10 Myths about FHA Loans

When you start researching about FHA loans you will learn a lot of information; everything from gathering info to the process of applying. But, with the heavy load of information you will find on the internet and different sources, sometimes you need to clear some areas up. Let’s discuss the facts of FHA loans and it’s myths.

Myth #1: If my bank won’t process FHA home loans, I should just get a conventional loan.

There are plenty of reputable lenders approved and willing to work with you on an FHA guaranteed home loan. It’s true that some lenders refuse to write FHA loans. But,  if your current lender won’t help, keep looking for someone who will. You’ll find plenty of lenders who will want to work with you and get the loan you need.

Myth #2: I can use “stated income” on my FHA loan application much like on conventional loans.

You are required to show proof of income when applying for an FHA home loan. You’ll need documentation like last year’s income tax return forms or pay stubs. Stated income is not enough to get approved for an FHA mortgage.

Myth #3: I won’t qualify for an FHA loan unless I have good credit.

The FHA is able to process your loan application even if you have no credit score. Your payment history is more important than a limited credit history or a few bad marks on your credit record. If you can show that you are a dependable borrower and have steady income, then chances are you are able to qualify for an FHA loan.

Myth #4: Since I declared bankruptcy, I won’t be able to get a home loan for seven years.

If you have made on-time payments and have established good history of on time payments since your bankruptcy filing, you may qualify for an FHA loan.  Work with your loan officer to determine what you need to do to get approved. If you are currently delinquent on your repayment agreement, you may not be approved for an FHA loan.

Myth #5: I need to save for a big down payment.

Some conventional loans require as much as 20% down. Fortunately, FHA loans require you to pay as little as 3.5% down plus closing costs.

Myth #6: I only need a 3% down payment on my home with an FHA loan.

This information is out of date.  In 2009, the official down payment rate changed to 3.5%. The FHA down payment rate is still much lower than conventional loans, but that extra .5% is an important figure to budget for.

Myth #7: I can use the money paid for closing costs to help meet that 3.5% down payment.

Closing costs are due separately from your down payment.

Myth #8: The FHA home loan down payment is only calculated at 3.5% of the selling price of the home.

FHA home loan down payments are calculated at 3.5% of the selling price of the home, but may also be calculated according to the home’s appraised value. The lower figure of the two determines the down payment.

Myth #9: I can buy any property with an FHA loan.

FHA home mortgages are approved only for those who will live in the building they buy. Commercial buildings or property don’t qualify.

Myth #10: I can’t purchase a condominium with an FHA loan.

NOT TRUE.  If you plan on living in the condo as your main residence, you can get an FHA-insured loan to purchase this kind of property. You can also purchase multi-family homes–the residency rule still applies.

9 Ways Your Property Becomes “Unmortgageable”

According to HUD, the Federal Housing Administration insures 4.8 million single-family mortgages as well as mortgages for 13,000 multifamily buildings. These account for 16% of mortgages written this year and 20% of those for new homes. For first-time buyers, FHA standards are especially important.

But the government is stringent about which loans it will approve or insure. The FHA and HUD give property appraisers a clear list of home problems that are not acceptable, including health, safety and structural hazards.

According to HUD and an array of real-estate experts and brokers, these 10 problems may make home-loan qualification difficult — or downright impossible — for buyers, no matter what credit score they may have.

1. Leaning walls, crumbling foundations  

Before the FHA will sign off on a mortgage, it requires the repair of any structural defect that, without fixing, would leave a house unmarketable.

If the subject property is in such poor condition that it may be impractical to bring it up to FHA’s minimum property requirements, the appraiser should recommend rejecting the property.

Sinking, disintegrating and otherwise failing foundations can lead to a mortgage rejection under FHA rules.

Non functioning drains or any drainage issues can also hurt you. In addition, soil issues indicated by peripheral walls leaning or collapsing can also rise as a serious problem if your house is on the side of a steep hill or valley.

2. Living near an airport runway

The loud noises of jet engines rattling a home, is not necessarily the main reason for this potential mortgage killer.

The FHA has one key condition when it comes to living near any airports or runways: There must be “evidence of acceptance (of the noise) in the market and (that) use of the dwellings is expected to continue.” In other words, the mortgage likely is acceptable if the airport isn’t planning on expanding.

Buyers must also receive a notification whether the house is a “runway zone”. When the loan-application process begins, the would-be buyer must be informed of all implications that come with living near a runway. The buyer then must sign a document acknowledging the receipt of that information. Without these in place, lenders may hesitate on making a deal.

3. A leaky roof

Whether you’re talking about its walls, floors, windows or doors, homes must be waterproof. That, of course, all begins with the roof.

