Monthly Archives: December 2010
FHA HECM loans are designed for borrowers who are 62 and older who want to take advantage of the equity built up in their homes. HECM, which stands for Home Equity Conversion Mortgage and is also known as an FHA Reverse Mortgage, allows qualified borrowers to apply for an FHA loan which uses equity as the security for the loan.
HECM loans have no monthly mortgage payments. The borrower pays off the loan in full if the property is sold or the borrower dies. Because of the structure of FHA HECM loans, the borrower can use the proceeds from the loan as a line of credit, choose to get monthly payments instead, or a combination of the two.
HECM loans have plenty of advantages for qualified borrowers, but many don’t realize these FHA mortgages can be refinanced under the right circumstances. Those who already have a reverse mortgage guaranteed by the FHA can refinance to add a spouse to the mortgage, which gives the borrowers an added advantage; if one person only is named on a HECM loan, the mortgage would be due if the borrower dies.
If the mortgage note has both occupants of the home named in the note, the second borrower is protected against the loan coming due–the terms of the reverse mortgage would be in effect as long as the surviving borrower continues to own the property.
HECM loans can also be refinanced under FHA rules to allow the homeowner to take advantage of any additional equity built up in the home since the original reverse mortgage.
In both cases, the borrower has the option to refinance into a standard FHA HECM loan or the more recent HECM Saver, which features savings on up-front mortgage insurance premiums.
The requirements for standard reverse mortgages and HECM Saver loans vary–check with your FHA regional loan center or loan officer to get details on which FHA reverse mortgage is best in your situation.
As with traditional FHA reverse mortgages, standard occupancy rules apply–the borrower(s) must certify that the home is the primary residence; summer homes do not qualify under these programs. FHA requirements also stipulate that in order to qualify for a reverse mortgage, the applicants must not be delinquent on any federal debt.
Most FHA home loan programs require the borrower to make a minimum down payment of 3.5% of either the appraised value of the property or the asking price of the home, whichever is lower.
The down payment is strictly regulated. The buyer is not only required to put down his or her 3.5%, but the FHA also requires documentation on the source of the down payment money in many cases.
Documentation is required when the borrower pays more than 2% of the sale price. It’s also required in any situation where the lender has certain questions about the down payment. According to FHA requirements, documentation is needed when the down payment “appears excessive based upon the borrower
As with many government programs, the rules and requirements for FHA home loans change often. Some alterations come as part of new legislation designed to close loopholes that could threaten the fairness of the FHA mortgage loan process, others come as a way to update or modernize
FHA HECM loans or reverse mortgages are designed for borrowers age 62
and older. These mortgages are designed to let qualified applicants take out a loan against the equity in the home–loans that can be used for living expenses, home improvements, even the purchase of a primary residence if the borrower is willing to pay (in cash) the difference between the FHA HECM loan amount and the sales price and closing costs.
According to the FHA, HECM loans differ from typical home loans or second mortgages because, “no repayment is required until the borrower(s) no longer use the home as their principal residence or fail to meet the obligations of the mortgage.”
HECM loans have no monthly mortgage payments–the loan balance is paid
off with the sale of the home or upon the death of the FHA borrower. The lender pays the borrower according to one of five options.
The borrower gets a monthly payment, the same amount every month for as long as the borrower lives and uses the property as the primary residence.
The borrower gets monthly payments for a fixed number of months as listed in the loan contract.
Line Of Credit
This option has no monthly installment payment, instead the borrower uses the FHA HECM loan like a credit card until the credit has been completely used up.
There are two “modified” types of HECM loan payment plans:
This is a combination of the line of credit and tenure payment plans, with a monthly payment made as long as the borrower occupies the home plus an additional amount to be used like a credit card until the credit is exhausted.
This option is a combination of line of credit plus monthly payments for a fixed period of months as spelled out in the loan contract.
FHA HECM loans are only available to qualified borrowers age 62 and up, and as with any other FHA home loan, the borrower must pay mortgage insurance, property taxes, and the usual expenses of living in the home. What makes the FHA HECM loan so appealing to many borrowers, money aside, in the words of the FHA,
Every home loan comes with associated fees, whether it’s an FHA mortgage or conventional home loan. Knowing the fees up front can help house hunters budget for the ones they must pay up front and understand which ones can be rolled into the amount of the loan when permitted by FHA regulations.
FHA loan fees include the loan origination fee, which includes the administrative cost of doing business with your chosen lender. There are also title search and examination fees and legal fees which must be paid.
Some sellers may agree to pay the legal fees as part of the incentive to close on the home, but such issues are handled on a case-by-case basis. There’s no requirement from the FHA as to who pays the legal fees, whether it’s the buyer or seller. The buyer is responsible for paying any legal fees associated when he or she chooses to hire a lawyer to review the contract or other documents.
