June 28, 2021
If you're shopping for a mortgage and considering government loans, you may have some FHA frequently asked questions. In this article, we'll be covering: How many FHA loans can you have? Who does FHA loans? What is a 203(k) loan? Discover these answers and read on to find out if an FHA loan is right for you.
Are FHA loans good?
That is a question we get asked quite often. Are these good loans, and should I get an FHA loan? This type of mortgage could be the answer for borrowers that:
- Have lower credit scores
- Don't have a 20% down payment
- Are looking for a medium-priced home
Are FHA loans bad?
No, these are great loans that offer many unique advantages that other mortgage products can't. But they may not be the best fit for borrowers that:
- Have excellent credit
- Have a 20% down payment
- Are buying higher-priced homes
Does FHA require seasoned funds?
Whether you get a government loan like an FHA, VA, USDA, or a conventional loan, funds need to be seasoned. What does seasoning mean? It means the funds have been in your bank account for at least two bank statement cycles.
Sourcing and seasoning funds go hand-in-hand.
- Sourcing funds shows where the money came from.
- Seasoning shows when the money was deposited.
Lenders want to see that you can save money and are financially responsible. They want to make sure you didn't receive the money on a short-term basis, for example, from a credit card cash advance or payday loan.
Any unusual deposits that don't come from the sources shown on your application will be a red flag. For example, if you receive four deposits like clockwork every month, but one month you receive an additional large deposit — the underwriter will want to know where those funds came from. You'll need to provide documentation like canceled checks or bank statements that show the funds' origin.
Acceptable sources and documentation include:
- Gift funds with a signed gift letter
- Bonus income from work
- Sale of assets like a car/motorcycle etc. with receipts
- Security deposit, insurance, and tax refunds
- Proceeds from the sale of stocks and real estate
For the above funds, it's essential to deposit them separately. Don't mix them with any other funds. That way, you can match the source with the exact deposit amount.
Some people like to store cash in all sorts of places, including in a safe, hidden in their freezer, or under a mattress. That's why it's sometimes called mattress money.
Please note, cash is not an acceptable source of funds.
Here's what HUD has to say in the FHA TOTAL Mortgage Scorecard User Guide about sourcing funds:
- Earnest Money and Other Large Deposits: Obtain an explanation and documentation for recent large deposits over 2% of the property's sales price, including the earnest money deposit. Also, verify that any recent debts were not incurred to obtain part or all of the required cash investment on the property being purchased.
How many FHA loans can you have?
Can you have two FHA loans? Here's what HUD.gov says:
FHA Requirement for Establishing Owner Occupancy (4155.1 4.B.2.b)
- At least one borrower must occupy the property and sign the security instrument and the mortgage note for the property to be considered owner-occupied. FHA security instruments require a borrower to establish bona fide occupancy in a home as the borrower's principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year.
- To prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not guarantee a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance. Any person individually or jointly owning a home covered by an FHA insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations as described in HUD 4155.1 4.B.2.d.
The above does say "except in certain situations." HUD lists four policy exceptions where a borrower may want to keep their current house and purchase another one:
- Job relocation that exceeds reasonable commuting distance from current home
- Change in family size where the current home doesn't meet the family's needs
- Vacating a jointly owned property
- Non-occupying co-borrower
The FHA doesn't want to fund a borrower's investment portfolio. These loans are for borrowers who will live in the home as their primary residence. Generally, a borrower can only have one FHA loan at a time. But you can always ask your lender to review your specific situation.
How do I refinance my FHA mortgage?
Your FHA mortgage can be refinanced into another FHA loan. Or, if you have some equity and your credit score is high enough, consider refinancing into a conventional loan. The advantage of refinancing into a conventional loan is that you can remove the Mortgage Insurance Premium (MIP). If you're refinancing into another FHA loan to lower your rate, you could still have MIP for the life of the loan.
