FHA Loans combined with Down Payment Assistance Programs $0 from borrower

By
Mortgage and Lending with Wintrust Mortgage

In recent years, FHA loans have accounted for about 2% of all mortgages, as there had been so many other options for people with less than perfect credit.  The market for mortgages has changed significantly, these "other" options are no longer avaialble, FHA loans are coming back strong, and it's important to understand how FHA loans can benefit buyers and sellers.

FHA loans are not only for people with less than perfect credit.  FHA loans can offer very competitive rates, sometimes equal to or better than conforming ("A-Paper) loans, and they work with Down Payment Assistance (DPA) programs, which allow a borrower to become a homeowner with $0 out of his/her own pocket.  Below is an overview:

FHA Loans vs Conforming loans

* FHA loans are much more lenient on credit, allowing people with less than perfect credit to still get Prime rates

            * FHA "price adjustments" (hits to the fees and/or interest rate) start when a borrowers middle credit score goes below 620, and aren't even significant unless the borrowers middle credit score goes below 600

            * Conforming "price adjusters" can start when a borrowers middle credit score goes below 720 (my how times have changed)

* FHA requires only 3% down, and the 3% does not need to be from the borrowers own funds (can be a gift from a family member or the use of a Down Payment Assistance Program (DPA) - read about DPA below)

* FHA loans have no issues with areas that may be considered to be in "declining markets"

* The Private Mortgage Insurance (PMI) requires an "Up Front Fee" due at closing, which can be rolled into the loan amount, but the monthly PMI payment can be signifantly less than that of a conforming loan, resulting in a lower monthly housing payment than an equivalent conforming loan

* FHA loans are government insured, so there are no issues with PMI coverage due to credit scores or declining markets

* FHA loans can be used in combination with a Down Payment Assistance Program (DPA), such as Ameridream or Nehemiah.  Here is how that works:

           * Seller credits to buyer can only be for closing costs and pre-paid items (insurance, tax escrows, etc...) but not for down payment

           * Lender guidelines do not allow for seller credits to be used for borrowers down payment

           * Loan programs today require at least 3% down, but if a borrower does not have 3% or cannot get a 3% gift from a family member, etc... then they can use an FHA loan with a DPA program.

           * The DPA organization "gifts" the borrower between 1% - 6% (whatever the borrower needs) of the purchase price for the 3% down payment and, if needed, the closing costs.  At the closing table the seller must "replenish" the DPA organization this gift plus an additional $500 administration fee.  This is allowed per lender guidelines and allows a borrower to buy a home with $0 out of their own pocket.  Example: $300,000 purchase.  DPA program "gifts" borrower 3% of purchase price ($9,000) for down payment, plus $5,000 for closing costs = $14,000 total.  Borrower uses $9,000 for their 3% down payment, uses $5,000 for closing costs, and has no out of pocket expense to buy the home.  Seller agrees to "replenish" DPA program back $14,000 plus a $500 admin fee.

            * Usage of the DPA program really does not affect the sellers bottom line.  If the seller knows they will be providing the DPA organization 3% + $500 admin fee, then the seller can factor that into the final purchase price.  The seller may not be willing to discount the purchase price of their home by that additional 3% + $500.  So by working with this program, it can be structured to have no effect on the sellers' bottom line.

           * The seller would be interested in this program because it opens up the pool of buyers for their home.  The buyer would be interested in the program because it allows the buyer to become a homeowner with no out of pocket expense.

           * FHA loans work fantastic with single family homes, 2-flats, 3-flats, 4-flats, requiring only 3% down for each type of property.  If trying to use an FHA loan on a condo, the condo project would need to be FHA approved.  Otherwise, an exception would need to be made.

           * FHA loans are for primary residences only.

           * There are no income restrictions or purchase price restrictions, but FHA loan limits are as follows in my home state of Illinois (there are some "high cost areas" of the country, like areas of California, where these limits have been significantly increased):

# of Units   FHA Loan Limit
1   $410,000
2   $524,850
3   $634,450
4   $788,450

Please contact me anytime should you have any questions about FHA loans and / or Down Payment Assistance Programs or if would like a flyer for your home for sale.  I'm here to help!  I can be reached at 773-742-7940 or bkelly@bryankelly.biz

Comments (1)

Dana Couch-Davis
Kendall Haney Realty Group - Memphis, TN
CRS, GRI, ABR, SRES

Thanks for that information.  I found it very informative.

Jun 13, 2008 01:53 AM