They buyer is also responsible for paying appraisal fees and any fees associated with hiring a mortgage broker, if one is used. Buyers should also anticipate paying the cost of getting credit reports–it’s true that free credit reports are available for consumers, but don’t expect to use your free credit reports to prepare an FHA home loan; borrowers aren’t permitted to furnish copies of a credit report to the lender–all credit reports must come directly from each of the three major credit reporting agencies.
Discount points can bring some confusion for some first time home buyers. The very phrase, “discount points” implies some kind of price break for the borrower; this is true in the sense that purchasing discount points lowers the interest rate on the loan. The buyer can purchase any discount points offered by the lender–one percentage point lowered per discount point purchased–to get a more competitive interest rate. In some cases the seller may offer to buy discount points as an incentive to buy the home.
These are just some of the fees associated with FHA home loans. It’s important to begin saving for the cost of buying a home as early as possible to prevent financial hardships later on. While it’s true that some of the costs of getting an FHA home loan can be rolled into the loan itself, the buyer must still pay certain fees and expenses up front. Start saving for such expenses at the same time you begin preparing for the loan–many financial experts recommend at least a year’s worth of preparation for both expenses and credit repair/maintenance.
In 2009, the Obama Administration created a plan to help the American economy recover from a serious financial crisis. Part of that plan included stabilizing the troubled housing market and reduce the amount of foreclosures. The Making Home Affordable program was introduced to help struggling home owners avoid defaulting on their loans, including FHA mortgages and equivalent programs for VA home loans.
Under the Making Home Affordable program, several loan modification and refinancing options became available. Those with FHA loans who qualify for help under these programs have many options to save the home, prevent foreclosure and get back on track with their mortgage payments.
But with any new program or set of programs, the terms can be confusing. With so many options available, struggling home owners sometimes feel their biggest challenge is getting into the right plan.
Under Making Home Affordable there are refinancing plans where eligible borrowers can get into more affordable monthly payments and lower interest rates. Home Affordable Refinance plans are intended for those who are current on their mortgage payments. Those who haven’t been more than 30 days late on a payment in the last 12 months qualify for Home Affordable Refinance plans.
Home Affordable Modification Programs are different; borrowers are eligible when they got their FHA mortgage or conventional home loan prior to January 1, 2009, and are “currently in trouble” making payments. “Trouble” can be qualified in many different ways–a sudden increase in mortgage payments on variable rate loans, a work-related hardship where a sudden reduction of income causes financial difficulty, and/or other qualifying circumstances apply.
FHA loan modification is different than refinancing. In many cases a portion of the original loan may be forgiven and the terms of the loan may be renegotiated or otherwise altered to help the borrower stay in the home and avoid foreclosure. Compare that to refinancing, which is a new contract and new terms. There’s nothing wrong with either course of action, much depends on the needs of the borrower and whether their circumstances allow them to participate in a particular Making Home Affordable program.
Each program under Making Home Affordable has its own terms, requirements and expiration dates. It’s not safe to assume these programs will be around indefinitely for those who might need them in the future; many are already set to expire unless new legislation is passed to extend them. If you need help, now is the time to act.
No two FHA mortgages are the same. House hunters have a variety of terms, interest rates, closing costs and other considerations to think about when applying for an FHA mortgage loan on a particular property; one of the most important decisions is the length of the loan itself.
FHA home loans for typical residential neighborhood homes come in 15-year and 30-year terms. There are a variety of compelling reasons to choose both–there is no strong argument for or against either term. It all comes down to what the individual buyer needs and wants from their mortgage.
The buyer’s perspective determines a great deal when it comes to deciding which to choose. A 30-year loan has buyer paying off more interest than principal in the early days of the FHA mortgage. That may sound like a disadvantage on one hand–a great deal of the buyer’s hard-earned money is not going to pay off the loan itself. But the advantages include potentially higher tax deductions.
A 15-year loan may have higher monthly mortgage payments, but more of that money goes toward paying down the principal of the FHA loan, and the loans often feature lower interest rates than their 30-year counterparts. Because the principal is paid down sooner, home equity is built up faster than on a 30-year loan. The trade off for the higher equity is the higher monthly FHA loan payments.
In both cases, FHA borrowers have the option to pay more than the required monthly mortgage payments.But it’s very important to check the terms of your FHA home loan first; have you signed a contract that features a pre-payment or early payment penalty? You may actually be charged a fee to pay off the loan early–know before you pay.
15-year loans and 30-year FHA mortgages have their own unique advantages and disadvantages; only the buyer knows for certain which terms best suit their needs, but when in doubt, ask for some additional help from the loan officer or FHA loan center to find out which is the best option in your circumstances.
First time FHA loan applicants soon learn the world of FHA loans is aimed at helping people who want to become homeowners; a fairly obvious assumption to make when dealing with a government agency with a mission statement that includes helping people achieve their dream of home ownership.
