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FHA review - what you need to know

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Mortgage and Lending MLS# 279272

With the Federal governments re-emphasis on the FHA as a key vehicle for resuscitating the real estate market, now is a good time to review FHA in more detail.

Let's start with some basics. First, the FHA insures loans that approved lenders make, it does not purchase them as Fannie and Freddie do. If a FHA insured home goes into bankruptcy, FHA pays off the mortgage to the Lender, takes ownership of the home, and then proceeds to sell it (a HUD home.)

To mitigate its risk and provide income to offset foreclosures and defray their expenses, FHA charges the borrower insurance premiums, both an up-front and a monthly premium. The up-front premium can be included in the mortgage amount.

FHA loans are available for purchasing or refinancing a 1 to 4 unit, owner occupied home. There a number of FHA programs that cover the gamut of real estate offerings, from your "vanilla" FHA loan to Condos to REO's to Reverse Mortgages to Rehab to Veteran loans and more. In subsequent articles we will be reviewing these programs in more detail.

Over the last number of months, FHA began implementing some changes to their programs. In addition, the Housing and Economic Recovery Act placed additional changes in FHA practices, some of which modified FHA proposed changes. I have listed some of those changes below.

Converting Existing Homes to Rentals

The FHA changed their underwriting rules to limit the ability of a homeowner to use rental income from a previous residence that it converted to a rental property, when applying for a new mortgage on a second property. Under the new rule, the homeowner must prove sufficient income to make both mortgage payments without the rental income or has an equity position in the rental property that it will not likely result in defaulting on that mortgage. There can be an exception to this rule for employment relocations.

This change mirrors the announcement by Fannie in August. Apparently, homeowners, in increasing numbers, are choosing to vacate their existing principal residence and purchase a new residence. They are then providing misleading information on the rental income of the property being vacated to justify the new mortgage. These changes effectively end "bail and buy" loans.

Moratorium on Risk Based Premiums

The Housing and Economic Recovery Act provided for a one-year moratorium on the implementation of the FHA's risk based premiums beginning October 1, 2008. The effect of the risk based premium was to increase the premium based on the amount of the down payment.

This will not delay the implementation of an upfront premium as well as well as monthly premiums on all loans.

Seller concessions of 6% are still allowed; however, down payment assistance programs have been eliminated effective October 1, 2008.

Down Payment Requirements

The Housing and Economic Recovery Act also called for an increase in down payment required to 3.5%. That change will not go into effect until January 1, 2009.

As with any loan program, there are a number of stipulations that need to be met to gain approval. That is why it is important to choose the right Mortgage Professional. Not all FHA approved lenders service all FHA loan programs.

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