Are FHA streamline loans a good idea?
If you already have an FHA loan and want to lower your rate or change the loan's term, a streamlined refinance can be a good idea. But there's no cash out with a streamline. A streamlined refinance is faster and has less paperwork than a regular refinance. If you've had the property for more than six months and your financial situation is the same, there may not be a credit check.
Similar to a VA refinance, to refinance, there has to be a net tangible benefit. Your new rate or term has to be better than what you have.
Can I refinance my FHA mortgage with bad credit?
It depends on how bad. For most lenders, your score will need to be 600-620 or above. Some lenders may go down to 500 with a higher down payment. But you can't be delinquent or in default on your mortgage or any other government loan.
If your financial situation is similar to when you obtained your loan, the lender may not pull your credit. For example, if you and your spouse received your FHA loan a year ago and both have the same job — and your income is similar — you might not be required to have a credit check. But you won't know until you talk to your lender.
What is a 203(k) loan?
A 203(k) is a government rehab loan. With an FHA 203(k) loan, you can get one loan to purchase the property and make repairs. Or if you're refinancing, you'll refinance your current loan, plus get money for repairs. Many borrowers like that because rather than having to have an additional loan for repairs, they just have one loan for both.
There are two types of 203(k) renovation loans depending on how much repairs are needed.
- Standard: For repairs of at least $5,000 and up. The total loan can't exceed the FHA lending limits.
- Limited: For smaller repairs. There are no minimum amounts for repairs, but they can't exceed $35,000.
Here's how the FDIC explains these rehabilitation loans:
Section 203(k) insured loans help the borrower access affordable financing and protect lenders by allowing them to have the loan insured before the final condition and value of the property may offer adequate security.
There are two versions of the program, Standard and Limited, which are used to finance different levels and types of repairs.
The Standard 203(k) program may be used for remodeling and extensive structural repairs. There is a minimum repair cost of $5,000, and the use of a 203(k) Consultant is required. 203(k) consultants are professionals certified by HUD who ensure that all FHA minimum standards are met during the 203(k) loan process and are listed in the HUD 203(k) consultant roster. Their duties include visiting the property, completing the work write-up/cost estimate and architectural exhibits, and performing draw request inspections.
The Limited 203(k) program was created in 2005 to finance minor remodeling and nonstructural repairs. Eligible projects must not exceed $35,000, and there is no minimum repair amount
For purchase transactions, the maximum mortgage amount that FHA will insure on a 203(k) loan is the lesser of:
- The appropriate LTV ratio multiplied by the lesser of the "As-Is Value," plus:
- Financeable repair and improvement costs,
- Financeable mortgage fees,
- Financeable contingency reserves, and
- Financeable mortgage payment reserves, (for Standard 203(k) only); or 110% of the after improved value (100% for condominiums); or the nationwide mortgage limits
As with all FHA loans, one of the 203(k) loan requirements is that you have to stay within the lending limits.
Are FHA 203(k) loans a good idea?
Just like with any FHA home loan, the 203(k) is an excellent mortgage product for many borrowers. These rehab loans work well for homes that only need a new roof to others with more extensive repairs. One of the biggest advantages is having one loan for the purchase or refinance that includes money for needed upgrades.
But not all lenders offer the 203(k) loan. FHA-approved 203(k) lenders aren't as easy to find because these loans are time-consuming and can be complicated.
All FHA home loans require a lifetime mortgage insurance premium (MIP) or 11 years depending on the down payment amount, and not all borrowers want to pay for this extra insurance. It's important to compare all your options to see what's best for you.
Who does FHA loans?
The FHA only insures the loan. They don't lend the money. To get an FHA loan, you have to go to an approved lender. You can find an FHA lender at credit unions, banks, and at mortgage brokerages.
As you can see, FHA home mortgages offer many advantages other home loans don't. One of the biggest ones is that these loans help millions of borrowers become homeowners that never thought they could.
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