Although there are a number of different methods for repaying a loan, there are only three types of mortgages in Florida available: FHA insured, VA guaranteed and conventional mortgage.
FHA Insured Mortgage Loans
The Federal Housing Administration (FHA) was created in 1934 to provide sound lending practices, promote home ownership and upgrade housing standards. The FHA is a part of the United States Department of Housing and Urban Development (HUD).
The FHA does not make loans. Instead, it insures loans made by approved local lenders. The loan is funded by a lending institution, such as a mortgage company, bank or savings and loan association. FHA provides a variety of loan programs for the purchase of manufactured homes, single family homes and multifamily properties.
The purpose of the insurance is to protect the lender from loss in the event of foreclosure. FHA insured mortgage loans insure the lender 100%. In the event of default of the mortgage loan, the lender is reimbursed for losses including foreclosure costs by HUD/FHA.
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Although there are no income limits to determinate who is eligible for FHA insured mortgage loans, FHA’s mortgage in surance programs help low and moderate income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements thereby protecting the lender against loan default on mortgages for properties that meet certain minimum requirements.
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FHA Insured Mortgage Loan Programs
There are a variety of different FHA insured mortgage loan programs under the authority of HUD. The four most popular loan programs are summarized below.
- FHA Section 203(b) Mortgage Insurance. This program provides basic mortgage insurance for the purchase or refinance of owner occupied one to four family properties.
- HUD maximum loan amount. HUD limits the maximum FHA insured mortgage loan amounts, which vary by geographic location. Lower cost areas, such as Ocala in Florida and Okeechobee have lower maximum loan amounts than higher cost areas, such as Key West. Refer to the HUD Web site for current limits/
- Down payment requirements. FHA requires eligible borrowers to have a FICO credit score of at least 580 and to provide a down payment of at least 3,5% of the home’s purchase price or appraised value, whichever is less. Borrowers who have a credit score between 500 and 579 are required to provide a 10% down payment. Borrowers who have a FICO score below 500 are not eligible for FHA insured financing. The down payment can be from the borrower’s own funds, from a non repayable gift, or a combination of the two. The lender is required to document any gift funds in a gift letter.
- Standard loan to value percentages. The standard maximum loan to value LTV ratio for an FHA insured mortgage loan is 96,5%. Closing costs associated with FHA insured mortgage loans may be rolled into the loan balance, as long as the loan to value maximum guidelines are still met. The loan plus closing costs must not exceed 96,5% of the home’s appraised value or the selling price, whichever is less.
- Qualifying income ratios. To qualify for an FHA loan a borrower must not exceed a housing expense ratio of 31% and a total obligations ratio of 43%.
- Calculating the borrower’s maximum loan amount. If closing costs are not financed, the borrower’s maximum loan amount can be determined by the multiplying the lesser of the purchase price or appraised value by the maximum LTV ratio (96.5%). FHA insured mortgage loans are underwritten in 50$ increments. If a mortgage calculation results in an odd amount, the loan amount will be rounded down to the next lower increment.
- FHA mortgage insurance premiums (MIP). An FHA mortgage insurance premium (MIP) is required for all FHA insured mortgage loans, regardless of the down payment. This is not the same as private mortgage insurance (PMI) charged for conventional loans. The amount of mortgage insurance premiums required on an FHA insured mortgage loan includes the payment of both an up front mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (AMIP).
- UFMIP. The UFMIP is paid at the time of closing of the loan, although all or a portion of the mortgage insurance premium may be financed. The UFMIP is 1.75% of the mortgage amount in most cases. If paid in cash at closing, the UFMIP can be paid by the borrower, seller, or a third party.
- AMIP. Annual mortgage insurance premiums must also be paid as a percentage of the annual outstanding loan balance divided into 12 monthly payments. The AMIP rates vary based on the loan to value, mortgage term, and the loan amount. If at the point of origination, the LTV is 90% or less the AMIP will not be required after 11 years. If the LTV is greater then 90% which is typical with 96,5% loans, the AMIP must be paid for the life of the loan.
The interest rate of an FHA insured mortgage loan is determined by the negotiation between the lender and the borrower. Interest rates are established by the supply and demand in the marketplace.
As with other types of loans, points are additional loan fees paid to the lender of an FHA insured mortgage loan. Points raise the effective rate of interest paid by the borrower over the life of a loan. Each point is equal to 1% of the loan amount and may be paid by either buyer or seller. The maximum loan origination fee is 1%.
FHA insured mortgage loans must provide the borrower with the right of prepayment without penalty.
Mortgage loan terms.
FHA insured mortgage loans have a maximum term of 30 years. Loans are fixed-rate.
Assumption. An FHA insured mortgage loan may be assumed (subject to rate change) if the borrower who is assuming the loan is qualified by the lender. When an FHA insured mortgage loan is assumed, only the lender, not FHA, can release the original borrower from financial liability.
An appraisal is required to make sure that the property meets certain safety, security and soundness standards. The appraisal must be performed by a FHA approved appraiser and is reported per the HUD Handbook. The buyer typically pays the appraisal cost.