums
Identify when secondary financing may be useful with an FHA loan
Explain when an FHA loan can be assumed
Describe underwriting requirements for an FHA loan, including income ratios

Suggested Lesson Plan

Students review the previous chapter on conventional financing using Exercise 11.1
Instructor provides overview of Chapter 11, "FHA-Insured Loans", and reviews the learning objectives for the chapter

Lesson Content - FHA Mortgage Insurance

FHA Mortgage Insurance is part of the Department of Housing and Urban Development (HUD) to promote residential real estate financing, improvement, and sale
FHA insures mortgages, but does not provide them
Borrowers apply for FHA-insured loans through FHA-approved lenders
Borrowers are liable to the federal government for any compensation FHA pays to lenders in case of default

FHA Loan Programs

Section 203(b) is the standard FHA loan program securing loans for 1 to 4-unit properties
Section 203(k) insures loans for the purchase (or refinancing) and rehabilitation of owner-occupied properties, up to 4 units
Section 234(c) covers individual units in condominiums
Section 251 covers adjustable-rate mortgages (ARMs) for owner-occupied properties up to 4 units
Section 255 insures reverse mortgages (HECMs) allowing income generation using home equity

Rules for FHA-Financed Transactions

FHA-insured homes are usually owner-occupied, principal residences
FHA maximum loan amounts are based on local median housing costs within a specific area
FHA maximum loan amounts usually match Fannie Mae/Freddie Mac conforming loan limits and are adjusted annually to reflect housing costs
Borrowers must invest a minimum of 3.5% of the property value, or sales price (lower of the two)
Loan terms are negotiable and there are specific rules to prevent property flipping transactions

Loan Charges and Closing Costs

Loan terms are generally negotiable within reasonable and customary limits within a given region or area
FHA loans generally do not have prepayment penalties
FHA restricts sales concessions from the seller to avoid circumvention of the FHA LTV (Loan To Value) rules
Seller contributions are limited to 6% of the sale price. Excess contributions are considered inducements to purchase and are subtracted from the purchase price before applying the LTV ratio.
Inducements to purchase include any funds provided to the buyer for decorating, repairs, moving costs and buyer’s agent fees

Secondary Financing

Secondary financing with FHA loans is permissible, as long as the aggregate of all loans doesn't exceed the maximum loan amount
Secondary financing from a close family member or a government agency is permissible for the minimum cash investment
Secondary financing can't be used for the borrower's minimum cash investment, except in certain cases (e.g. a close family member or government agency)

Property Flipping Prevention Rules

Stricter rules for sellers of FHA-financed properties reduce the risk of property flipping activities; sellers must be the property owner of record and must have owned the home for a minimum period of time. Sellers are more closely monitored if there are substantial increases in property value

Assumption of FHA Loans

Creditworthy buyers who intend to use the property as their primary residence can assume an FHA loan
Original borrower's liability is released automatically

FHA Insurance Premiums

FHA programs have upfront and annual premiums.
Upfront premium (UFMIP) is 1.75% of the base loan amount
Annual MIP usually ranges from 0.45%–1.05% of the loan balance, dependent on the loan's terms and the Loan-to-Value ratio
UFMIP is typically paid as part of closing costs but has financing options
Annual MIP, paid monthly/periodically, remains in effect for the entirety of the loan term

FHA Underwriting Standards

FHA underwriting is less stringent compared to conventional loans
Credit reports and scores are considered, but a score below 500 still may qualify for approval
Loan-to-value ratios vary based on credit score
Income analysis factors into FHA loan approval and the income ratio limits
Monthly effective income is assessed over a three-year period to analyze consistency
Effective income includes all regular sources of income
FHA loan limits or ratios to avoid borrower default are significant considerations

Assets Required for Closing

Borrowers need sufficient cash at closing to cover minimum cash investment, prepaid expenses, discount points for the loan if not financed, and closing costs (if not otherwise covered by seller/funding)
Acceptable funding sources include gifts from family members, a government entity, and secondary financing (but not always for the minimum investment, exceptions apply)

FHA Loan Programs and Types

Section 203(b) is the standard FHA program for purchase and refinancing
Section 203(k) is also for purchase or refinance but involves rehabilitation
Section 234(c) involves condominiums
Section 251 is for adjustable-rate mortgages
Section 255 covers reverse mortgages

Property Flipping Prevention

FHA rules are aimed at preventing the risky practice of buying a property solely for the purpose of quickly reselling it for a higher profit; these rules apply directly to sellers

FHA Loan Assumptions

FHA loans can be assumed but only by particular buyers who intend to occupy the property as their primary residence
Original borrower's liability is released automatically upon assumption

FHA Quiz Questions

Comprehensive review questions concerning FHA loan basics are provided.

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Description

This quiz covers essential aspects of FHA-insured loans, including their purpose, key regulations, and different types available. Students will also explore the calculation of mortgage insurance premiums and underwriting requirements. Prepare to test your knowledge on the intricacies of FHA financing!