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Government backed mortgage
Government backed mortgage are the type of mortgage which is secured by the federal agency. There are 3 types of loan namely FHA, VA, USDA. Depending on the borrower's situation, they may qualify for one or more. It is easier to qualify for these types of loans when compared to the conventional loan. Even though these loans are secured by federal agency, the same mortgage agent can facilitate the loan.
FHA Loan
It is a type of loan when the loan in insured by the Federal Housing Administration. FHA loans are possible with a minimum down payment of 3.5% and credit scores of as low as 580. With credit score of 500 - 579, you may be eligible with a 10% down payment. The debt to income ratios are also higher than conventional loans.
The property (home, multifamily, condo, town home, manufactured home) that the borrower is planning to buy must meet the standards outlined by the FHA. There is an upfront mortgage insurance premium that has to be paid initially or can be rolled into the loan. The loan amount cannot exceed the conformed limit on that area. FHA provides loans with a low down payment and a low credit score, which makes the dream of buying home possible who are not eligible for the conventional loans.
Mortgage Insurance premium
Mortgage insurance premium is used in the loans underwritten by Federal housing administration (FHA). This is an insurance premium charged by the lenders for the borrowers who take out loans backed by Federal Housing Administration. This is charged by the lenders to offset a low down payment made by the borrower. FHA loan can be obtained by making a down payment as low as 3.5% and a minimum credit score of 580. In the event of a Homeowner's death, the mortgage insurance premium pays off their mortgage debt.
Usually, there are two premiums paid - an upfront fee and an annual fee. The upfront fee is usually 1.75% of the loan amount.
Some lenders may allow the cancellation of mortgage insurance premium after 11 years if at least 10% down payment has been made.
This can be paid either as an upfront fee or may be rolled into the mortgage for the entire term of the loan.
The monthly premium added to the monthly payments in addition to the upfront fee varies usually from 0.45% - 1% of the loan amount per year.
These monthly premiums differ based on various factors such as loan amount, size of the FHA down payment, the length of the loan term.
The mortgage insurance premium does not vary based on credit score.
The upfront and monthly mortgage insurance costs increase the overall loan amount and the monthly mortgage payments.
Eligibility
The borrowers must follow these guidelines to be eligible. The guidelines may change according to the lenders.
FICO score of at least 580 is needed to be eligible for the loan with 3.5% down payment.
FICO score of 500 - 579 is needed to be eligible for the loan with 10% down payment.
Two years of Employment History - Pay stubs, Tax returns, Bank statements.
Property must meet the required HUD guidelines and standards and appraised by the FHA approved appraiser.
Debt to income of at least 31% of gross monthly income, calculated for the monthly mortgage payments.
Debt to income ratio of at least 43% of gross monthly income , calculated for the monthly mortgage payments plus all the other debts.
FHA loan limits are based on the property values in a particular county in which the home is located. These loan limits are set by Federal Housing Financing Agency. Usually areas with higher cost of living has higher limits.
FHA is only for the owner occupied primary residence, it is not for rental or investment properties.
FHA has different limits for one unit and multi unit properties.
203(K) Rehab Loan
FHA 203(K) rehab loan is a type of loan where the home purchase and renovation can be done under one mortgage transaction. Those who are thinking about buying a fixer-upper that requires multiple repairs and significant rehabilitation can roll the costs of both the property and these projects into one loan. But conventional loan option may also be a better option for homeowners who are considering making upgrades to their home. The work for the repairs are usually expected to start within 30 days from closing and are expected to be completed within 6 months.
Streamline 203(K) Rehab Loan
This type of loan is frequently utilized for homes requiring fewer repairs. They usually provide up to $35,000 for home repairs and renovations. Due to this, the application process is simple.
Standard 203(K) Rehab Loan
Typically, this type of loan is used for bigger repairs and renovations. It provides coverage to major structural changes above $35,000. Renovations are expected to be at least $5000 to be eligible and U.S Department of Housing and Urban Development Consultant are expected to be hired to do the renovation job.
The loans may be used for landscaping, fixing safety hazards, roof repair, curb appeal. Luxury expenses such as outdoor fireplace, BBQ pit, swimming pool are not considered to be eligible expenses for FHA loan.
Home Equity Conversion Mortgage
This is also called as a Reverse mortgage. This type of mortgage is best suited for seniors who have equity in their homes and wish to supplement their income. This mortgage is only available through the FHA approved lender. The amount available for withdrawal depends on a number of factors such as age of the youngest borrower or eligible non borrowing spouse, current interest rate, Lesser of the appraised value or sales price of the home or the FHA mortgage limit for the home.
Eligibility
Be at least 62 years of age
Own the property or have a considerable amount of equity or loan paid on the property.
Does not have any delinquency or debt.
Have the financial capacity to continuously pay for the property tax, insurance, homeowners association fees etc.
The property may be a single family, 1 to 4 unit where one of the unit is occupied by the owner, FHA approved condominium, manufactured home that meets FHA requirements.
Because of its complex nature, HUD requires all its borrowers to complete a Reverse mortgage counseling session. There are two types of HECMs - fixed rate and adjustable rate.
Fixed rate HECM
Fixed rate option has the same interest rate throughout the life of the loan and offers only one way to receive payment, as a lump sum.
Adjustable rate HECM
Adjustable rate option has a variable interest rate and it varies through the life of the loan and has multiple payment options - lump sum, monthly payments, line of credit or a combination of the three.
245(a)Loan
Home buyers who are looking for a 245(a)Loan, must first meet the standard requirements needed for a FHA loan. This is also called as Graduated payment mortgage. These types of loans are best suited for families with low income whose income is expected to rise in the future as the mortgage payments start small and continue to rise gradually. This loan can be packaged either as a 15 year mortgage or a 30 year mortgage.
The drawback or disadvantage on this type of loan is that it might result in Negative Amortization. If the lowered monthly payments does not even cover a major portion of interest, then the equity on the home gets added and result in a balloon payment at the end of the term. Choosing the right plan that fits the income structure is crucial. This is ideal for first time home buyers or for the buyers who don't have problem making a balloon payment,
The graduated payment mortgage has 5 different plans to choose, 3 plans in a 5 year graduation option and 2 plans in a 10 year graduation option. 5 year graduation option has increases of 2.5% per year, 5% per year, 7.5% per year and 10 year graduation option has increases of 2% per year and 3% per year option. Most borrowers choose one of the 10 year graduation option as they anticipate gradual or slow increase in their income potential.