Overview – Of all the loan programs available in the market today, FHA loans seem to be the source of the greatest numbers of misconceptions. It is assumed that the program is available only for first time buyers, or that such financing is only available for purchases in low-income neighborhoods, or that borrowers themselves must be low-income earners, etc. In reality, we consider FHA financing to be the most consumer friendly product available. It provides an outstanding financing alternative for many different types of borrowers who never realized such a versatile product existed. FHA provides opportunity for home ownership even if the buyer has no cash to put into the deal, limited or past credit problems, or relatively high debt-to-income ratios.

The benefits of a FHA loan are derived from the unbeatable combination of lenient credit qualifying, low interest rates, and options for a no-down payment / no cash investment purchase. The loans can be obtained as a 30 or 15 year fixed rate, or as a 1-year adjustable rate. The different options are handy in meeting the needs and desires of a variety of loan applicants, and all are offered at interest rates and closing costs that rival conventional loans that demand much tougher borrower qualifications.

FHA loans are insured products. That is how such fantastic loan terms can be obtained with lenient qualifying standards. Such insurance is referred to as mortgage insurance, and the insurance is set up to protect lenders against a default on the part of a borrower. Like any insurance coverage, the premiums are pooled with those of other insured parties, and in the case where a foreclosure occurs and the lender takes a loss, FHA will step in and cover the lenders loss with a payment from the insurance premium pool. As such, lenders can offer a higher risk loan without actually taking a higher risk themselves. Since the lender is in reality not taking the implied higher risk, the interest rates for the loan can remain at the same general level as those offered on lower risk conventional loans. This is a rather simplistic explanation of the FHA insurance operation, but it does express the general idea as to how the funding works.

Credit qualifying for a FHA loan is relatively easy. With their lenient standards, FHA loans are available to borrowers with fair to outstanding credit. A borrower with credit problems that are at least one year old can still qualify. (A more detailed list of qualifications is listed below.) A borrower with a very limited credit history can also qualify. We have approved borrowers with nothing more than a 12-month rent history and 3 utility company account references. A formal credit history is not required. Borrowers with an unblemished credit history can also make use of the program and the favorable rates and terms available with no money invested.

Borrowers with no cash can still buy a home using FHA.
We can construct your deal so as to allow you to buy a home with no cash at all. Using one of our down payment assistance foundations, we can cover the down payment for you. We can also design your purchase contract so as to allow the seller to cover all other expenses. By using FHA and our contract designing talents, we can get you a home with no money from you at all. Sorry, no investors; you must be an owner-occupant.

The FHA Streamline Refinance is an excellent feature that comes with every FHA loan. In the event interest rates drop below the level of the rate obtained at the time of purchase, a borrower with a FHA loan can perform a Streamline Refinance of their loan and reduce the rate to match current market conditions. The process does not require a borrower to go through the standard qualification process; there is no employment, income, or asset check. Consumer credit is screened for recent bankruptcies or judgments, but the payment history of individual accounts is not reviewed. The mortgage history is reviewed to ensure it is current and paid as agreed. With this feature, a borrower can take advantage of a drop in rates and the resulting lower payment without having to re-qualify for their loan. There is no minimum time a borrower must have owned their home to take advantage of this feature, nor is there a limit to the number of times the option can be exercised.

Some of the most popular misconceptions regarding FHA loans are as follows:

Fallacy:     
A borrower must be a first-time home buyer to get a FHA loan.
Fact:
While the product is extremely friendly toward first time buyers, it is also available to people that have previously owned homes.

Fallacy:
FHA loans are only for low-income wage earners.
Fact:
There are no maximum income limitations.

Fallacy:
Only certain homes or neighborhoods qualify for FHA financing.
Fact:
FHA loans can be used to finance almost any home. There are minimum quality standards that must be met: FHA will not finance junk. FHA does set maximum loans amounts based on counties, but the limits are typically high enough to never cause a problem.

