FHA Loan Introduction

FHA guidelines provide substantial credit flexibility and other benefits to borrowers. FHA loans are not credit score driven. Instead, they are written in a way that provides the borrower the benefit of the doubt that there had been, at some point in their past, circumstances beyond their control, and as long as the borrower has recovered from those circumstances in a reasonable manner, they’re generally going to be credit-eligible for an FHA loan.

Guideline Information

The FHA guidelines are forgiving about circumstances that many other lending programs, including conventional, are not favorable towards.The FHA states that a borrower, recovering from a Chapter 7 bankruptcy, can be eligible for an FHA loan two years after being discharged. An exception can be made after 1 year if the bankruptcy was due to extenuating circumstances that can be documented and are not likely to recur.

To be eligible for an FHA loan after a foreclosure, a three-year wait time is required after being discharged. An exception to the 3 year rule can be made if the foreclosure was due to extenuating circumstances that can be documented. If the borrower has filed for a Chapter 13 bankruptcy or is in a consumer credit counseling program (where the borrower has re-established a negotiated repayment term based on their credit items), and has been on the plan for 12 months making consistent payments on time, the borrower will be eligible for an FHA loan.

Automated Underwriting: Capability to Reach Higher Ratios

Automated underwriting is a valuable tool that allows you to qualify borrowers at higher ratios, therefore allowing them to buy a larger home for the same amount of money, combined with low interest rates available through the FHA. However, it is not available to most high LTV first time home buyer loan programs, such as the emerging markets national program and other programs from non-conforming lenders.

If the borrower has a clean credit profile and decent asset reserves, it is not uncommon to see debt-to-income ratios as high as 50%, or higher, approved through an automated underwriting system for FHA-insured loan programs.

Great Rates and Low Monthly Mortgage Insurance

A distinct advantage of an FHA insured loan, as compared to a conforming loan, is great interest rates and lower monthly mortgage insurance (MI). Depending on the lender, standard FHA loan interest rates are usually better than a conforming 30-year fixed loan. Also, the mortgage insurance premium on any FHA loan is only .05% per year, with the exception of 15 year loans with less than 90% LTV that have only a .025% annual MI premium. Compared to a conforming loan, this is substantially less expensive than most of the high LTV conventional programs in which the mortgage insurance and premium could be as high as 2.87% per year.

Adjustable Rate Options

FHA guidelines give you the option of doing hybrid Adjustable Rate Mortgages (ARM), including a 3/1 ARM and a one year ARM that has the lowest adjustment caps of any ARM in the industry. Both the FHA hybrid ARM options and the FHA one year ARM options have interest rate adjustment caps of 1% per year and 5% over the life of the loan compared to standard conforming loans in which the caps are usually set at 2% and 6%, respectively. They also tend to have a much lower margin compared to the standard treasury ARM options. The loan margin in a conforming loan is usually 2.75%, whereas FHA loans generally have a 2% margin depending on the lender and program.

Property Types Allowed

Another advantage of an FHA loan program is the variety of properties that can be used. While FHA Guidelines do require that the property be owner occupied (OO), they do allow you to purchase condos, planned unit developments, manufactured homes, and 1–4 family residences, in which the borrower intends to occupy one part of the multi-unit residence.

Streamlined Refinance and Assumable Loans

One of the most important advantages of an FHA loan is the ability for the loan to be assumed. This gives the buyer a significant advantage in a high interest rate market in that anyone qualifying for a loan through their existing lender could come in and assume liability for the loan and replace the borrower as the owner of the property.

FHA loans are eligible for streamlined refinance, a program HUD offers that allows the borrower to easily refinance the loan to reduce their interest rate and lower their monthly payment. As long as they are current on the loan, they are generally eligible for a streamlined refinance with no additional credit, income, or asset documentation required. This feature makes it very easy to refinance an FHA loan.

Greater Flexibility on Refinances, Both Cash Out and Rate & Term:

In October 2005, HUD issued Mortgagee Letter 05-43 which extended the FHA guidelines to allow cash out refinances up to 95% of the appraised value in certain circumstances. However, all rules for the standard program of 85% remain if the borrower does not meet the extended criteria. To qualify for a 95% cash out FHA loan the following conditions must be met:

  • Borrower must have owned the property as their primary residence for the previous 12 months
  • Borrower must have paid any existing mortgage on time for the previous 12 months
  • Property may be a 1- or 2-unit dwelling only
  • Any existing second mortgage must subordinate to new first (CLTV is not considered an issue).
  • Occupant borrowers must qualify on their own merit (non-occupant co-borrowers may not be used to qualify).
  • Meet any additional qualifying restrictions of the funding lender (i.e., lender-imposed minimum FICO requirements of 620)

In addition, FHA guidelines treat the refinance of seasoned second liens (in place over 12 months) as if they are rate and term refinances. This allows for first and second liens to be combined in a way that conforming guidelines stopped allowing in 2004.

Another great refinance advantage of FHA is that they do not care about CLTV in the case of a full qualifying refinance. As long as the first mortgage LTV is within FHA limits and the existing second will subordinate, the CLTV does not matter. So in this case you could literally close a loan that has an LTV of 97.75% with a CLTV of 130% or more. However, in practice it is rare to find a 2nd mortgage holder whose guidelines allow such a high CLTV.

Note: All program and guideline information on this page are subject to change. Please contact Alpha Mortgage for the most up-to-date FHA program guidelines

Helping You Make a Well Informed Decision

Visit our Education Center to learn more about qualifying for a home loan, mortgage program options, and how Alpha Mortgage can assist you with buying and refinancing your property in the Carolinas.