The FHA, in particular, doesn’t want a roof to just block moisture, it has to last.

4. Avalanche or mudslide threat

Government lending standards frown upon homes that face a threat of any mud or landslide.

Federal housing regulations require that residential properties be free from foreseeable hazards … which may affect the health and safety of the occupants or the structural soundness of the property.

The FHA identifies rock slide areas as red or blue zones. Homes located within either color on federal housing maps are ineligible for FHA insurance and should be rejected.

5. Missing appliances

In an era thick with foreclosures, real-estate professionals may be used to going through  distressed properties and seeing that stoves, dishwashers, bathtubs and mounted appliances and fixtures are missing.

In some real-estate-owned properties — homes possessed by a bank, a government agency or a government-loan insurer, typically after an unsuccessful foreclosure auction. For instance, all or some of the appliances may be missing, and there may be damage to the floor, wall or ceiling finish as a result of the removal which will back loans on these properties, if certain hurdles are cleared. Depending on the damage, the FHA advises appraisers to note those holes, cracks and gouges as “deferred maintenance” and make sure the house is devalued appropriately.

6. Unheated rooms

All rooms must have a heat source or receiving at least some source of heat source, according to FHA rules.

There are, however, a handful of geographic exceptions: homes in Hawaii and the Florida counties of Lee, Charlotte, Glades, Hendry, Palm Beach, Collier, Broward, Monroe and Miami-Dade don’t require heat if the lack of a furnace is normal for the local housing market and doesn’t hurt the property’s marketability.

7. Lava flows

Given that thousands of American homes are in the Hawaiian islands, FHA mortgage rules include the threat of hot lava in those areas.

Federal housing policies on volcanic hazards were established in 1971 and include boundaries for two specific areas on Hawaii’s big island that may be in lava’s path. The FHA will not back loans in these zones.

Zone No. 1 includes the summit areas and active parts of the rift zones of Kilauea, a volcano on the southeastern side of the island, and Mauna Loa, a volcano on the southern end of the island. Zone No. 2 includes several areas adjacent to and down-slope from the active rift zones of those two volcanoes.

8. Underground oil tanks and wells

Whether they are still operating or abandoned, fuel tanks and wells buried below a residential property could derail a mortgage loan if they are detected or noted in property records.

Tanks and wells point out that they pose potential hazards via fire, explosion and ground pollution. Therefore, no dwelling may occur closer than 300 feet from an active drilling site or 75 feet from an operating well.

9. Termites

Wood-chomping bugs can eat through walls, ceilings and can have a major impact on a home’s chances of qualifying for a mortgage, real-estate experts say.

Termites can cause serious problems in the wood structural components of a house and may go undetected for a long period of time. However, the agency requires inspection only if there is evidence of “active infestation.”

FHA designated two termite infestation probability zones.

The first — a “very heavy” termite infestation — includes Alabama, Florida, Georgia, Mississippi, South Carolina and Puerto Rico. The second, classified as having “moderate to heavy” termite activity, includes Illinois, Indiana, Kentucky, North Carolina and Tennessee.

Time Your FHA Streamline Refinance Closing

The Streamline Refinance allows a limited amount of paperwork; the FHA Streamline Refinance can be among the simplest, fastest refinance programs out there. According to FHA guidelines, there is no appraisal, no income to verify; and no credit to review (be aware some lenders do ask for tax returns).

This is a simple and quick refinance; however, to close on a FHA Streamline Refinance, it requires vigilance. Mainly, the homeowners need to pay close attention to their expected mortgage closing date so they don’t waste any of their hard earned cash.

What’s at stake is up to 30 days of prepaid mortgage interest which may be double-paid without your knowledge. It’s because of the FHA guideline which allows mortgage lenders to collect a full month of mortgage interest, regardless of whether the loan’s been paid off prior to the month end; this is different from a conventional refinance for which a mortgage lender will only collect through the payoff date.

To put this FHA rule to an example, assume a homeowner in Orange, California is doing the FHA Streamline Refinance to refinance a $450,000 mortgage; and assume the new FHA loan will fund on the 10th of the month.

• 20 days of per diem interest paid to new lender, to cover the rest of the month
• 30 days of per diem interest paid to old lender, because the FHA prescribes it

The homeowner who funds an FHA Streamline Refinance on the 20th day of the month, therefore, is paying 50 days of mortgage interest for 30-day month — a waste of 20 days of interest.

The better plan is to fund the loan on the 30th of the month such that only 1 day of mortgage interest is paid to the new lender, reducing the total interest paid to 31 days and this will save a good amount of money.