Fallacy:
FHA loans are difficult to do and take a long lime to close.
Fact:
Absolutely false. Some unskilled real estate agents complain about FHA deals, but that is only due to their lack of ability and training. In reality, FHA loans are quick and easy to do, and can be closed as fast as any other loan product. Our record for closing a FHA purchase loan from the first borrower contact to finishing at the closing table is 96 hours (4 days).

Fallacy:
You need a lot of cash to purchase a home.
Fact:
With FHA, we can get you into a house without any cash input from you at all.  We accomplish this by combining the feature that allows the seller to pay all closing costs and prepaids with funds from a down payment assistance foundation.  The seller covers all the out of pocket expenses a buyer normally has, and the foundation gives you the money for the down payment with no obligation of repayment.  There are no special hoops to jump through: if you qualify for FHA, you get the down payment funds. This works as easy as it sounds, and we do such deals all of the time.  The interest rates are low, and you buy with no money at all.  it doesn't get any easier than that.

Fallacy:
Past credit problems will prevent someone from buying a home on good terms.
Fact:
FHA will disregard most consumer credit issues that are more than 1 year old, provided the old accounts are settled. Old collections and charge-offs that appear on the credit report will have to be paid. FHA requires clean credit for the previous 12-month period.

• No late payments of 30 days or more within the most recent 12-month period for accounts appearing on the credit report.
• Any listed charge-offs, judgments, or collections must be paid off, or be in repayment through a formal written agreement for at least 6 months.
• No multiple bankruptcies showing on the credit report.
• A minimum of 2 years since the discharge of a Chapter 7 bankruptcy.
• Chapter 13 bankruptcies must be discharged (not dismissed) and have had a good payment history.
• A minimum of 12 months rental or mortgage history without any 30-day late payments, unless living in current residence without a payment.
• A minimum of three sources of other credit with a 12-month history. Can even be utility company accounts, cell phone account, insurance carrier report, fitness center, etc.
• No delinquent child support accounts.
• No outstanding tax liens unless in formal repayment with the I.R.S.

Employment / Income

• Requires a 2-year employment history. Does not have to be with same employer, but stability is a plus. Moves within a like industry are acceptable.
• Self-employed borrowers will have to produce 2-years tax returns. Income is averaged from adjusted earnings. No declining income.
• Part-time employment income can only be counted with at least an 18-24 month history of such employment.
• Bonus, tip, or commission income can only be counted with an 18-24 month history of receipt and evidenced via a W-2 or tax return.
• Must be employed at the time of loan closure. Buyers new to the area will have had to report to work for at least one day.

Debt Ratios

• Debts counted are consumer items such as installment loans and credit card minimum payments. Car insurance, utilities, and other such items are not counted.
• Installment loans with a balance equal to or less than 10 times the monthly payment are not counted.
• The proposed housing payment including property taxes, hazard insurance, and mortgage insurance is counted.
• The combination of new housing payment and the existing consumer debt payments are compared with the monthly gross (before tax) income of the borrower(s). That is, the total monthly payment obligation is divided by the gross monthly income. The result is the debt ratio. Example: consumer debt of $400, new housing of $1,200, gross income of $3,700. 1,600/3,700 = .43. This borrower has a 43% debt ratio.
• The ideal maximum debt ratio for a FHA loan is 41% or less. However, a borrower with good credit or a history of savings can get approved on a higher debt ratio. The allowable maximum ratio is rarely over 50%.

Down Payment

• FHA requires a minimum 3% down payment. However, they also allow this down payment to be made via a down payment assistance foundation. At Centurion, we work with several such foundations. There are no special requirements to qualify; if you qualify for a FHA loan, you qualify for the down payment assistance.
• You do not repay down payment assistance grants. The funds from the grant are provided by the seller of the property you are buying. This is a sales concession that will be requested of the seller in your purchase contract.
• We help you and your agent construct the purchase contract so as to make the allowance for the down payment assistance. Do not be concerned if you are working with an agent who is unfamiliar with the procedure. It is easy to do with a little guidance.

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