Sunday, June 7, 2009

100% Financing Back In Style thanks to FHA Loans

Did you think that 100% financing had gone the way of the ranch house? Think again. Thanks to the US government, buyers with as little as 3.5% downpayment (and/or low credit scores) can purchase a single family home, condo, or 2 – 4 unit property with an FHA loan.

The Obama administration has now sweetened the deal by allowing the $8,000 first-time buyer credit to be applied to downpayment or closing costs.

Starting soon, first-time home buyers nationwide will be able to turn their $8,000 federal tax credits into cash for use at closing if they use Federal Housing Administration mortgage financing.

But in its final guidelines issued May 29, the Department of Housing and Urban Development clarified that buyers obtaining FHA loans through private lenders would have to invest at least some of their own funds -- whether from personal savings or gifts from relatives -- in the form of a minimum 3.5% down payment.

You’ll be able to use the $8,000 tax credit for settlement fees, escrow charges, higher down payments or to "buy down" your interest rate to cut monthly payments.

To start, you'll need to qualify as a first-time buyer under the generous definition permitted by Congress -- that is, you cannot have owned a principal residence during the previous three years, and your household gross income cannot exceed $95,000 for single taxpayers or $170,000 for married couples filing jointly. [Los Angeles Times]

FHA loans have stringent underwriting requirements, so not everyone is going to qualify. FHA loan fees are higher than commercial loan fees – buyers pay 1.75% of the 1st loan principal to obtain the loan. On top of this FHA fee, there may be lender “discount” points. Mortgage insurance is required if the loan-to-value ratio is less than 78%. Monthly mortgage insurance for FHA loans is $45.80 per $100,000 of loan and is required for a minimum of five years.

In spite of these additional fees, FHA loans are outstanding deals for borrowers with low FICO scores or low downpayment. Interest rates are competitive, and if they go down homeowners can do a “streamline” refinance with lower fees than with a commercial lender.

Roll in the $8,000 first-time buyer credit that can be applied at closing – and many people who considered homeownership out of reach may find themselves with a new set of keys. These government-backed "no equity" loans may lead to a new round of foreclosures, but in high-priced Los Angeles County, they may also turn a new generation of renters into homeowners.