FHA Loans: Things To Consider

First review the requirements and common fees for FHA loans. The requirements can be broken down into three ideas.  The first is capacity. Are you making enough money to pay for the new loan without difficulty? In order to qualify for an FHA loan the combined gross monthly income of borrowers should normally be at least three times greater than the projected monthly mortgage payment (including taxes and insurance).

The second is collateral. Do you have equity in your home to get a traditional FHA loan? Through the traditional FHA program one can refinance up to 97% of the current appraised value of a home. Through the new Homeowner Affordability and Stability Plan you can finance up to 105% of of the current value of the home.

The final is character. This is the credit score required for traditional FHA loans. Your credit history comes into play with any home loan application. Lenders insist that borrowers show that they are accountable and that they assiduously seek to meet their financial obligations. The minimum credit score needed for an FHA loan is now 640.

As with any mortgage there are fees associated with government-backed loans. Some people assume the government is the lender with FHA loans but that is not the case. FHA loans are simply loans that are backed or insured by the federal government. In other words regular banks lend the money but with an FHA loan it is like having Uncle Sam co-sign with you.

What are the fees involved with an FHA loan?

Depending on the size of the loan and the terms, bank fees will usually range between about $1100 to $5000.

There are fixed fees that usually amount to about $1100 and then it is common for there to be a loan origination fee of at least 1% of the loan amount. Title and escrow fees are fees charged by the title company and vary from state to state. It is common for these fees to tally $1000-2000. The larger the loan, the larger the title and escrow fees. Another cost are pre-paid items which are pre-payments on property taxes and homeowners insurance.

FHA insists that taxes and insurance be included in the escrow account and paid monthly. While these aren’t fees (since you are simply paying ahead on taxes and insurance) they do need to be added to the loan amount or otherwise paid in advance.

Finally, there is a 1.75% mortgage insurance premium that Uncle Sam requires in exchange for essentially co-signing on your FHA loan. This mortgage insurance premium (along with the mandatory monthly mortgage insurance fees) helps keep the FHA solvent and able to pay the banks back when FHA borrowers default on their loans. This fee does not apply to conforming loans refinanced under the Homeowner Affordability and Stability Plan. Some other items you will need as you go through the process include: your last two years W2′s and recent pay stubs for income verification, plus two months of recent bank statements for asset verification. Other verifications are occasionally needed as well.

Now what? Contact someone who can help you get started in the process and can get FHA loans done in as little as Ten Days!

As with any mortgage there are costs associated with government-backed loans. Some people think the government is the lender with FHA loans but that is not the case. FHA loans are simply loans that are backed or insured by the federal government.  Regular banks lend the money but with an FHA loan it is like having Uncle Sam co-sign with you.

Having Uncle Sam co-sign means people with less than perfect credit can get an FHA home loan whereas the banks would have rejected them otherwise (though banks are requiring at least a 640 credit score even with FHA loans). Having government backing on a loan also means that borrowers can get up to 97% of the appraised value of a home with traditional FHA loans rather than the 80-90% limit most banks impose on conventional loans. FHA loans also allow you to get the rates of those with excellent credit.  FHA loans are often the best or only solution for people with not much equity or less than stellar credit. But the fee structures on FHA loans are similar to conventional loans.

FHA loans: What fees are there?

Bank fees can range anywhere from about $1100 to $5000 depending on the size of the loan and the terms worked out. There are fixed fees that usually amount to about $1100 and then it is common for there to be a loan origination fee of at least 1% of the loan amount. Title and escrow fees are fees charged by the title company and vary from state to state. It is common for these fees to tally $1000-2000. The larger the loan, the larger the title and escrow fees. Another cost are pre-paid items which are pre-payments on property taxes and homeowners insurance. FHA insists that taxes and insurance be included in the escrow account and paid monthly. While these aren’t fees (since you are simply paying ahead on taxes and insurance) they do need to be added to the loan amount or otherwise paid in advance. Finally, there is a 1.75% mortgage insurance premium that Uncle Sam requires in exchange for essentially co-signing on your FHA loan. This mortgage insurance premium (along with the mandatory monthly mortgage insurance fees) helps keep the FHA solvent and able to pay the banks back when FHA borrowers default on their loans. This fee does not apply to conforming loans refinanced under the Homeowner Affordability and Stability Plan. Some other items you will need as you go through the process include: your last two years W2′s and recent pay stubs for income verification, plus two months of recent bank statements for asset verification. Other verifications are occasionally needed as well.

So as an example you should expect fees on an FHA loan of about $150,000 to look something like this: ~$2500 in bank fees, ~$1200 in title fees, ~$1300 in prepaid items, and ~$2625 for the upfront FHA mortgage insurance premium. That adds up to more than $7500 added to the overall loan amount after the refinance. Be prepared for balance increases as you look to refinance.

Of course the positives of refinancing into a fixed-rate FHA loan often far outweigh the negatives of a slightly higher mortgage balance. If you are in an adjustable rate mortgage (ARM) that is about to shoot up or just in a bad loan in general you can often lower your monthly payments by hundreds of dollars. Not only does a lower monthly payment ease your month to month burden but you will usually save a lot of money in the long run in spite of the refinance fees discussed here. As a general rule, the longer you plan to stay in your home the more sense getting a refinance makes.

What to do next? Contact someone who can help you get started in the process and can get FHA loans done in as little as Ten Days!