But private home owners aren’t the only ones interested in buying and selling real estate; that’s one of the reasons for the strict FHA requirements that single-family FHA home loan borrowers certify the property is to be used as the primary residence.
FHA mortgage loan rules forbid using FHA home loans to buy real estate for investment purposes. Private investors have plenty of access to other lending options if they are qualified to borrow; FHA loan products are intended for residences, not investments.
But even with the strict FHA loan rules on occupancy, the FHA does make an exception; a non-occupying co-borrower may be included on an FHA home loan with that borrower is a family member trying to become a home owner. For example, a parent and child can apply together for an FHA home loan; the child may be getting ready to go away to college, but can still be listed provided all non-occupying borrowers list their status as such on the FHA loan paperwork.
These FHA loans have limitations. According to FHA requirements, “Mortgages with non-occupying co-borrowers are limited to one-unit properties if the LTV will exceed 75%.” The FHA also adds, “If a parent is selling to a child, the parent cannot be the co-borrower with that child on the new mortgage unless the loan-to-value is 75% or less.”
Non-occupying co-borrower arrangements on FHA loans can be a distinct advantage for those newly graduated from college, but the arrangement can also be helpful in some cases where a co-borrower is trying to re-establish credit histories after a bankruptcy or foreclosure. In such cases, specific minimum wait times may be required before the non-occupying co-borrower can be included on an FHA loan application.
In our last post we discussed the cost and process of FHA appraisals. Since the FHA appraisal is such an important part of the FHA mortgage process–the loan amount can’t be established without the appraisal–it’s good to know how and why the process works the way it does.
One of the key aspects of getting a fair, accurate estimate of the reasonable market value of a home is the independence of the appraiser. How does the first time FHA borrower know the FHA-approved appraiser is assigning value to the home for sale that’s actually consistent with market practices rather than helping the lender raise the FHA loan amount by over-valuing the property?
According to FHA requirements, FHA lenders cannot use an appraiser who
is “selected, retained or compensated in any manner by a real estate agent, mortgage broker, or any member of the lenders staff who is compensated on a commission basis tied to the successful completion of the loan.” This FHA rule keeps the appraiser and the lender on separate terms. This rule applies to all appraisers on the FHA roster, and the home MUST be reviewed by someone listed on that roster.
The rule against “appraisal shopping” is another way the FHA loan process is designed to keep the system fair. FHA mortgage rules say it’s illegal to order multiple appraisals for the purpose of getting the highest possible dollar amount in reasonable market value. This rule does not forbid a second appraisal out of hand; another one may be needed or even required if the borrower changes lenders.
These circumstances are strictly regulated and the FHA requires lenders to fully document the process. FHA rules state, “The lender must document why a second appraisal was ordered and retain theexplanation in the case binder along with a copy of both appraisals.”
This prevents anyone in the FHA loan process from gaming the system to
get a more favorable appraisal on the property unless it is actually warranted.
Part of the FHA home loan process is establishing the reasonable value of the home for sale. The reasonable value is not necessarily the asking price, but rather the estimated market value of the property based on the work of a licensed, FHA-approved appraiser. The appraisal is a crucial part of the FHA loan process; without it, the loan can’t move forward.
The FHA will not insure or guaranty a loan amount for more than the reasonable market value of the property (with approved extra costs such as energy-efficient upgrades and other items approved by the FHA to be included in the FHA loan amount). That’s why getting the FHA appraisal is so important–no loan amount can be approved without knowing how much the home is worth.
The buyer pays for an FHA appraisal, and an FHA-approved professional is required to do the job, so it’s only logical to assume the FHA would set the appraisal fee. But this is not true.
The FHA does not establish fees or rate structures for FHA appraisals. That’s not to say the FHA doesn’t have rules governing FHA fees, but according to FHA requirements, “the marketplace best determines what is reasonable and customary in terms of establishing fees for appraisal services. Fees are established and negotiated between the FHA Roster Appraiser and the client whether that is an FHA approved lender, Appraisal Management Company (AMC) or third party.”
FHA rules about appraisal fees include a stipulation that fees must not be set according to performance; the fee can’t be determined based on the outcome of the appraisal. This rule eliminates the potential for inflated values or undervalued properties based on how much fee is paid. There’s no temptation to game the system because the fees are the same regardless of the results of the appraisal.
All of this is helpful, but doesn’t answer the basic question; “How much do FHA appraisal fees cost?”
The short answer is that appraisal fees vary depending on the market. Your local costs may vary compared to other locations. If you want to budget for an FHA appraisal, the best course of action is to ask your loan officer what is typical for the size and type of property you want to buy and use that figure as a rough guide on what to plan for when it comes to your house buying budget.