Low Down with FHA loans

With low down payment loan options decreasing, FHA insured loans are increasingly popular. I recently posed a series of questions about FHA loans to Jared Helton, one of the owners of Infinity Lending Solutions, located on the corner of River Road and Irving, in Eugene. Jared can be reached at 345-7827.

Q. What are the FHA loan limits and when do they take effect?
A. January 1, 2009. The FHA limit for Lane County dropped to $271,050.

Q. How strict are the credit score requirements for FHA loans?
A. FHA is not as score driven as conventional loans. We’ve recently closed FHA loans with FICO scores in the 500s.

Q. Is it difficult for a property to qualify for an FHA loan?
A. Not really. For typical homes, FHA appraisers check for a few more things than on a conventional loan. For manufactured homes, however, FHA requires a engineer’s inspection for the foundation, which is not required on conventional loans

Q. Does it take longer to get an FHA loan?
A. Currently, there is little difference in the time required for an FHA loan and a conventional loan.

Q. How do FHA interest rates compare to conventional rates?
A. FHA rates on lower FICO scores are better than conventional loans. At higher FICO scores they are around the same. When mortgage guarantee insurance is required, FHA is much lower than conventional loans.

Q. Can you tell me more about mortgage guarantee insurance (MGI)?
A. Conventional loans require mortgage guarantee insurance when the loan to value ratio (LTV) is too high. In general, LTV ratios greater than 80% require MGI, for a conventional loan. The insurance is part of your monthly payment. Insurance costs are based on “factors.” Typical factors are: LTV 95%, factor 0.94%; LTV 90%, factor 0.62% LTV 85%, factor 0.38%.

Q. What kind of addition to monthly payments does that translate into?
A. For example, a $200,000 conventional loan with a LTV of 95%, is: $200,000 x .94% = $1,880 per year. Divide by 12 to get $157/month.

Q. What kind of LTV ratios trigger mandatory mortgage insurance with FHA loans?
A. All FHA loans require mortgage insurance. Even a LTV of 25% will require the insurance. It takes at least five years before you no longer need the insurance.

Q. How does mortgage insurance work on an FHA loan?
A. There are two components. There’s an up-front fee that currently is 1.75% of the loan amount. So, for a $100,000 loan, the fee is $1,750. This is added to the loan and $101,750, in this example, is the amount that is used to determine your payments. There is also a monthly component of 0.50% to 0.55% depending on the LTV.

Q. What is the minimum down payment required for an FHA loan?
A. 3.5%

Q. Does it matter where the down payment comes from?
A. Yes. The borrower either has to have the money for the down payment, or it can be a gift, but only from acceptable sources.

Q. What sources are acceptable?
A. For example, family members, employers and approved grant programs such as HAP and SHOP.

Q. Can the seller contribute to the down payment?
A. Generally, no. This ceased in October 2008. However, this is different if the seller is a family member; gifts for down payment may be allowed in that case.

Q. What kind of ratios are you seeing approved on FHA loans these days?
A. Approval takes two paths: Automated (also called system generated) and manually underwritten. Interestingly, the ratios have been different depending on the way in which approval is sought. Automated approvals with DTI ratios of 49% (front) and 65% (back) are possible. Manually underwritten FHA loans are typically limited to 43% back end DTI.

Q. Are there extra costs for the seller associated with an FHA loan?
A. No. This used to be the case, but isn’t any more.

Q. How many FHA loans do you write?
A. About 50% of our loans were FHA in 2008.

Jared Helton, Partner, Infinity Lending Solutions

Jared Helton, Partner, Infinity Lending Solutions