Notes

The Federal Housing Administration (FHA) is a part of the Department of Housing and Urban Development (HUD) that is charged with increasing home ownership and contributing to building healthy neighborhoods and communities. Created by the National Housing Act of 1934, the FHA's initial purpose was to encourage lenders to invest in the mortgage market in an effort to stimulate the construction industry.

The mortgage insurance premium (MIP) is the FHA's equivalent of private mortgage insurance. With FHA loans, borrowers who closed their loans after June 3, 2013 must make mortgage insurance payments every year for the life of the loan, no matter how much equity they accrue. The borrower pays 1.75 percent of the loan amount up front at closing (UFMIP) or it can be added to the loan amount, and an annual premium depending upon the loan term: 0.85 percent for 30-year loans. The premiums go into an account held by the FHA to repay lost amounts on insured loans where the borrower defaulted.

Calculations that are used by lenders to determine the biggest mortgage that a home buyer can afford are called qualifying ratios. The current qualifying ratios for FHA-insured loans are a 31-percent (HER) housing expense ratio and a 43-percent total debt-service ratio, i.e. no more than 31 percent of a buyer's monthly income can go toward their mortgage.

Formula: monthly housing expense (PITI and MIP) ÷ monthly gross income = HER

Example: A potential borrower has a monthly housing expense of $1,450 and monthly total debts of $1,775. The borrower's gross monthly income is $6,200. What is the housing expense ratio and total obligations ratio for this borrower?

Solution:

HER= $1,450 ÷ $6,200 = .23 or 23%
TOR= $1,775 ÷ $6,200 = .29 or 29%

Calculations that are used by lenders to determine the biggest mortgage that a home buyer can afford are called qualifying ratios. The current qualifying ratios for FHA-insured loans are a 31-percent (HER) housing expense ratio and a 43-percent total debt-service ratio, i.e. no more than 31 percent of a buyer's monthly income can go toward their mortgage.

Formula: monthly housing expense (PITI and MIP) ÷ monthly gross income = HER

Example: A potential borrower has a monthly housing expense of $1,450 and monthly total debts of $1,775. The borrower's gross monthly income is $6,200. What is the housing expense ratio and total obligations ratio for this borrower?

Solution:

HER= $1,450 ÷ $6,200 = .23 or 23%
TOR= $1,775 ÷ $6,200 = .29 or 29%

Section 203
(b) This is the FHA's main program and the subject of most of this lesson. It insures fixed-interest rate loans for owner-occupied, one- to four-family properties. Terms are available for 10, 15, 25 and 30 years, but it does have relatively low loan limits.

(k) Non-investors who need a loan from $5,000 to $35,000 to rehabilitate or repair their one- to four-family residences can use a 203(k) loan. The purchaser puts 3 percent down and pays only taxes and insurance for the first six months. If purchasing a property that requires rehabilitation, the borrower can receive one fixed- or adjustable-rate loan that includes the purchase price and the cost of rehabilitation. The funds of the loan are paid into an escrow account from which they are disbursed by the lender upon completion of the rehabilitations.

Section 234
(c) This program insures loans for the purchase of condominium units. It is only available for those condominium projects that have been approved by HUD and have at least 51 percent of their units occupied by their owners.
Section 251
The FHA also has a program for adjustable rate mortgages with one-year adjustment periods and 30-year terms. The interest rate, which is tied to one-year treasury bills (T-bills), has a one-percent annual cap and a five-percent cap over the life of the loan. FHA-insured ARMs cannot negatively amortize, and they may be bought down.

An FHA ARM has much of the same appeal over any other ARM that a fixed-rate FHA loan has over a most fixed-rate loans. That is, FHA ARMs have lower down payment requirements, and lenders consider them safer investments. In addition, ARM borrowers can switch over to a fixed-rate loan at a future date, without refinancing.