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FHA Loans - Down Payment, Reserves and Mortgage Insurance
Posted by Paul Gonzales | Currently 1 Comment »
This is the fourth and final post in a series that deals with important aspects of FHA financing.
- The first post provided an overview of the program.
- The second post detailed FHA credit requirements
- The third post discussed the income and employment requirements.
- This post will discuss the down payment and asset requirements necessary to obtain an FHA home loan.
Minimum Down Payment
In today’s challenging market, this is probably the most attractive feature of the FHA home loan - the minimal down payment requirement. For years the minimum requirement has been 3% of the purchase price. Effective January 1, 2009 this will increase to 3.5%, still a great deal especially for first-time homebuyers. This benefit is enhanced further by the flexibility allowed for the source of those down payment funds, as discussed below:
Reserve Requirements
Reserves are funds that a buyer has “left over” after purchasing the home. Most conventional home loans require enough reserve funds to cover at least two months of mortgage payments including property taxes, insurance, mortgage insurance and home owner’s association (HOA) dues if required.
FHA financing does not have a reserve requirement if purchasing a 1 or 2 family property (a 3 or 4 family property requires at least three months of reserve funds).
Acceptable Sources of Funds
- Borrower’s depository funds - Funds owned by the Borrower in bank accounts, stocks and bonds, Certificates of deposit, retirement accounts such as 401k plans
- Gift funds - Can come from a wide variety of sources, including family members, a close friend with established close ties to the borrower, an employer or labor union, charitable or non-profit organization, government agency or a public entity such as a city through a homebuyer’s assistance program. A couple important caveats: the gift funds must be thoroughly documented and provide a clear paper trail. Depending upon the source of the gift funds, such documentation will include a detailed “gift letter”, copies of cancelled checks and bank withdrawal slips or evidence of bank wire transfer. There must be reasonable evidence that the qualified donor has the financial ability to give the gift. As of October 1st, 2008, funds from certain non-profit organizations which are matched by donations from the home seller can no longer be gifted to the buyer
- Sale of existing home - proceeds from the sale of an existing home may be used to purchase a new home with FHA financing
- Sale of personal property - the sale of a car or other personal property is acceptable as long as the funds can be paper trailed to the sale
- Cash or “mattress money” - this requires a written explanation describing the source of the cash, how it was accumulated and how long it took to accumulate. Such cash accumulation must make sense for the borrower, such as not having a checking or savings account or credit accounts.
- Commission from sale of property - acceptable if the borrower/buyer is a licensed real estate agent and entitled to a commission from the sale
Mortgage Insurance
A lesser appreciated, but very vital benefit of FHA financing, has to do with mortgage insurance, or MI. Until recently, it was generally easy to avoid having to pay for mortgage insurance when purchasing a home with less than 20% down payment. This was accomplished by getting a second mortgage to “piggy back” with an 80% first mortgage. Thus a qualified buyer could buy a home with little or no money down by obtaining two mortgages. In the reality of today’s markets such second mortgages are all but non-existant or exorbitantly priced.
The only remaining option for a homebuyer with less than 20% for a down payment is to pay for mortgage insurance. In certain areas such as California, most companies that provide such insurance have limited the maximum coverage to 90% (or less) of the purchase price. In addition, they have tightened their underwriting guidelines and it is indeed more difficult to actually qualify for the insurance.
Enter the FHA home loan. It is generally considered easier to qualify for MI under the FHA and it will go to 96.5% of the purchase price. In short there is a significant portion of the home-buying population who have no other option than FHA financing just for these two reasons alone.
In a Nutshell…
FHA financing may not necessarily be the best fit for everyone in the home-buying market. However, these hallmark features of the FHA home loan - minimal down payment and reserve requirements, flexible sources of funds and availability of mortgage insurance - are far and away the primary reasons that many home buyers, particularly younger first-time home buyers, seek FHA financing. It’s clear to see why.
Special Note: Pursuant to recent legislation addressing current housing issues, various departments of the Federal government are working on implementing new programs and expanding the role of the Federal Housing Administration (FHA) in dealing with these issues. As these programs are actually implemented and become available to consumers, look to PicturePefectSanDiego.com for new posts describing them in detail.
Read more articles and valuable tips about financing by Paul Gonzales
You can contact Paul at (800) 775-7334 or paulforloans@aol.com
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Related Posts: CW Mortgage, Financial news, Home Loans, Homeowners, Interest Rates, Mortgage News
New Conforming Loan Limits Announced For 2009
Posted by Kevin Kueneke | Currently 1 Comment »
After months of speculation, we finally know what the new 2009 high balance conforming loan limits are for San Diego and other “high cost” areas. The Federal Housing Finance Agency (FHFA) said that the $697,500 number we enjoyed for part of 2008 is dropping to $546,250 in San Diego.
Some areas such as Los Angeles-Orange Counties, San Francisco, San Jose, and Santa Cruz are having their 2009 numbers set at the new maximum of $625,500.
According to FHFA’s press release, the 2009 loan limits were calculated using 115% of median house prices as determined by the Federal Housing Administration (FHA) whereas the 2008 loan limits were calculated using 125% of median house prices.
