FHA - How can HUD and the FHA help me become a homeowner?

What is the U.S. Department of Housing and Urban Development?

Established in 1965, the U.S. Department of Housing and Urban Development (HUD) develops national policies and programs to address housing needs in the United States. One of HUD's primary missions is to create a suitable living environment for all eligible individuals by developing and improving the country's communities and enforcing fair housing laws.

How does HUD help homebuyers and homeowners?

HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans available for lower and moderate-income families through its FHA mortgage insurance program and its HUD homes program. HUD owns homes in many communities throughout the United States and offers them for sale at attractive prices and economical terms. HUD also seeks to protect consumers through education, Fair Housing Laws and housing rehabilitation initiatives.

What is the Federal Housing Administration (FHA)?

An agency within HUD, the Federal Housing Administration (FHA) was established in 1934 to advance opportunities for eligible individuals to own homes. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 34 million eligible individuals buy a home.

How can the FHA assist me in buying a home?

The FHA works to make homeownership a possibility for more eligible individuals. With the FHA, you don't need perfect credit or a high-paying job to qualify for a loan. In fact, the FHA down payment could be as little as a few months' rent and your monthly payments may not be much more than your monthly rent.

How is the FHA funded?

Lender claims paid by the FHA mortgage insurance program are drawn from the Mutual Mortgage Insurance fund. This fund is made up of premiums paid by FHA-insured loan borrowers. No tax dollars are used to fund the program.

Who can qualify for FHA loans?

Anyone who meets the credit requirements can afford the mortgage payments and cash investment and who plans to use the mortgaged property as a primary residence may apply for an FHA-insured loan.

What is the FHA loan limit?

FHA loan limits vary throughout the country, depending on local housing costs. Loan limits determine the maximum amount you can borrow to purchase a home. The loan maximums for multi-unit homes are higher than those for single-units and also vary by area.

Because these maximums are linked to the conforming loan limit and average area home prices, FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits. You can also visit www.fha.gov for more information.

With the exception of a few additional forms, the FHA loan application process is similar to that of a conventional loan (see Question 47). With new automation measures, FHA loans may be originated more quickly than before. And, if you don't prefer a face-to-face meeting, you can apply for an FHA loan via mail, telephone, the Internet, or video conference.

How much income do I need to have to qualify for an FHA loan?

There is no minimum income requirement. But you must prove steady income for at least two years and demonstrate that you've consistently paid your bills on time.

What qualifies as an income source for the FHA?

Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony and rent paid by family may qualify as income sources. Part-time pay, overtime and bonus pay may also count as long as they are steady. Special savings plans-such as those set up by a church or community association qualify. Income type is not as important as income steadiness with the FHA.

Can I carry debt and still qualify for FHA loans?

Yes. Short-term debt doesn't count as long as it can be paid off within 10 months. And some regular expenses, like child care costs, are not considered debt. Talk to your lender or real estate agent about meeting the FHA debt-to-income ratio.

What is the debt-to-income ratio for FHA loans?

The FHA allows you to use 31% of your income towards housing costs and 43% towards housing expenses and other long-term debt. Should your ratios exceed this, please consult a lender in your area.

Can I exceed this ratio?

You may qualify to exceed if you have:

• A large down payment
• A demonstrated ability to pay more toward your housing expenses
• Substantial cash reserves
• Net worth enough to repay the mortgage regardless of income
• Evidence of acceptable credit history or limited credit use
• Less-than-maximum mortgage terms
• Funds provided by an organization
• A decrease in monthly housing expenses

How large a down payment do I need with an FHA loan?

You must have a down payment of at least 3% of the purchase price of the home. If you are purchasing a HUD home, HUD may pay up to 3% of the home sales price for closing costs that are reasonable and customary for the area.

What can I use to pay the down payment and closing costs of an FHA loan?

Besides your own funds, you may use cash gifts or money from a private savings club. If you are doing a lease purchase, paying extra rent to the seller may also be considered the same as accumulating cash.

How does my credit history impact my ability to qualify?

The FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, the FHA allows you to re-establish credit if:

• Two years have passed since a bankruptcy has been discharged
• All judgments have or will be paid
• Any existing tax liens have or will be satisfied or appropriate arrangements have been made to establish a repayment plan with the IRS or state Department of Revenue and evidence of history of payments being made
• Three years have passed since a foreclosure or a deed-in-lieu has been resolved

Can I qualify for an FHA loan without a credit history?

Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.

What types of closing costs are associated with FHA-insured loans?

Except for the addition of an FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan outlined in Question 63. The FHA requires a single, upfront mortgage insurance premium equal to 1.50% or current rate in effect at time of closing. After closing, you will then be responsible for an annual premium which is paid monthly for a minimum of 5 years.

Can I roll closing costs into my FHA loan?

It may be possible to finance a portion of the closing cost. Ask your lender for details.

Are FHA loans assumable?

Yes. You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. And you must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.

What should I do if I can't make a payment on loan?

Call or write to your lender as soon as possible. Clearly explain the situation and be prepared to provide him or her with financial information.

Are there any options if I fall behind on my loan payments?

Yes. Talk to your lender or a HUD-approved counseling agency for details. Listed below are a few options that may help you get back on track.


For FHA loans:

Keep living in your home to qualify for assistance.

Contact a HUD-approved housing counseling agency (1-800-569-4287 or TDD: 1-800-483-2209) and cooperate with the counselor/lender trying to help you.

HUD has a number of special loss mitigation programs available to help you:

• Special Forbearance - Your lender will arrange for a revised repayment plan which may include temporary reduction or suspension of payments; you can qualify by having an involuntary reduction in your income or increase in living expenses.
• Mortgage Modification - Allows refinance debt and/or extend the term of the mortgage loan which may reduce your monthly payments; you can qualify if you have recovered from financial problems, but net income is less than before.
• Partial Claim - Your lender maybe able to help you obtain an interest-free loan from HUD to bring your mortgage current.
• Pre-foreclosure Sale - Allows you to sell your property and pay off your mortgage loan and to avoid foreclosure.
• Deed-in lieu of Foreclosure - Lets you voluntarily "give back" your property to the lender; it won't save your house but will help you avoid the costs, time and effort of the foreclosure process.

If you are having difficulty with an uncooperative lender or feel your loan servicer is not providing you with the most effective loss mitigation options, call the FHA Loss Mitigation Center at 1-888-297-8685 for additional help.

For Conventional Loans:

Talk to your lender about specific loss mitigation options. Work directly with him or her to request a "workout packet." A secondary lender, like Fannie Mae or Freddie Mac, may have purchased your loan. Your lender can follow the appropriate guidelines set by Fannie or Freddie to determine the best option for your situation.

Fannie Mae does not deal directly with the borrower. They work with the lender to determine the loss mitigation program that best fits your needs.

Freddie Mac, like Fannie Mae, will usually only work with the loan servicer.

However, if you encounter problems with your lender during the loss mitigation process, you can call customer service for help at 1-800-FREDDIE (1-800-373-3343).

In any loss mitigation situation, it is important to remember a few helpful hints:

Explore every reasonable alternative to avoid losing your home.
"Be aware of scams"

For example, watch out for:

• Equity skimming: a buyer offers to repay the mortgage or sell the property if you sign over the deed and move out.
• Phony counseling agencies: offer counseling for a fee when it is often given at no charge.

Don't sign anything you don't understand.


NOTE: This information was found on the official Federal Housing Authority website. For more information, visit www.fha.gov.

FHA's DISCLAIMER: All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

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