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5 FHA Rules to Know Before Getting a Loan

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If you're shopping for a mortgage, you've probably heard of FHA loans — especially if you're a first-time homebuyer. But before you plan on using this type of loan, it's good to know about the FHA rules. Although every mortgage has its guidelines, there are a few unique ones for this government-insured loan. Read on to see what they are.

1. FHA Primary Residence Requirement

When getting a loan, there are many home buying process steps. It's good to know some of the basic loan requirements for the mortgage you're applying for. Occupancy rules are an important one. FHA occupancy requirements are pretty straightforward. In order to get an FHA loan, you have to live in the property as your primary residence. The purpose of the Federal Housing Administration (FHA) is to increase America's homeownership rate. They want to help borrowers get into homes to live in. They don't want to help fund second homes, rental properties or build an investor's portfolio.

But with every rule comes a few caveats. Here there are:

Non-occupying co-borrowers are basically co-signers. They help the primary borrower qualify for the loan and are not required to live in the property. Common examples of that are parents helping kids qualify for their first home. Or, grown children who have a higher income helping their parents qualify for a home. 

The other thing to know is that FHA loans are available for:

  • One-Unit Properties: These include single-family homes, condominiums, townhomes, manufactured homes.
  • Two-Unit Properties (Duplex): The borrower must live in one unit as their primary residence and can rent the other unit out.
  • Three-Unit Properties (Triplex): The borrower must live in one unit as their primary residence and can rent the other two units out.
  • Four-Unit Properties (Fourplex): The borrower must live in one unit as their primary residence and can rent the other three units out.

In order the qualify for the multi-unit properties, the borrower will most likely need to have landlord and rental experience.

2. FHA MIP — Mortgage Insurance Premium

You've probably heard about mortgage insurance. FHA's mortgage insurance premium (MIP) is insurance that FHA provides the lender to insure them in case of default. If you're wondering what FHA insurance covers, the answer is it covers the lender (credit union or bank) that funded the loan.

MIP is for the life of the loan, but it wasn't always that way. Before May 2013, once a borrower had 20% equity the MIP was removed. That changed after April 1, 2013. Now the FHA requires the mortgage insurance remains no matter how much equity the borrower has.

Besides the ongoing monthly insurance. There is a one-time upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount. We'll talk about this more in the closing cost section.

3. FHA Closing Costs

FHA closing costs run about 3-4% of the sale price of the home. These are costs associated with the purchase of your home. Here are some of the fees explained:

  • Mortgage insurance premiums include the upfront fee of 1.75% of your loan, while the ongoing amount of .45% to 1.05% is included in your monthly mortgage payment.
  • Lender fees vary. Common ones include loan origination fees and underwriting fees.
  • Third-party fees vary. Common ones include fees for title, notary, credit checks, appraisal, inspections, attorneys, and more.
  • Prepaid items vary and some of these fees are shared by the buyer and seller. These include homeowner's insurance, real estate taxes, and per diem interest.

When you apply for a mortgage, you'll receive a loan estimate. It's important to know that this is just an estimate. Here's why. Many fees like property taxes are based on location, so you won't have the exact numbers (or close to exact) until you find a home.

Your lender will provide you with a list of service providers to choose from. If you're comparing fees when it comes to title companies, it can be a bit complicated. That's because, although there are similar fees from title company to title company, they may call these fees by a different name. So, your original loan estimate only gives you general title estimates not ones for specific title companies.

Lender fees can also vary. But when you use a credit union or bank, you'll know what they are upfront when you get your loan estimate. On the other hand, if you use a mortgage broker, their fees will vary depending on what lender they're sending you to. A broker doesn't lend the money like a credit union or bank does, they just find a lender to send your loan to. So, if your loan falls through with one lender, they may have to send it to a different lender and they will most likely have different fees.

The point to realize is that when you get a loan estimate, that's what it is — an "estimate." While the fees are not set in stone, they are only allowed to change by prescribed tolerances based on TRID guidelines.  For example, fees paid to the creditor are subject to zero tolerance and cannot change more than the amount disclosed on the loan estimate unless there is a valid change circumstance.

As you move along the process and find a property, then your loan officer will be able to give you a more accurate list of fees. The fees you'll need to be aware of are:

If you're refinancing, there are no realtors involved — it's just you and the lender. The lender will disclose all fees upfront. In doing so, it will give you an opportunity to shop around for the title company that most aligns with what you're hoping to pay.

4. FHA Property Guidelines

When you start getting ready to buy, it's good to list your housing needs. What type of property do you want? Here are some options:

  • Single-family home
  • Condo (The condo must be on the approved condominium list.)
  • Manufactured homes (The FHA won't lend on a manufactured home built before June 15, 1975. Also, not all lenders will lend on manufactured homes .)
  • Multifamily property

FHA property guidelines focus on the safety, durability, and usability of the property. Properties with bad roofs, missing major appliances like a stove, broken windows or exterior doors, chipping paint, or problems with major systems like HVAC, electrical, plumbing won't pass inspections. If you see a home listed as a "handyman special" an FHA loan probably isn't your best choice unless it's a 203(k)-rehab mortgage.

5. FHA Loan Limits 2021

Once you decide on how much home you can afford, it's important to see what the FHA loan lending limit is for the area. Also, let your realtor know you're getting an FHA loan. That way they won't show you any properties that are over the limits. And if you're shopping in multiple counties, make sure you check each one for the maximum you can borrow.

Now that you know these five important points about getting an FHA loan, you'll be much more prepared. Although FHA loans have their limitations, they also open the door for more borrowers to become happy homeowners.

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