So what does this mean? It means that anyone currently in escrow in San Diego with plans to borrow more than $546,250 needs to do everything they can to get their loan closed before 12/31/2008 or face significantly higher interest rates. There is almost a 2% interest rate difference between loans less than $697,500 and loans greater than $697,500 (also known as true jumbo loans) because conforming loans are guaranteed by the government (FNMA and FHLMC). Guidelines are also more strict for true jumbo loans than for conforming and high balance conforming loans.
As expected, the Federal Housing Administration (FHA) announced that FHA Jumbo limits will match the high balance conforming limits. The Department of Veteran’s Affairs (VA) said that VA Jumbo loans with zero-down payments will be allowed up to the high balance conforming loan limits through the end of 2011. This is good news for FHA and VA buyers as they will still be allowed to take advantage of these programs for higher priced properties.
Any questions or comments? Please email me at Kevin@MyCWMtg.com
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Related Posts: Buyers, CW Mortgage, Education, Financial news, Home Loans, Homeowners, Interest Rates, Mortgage News
FHA Loans - Income and Employment Requirements
Posted by Paul Gonzales | Currently 1 Comment »
This is the third in a series of six posts that deal with important aspects of FHA financing. The first post provided an overview of the program while the second post detailed FHA credit requirements. This post will discuss the income and employment requirements necessary to obtain an FHA home loan.
Income Documentation
For employees this is quite straightforward. Copies of the most recent paystubs covering at least one month and W2s for the previous two years are required. Complete Federal income tax returns for the previous two years may be required as well.
For self-employed people, signed copies of personal tax returns for the previous two years are required. If the business is a legal entity such as an “S” or “C” corporation, partnership or other legal entity then two years of business tax returns are also required. A signed year-to-date Profit and Loss statement (P&L) will be needed to complete the income documentation. FHA guidelines state that 25% or more ownership in a business is considered self-employment.
Types of Income for Employed People
The lender will review the paystubs together with the W2s and tax returns to establish a baseline amount of income as well as stability of the income. In general, if base income is increasing they will likely be able to use the current income amounts. On the other hand, income that is declining over the past two years will result in an averaging of the income. A significant decline in base income will require a written explanation.
- Overtime - to be counted it must have been relatively constant for the past two years as well as currently. There must be the prospect that it will continue and the employer will be required to state that it is likely to do so on a written Verification of Employment. If used it will be averaged over time and added to the base income
- Bonuses - the rules are similar to considering overtime.
- Commissions - will be averaged over the prior two years and must demonstrate reasonable stability; tax returns will be reviewed and unreimbursed business expenses will be deducted from the income
- Child support, alimony and spousal maintenance - such income can be included provided that it can be shown to continue for at least the next three years. It must be documented by a divorce decree, court order or separation agreement and actual receipt of the income documented by cancelled checks, bank statements or other positive means.
- Retirement income - Pension and Social Security income is acceptable and must be documented by award letters, IRS form 1099s and current “pay advices” (stubs). Again, there must be the prospect of continuing for at least the next three years
- Insurance and government income - workman’s compensation, long-term disability or other similar income must be documented and expected to continue for at least three years
Self-Employed Income
Income and expenses will be analyzed from the past two years tax returns and current P&L. The earnings will be averaged over this time period. Income that appears stable or increasing will be considered, whereas declining earnings may not be considered acceptable.
Minimum Length of Employment
Stable employment in the same general field of work or business for two or more years is considered minimum. Going from being an employee to self-employed, even in the same line of work, gets special scrutiny. A person who has been self-employed for at least one year AND has at least two previous years of employed experience in the same field may be considered. Formal training or education in the same line of work during the prior two years may be considered in lieu of employed experience.
The next post in this series will discuss the financial assets and down payment requirements for obtaining FHA financing.
you can contact Paul Gonzales at (800) 775-7334 or paulforloans@aol.com
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San Diego Homes Under $200,000? - Get the Facts
Posted by Diane White | Currently 1 Comment »
Are there really homes in San Diego for under $200,000? Yes there are…over 2,700 of them! And they are located throughout the county.
In fact there are a number of “affordable” homes that under $300,000 (5,800) and an additional 4,400 between $300,000 and $500,000. Listed below are the number of homes available (single family residences detached and attached homes only) in different price ranges as of Friday, 10/24/2008.
Below $200,000
San Diego County: 2,709 Listings
562—Metro Area
226—North County Coastal
603—North County Inland/No East
536—East County
Below $300,000 ($200,000-$299,000)
San Diego County: 3,095 Listings
625—Metro Area
322—North County Coastal
821—North County Inland/No East
453—East County
Below $400,000 ($300,000-$399,000)
480—Metro Area
326—North County Coastal
761—North County Inland/No East
490—East County
Below $500,000 ($400,000-$499,000)
298—Metro Area
229—North County Coastal
555—North County Inland/No East
201—East County
Below$600,000 ($500,000-$599,000)
San Diego County: 1,189 Listings
225—Metro Area
224—North County Coastal
402—North County Inland/No East
115—East County
It may be the perfect time to get into your first home or to buy that investment propety you have always talked about doing. Because of the foreclosures and short sales, prices are down and interest rates are very low.
Contact me for more detailed information on a particular area in San Diego County.
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Related Posts: Area Information, Area Statistics, Buyers, Condos & Townhomes, Find A Home, Foreclosures, Great Real Estate Deals, Interest Rates, Investment Properties, Market Trends, Picture Perfect San Diego, San Diego, Short Sales, Windermere
