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There are two federal agencies and one state agency that help make it possible for people to buy homes they would never be able to purchase without government involvement.
The two federal agencies that participate in real estate financing are the Federal Housing Administration (FHA) and the Veterans Administration (VA). The California Farm and Home Purchase Program, or CalVet loan, is a state program that helps eligible veterans.
Federal Housing Administration (FHA)
The FHA program, a part of HUD (U.S. Department of Housing and Urban Development) since 1934, has caused the greatest change in home mortgage lending in the history of real estate finance. The FHA was established to improve the construction and financing of housing. The main purpose of the FHA program has been to promote home ownership. Secondary results include setting minimum property requirements and systemizing appraisals. An appraiser would be reprimanded if he or she did not use FHA guidelines when preparing appraisals for FHA loans. Additionally, an appraiser who intentionally misrepresents the value on FHA loan appraisals, which subsequently cause a loss, could be fined and face legal action.
The FHA does not make loans; rather, it insures lenders against loss. Loans are made by authorized lending institutions such as banks, savings banks, and independent mortgage companies. As long as FHA guidelines are used in funding the loan, the FHA, upon default by the borrower, insures the lender against loss. If the borrower does default, the lender may foreclose and the FHA will pay cash up to the established limit of the insurance.
The lender is protected, in case of foreclosure, by charging the borrower a fee for an insurance policy called Mutual Mortgage Insurance (MMI). This insurance requirement is how the FHA finances its program. The premium may be financed as part of the loan or paid in cash at the close of escrow.
The borrower applies directly to the FHA-approved lender (mortgagee), not the FHA, for a loan. FHA does not make loans, build homes, or insure the property. A buyer who would like to purchase a home with FHA financing would apply to an FHA-approved mortgagee (lender) who would then request a conditional commitment from FHA. The conditional commitment is good for six months. A firm commitment is requested when the FHA approves the borrower (mortgagor).
The FHA guidelines encourage home ownership by allowing 100% of the down payment to be a gift from family or friends and by allowing closing costs to be financed to reduce the up-front cost of buying a home. The down payment on FHA loans varies with the amount of the loan.
Popular FHA Loan Programs
Section 203(b)
The FHA 203(b) loan offers financing on the purchase or construction of owner-occupied residences of one-to-four units. This program offers 30-year, fixed-rate, fully amortized, mortgages with a down payment requirement as low as 3%, allowing financing of up to 97% of the value of the home. FHA has mortgage limits that vary from county to county.
Their website, https://entp.hud.gov/idapp/html/hicostlook.cfm, provides the current FHA mortgage limits for several areas.
Section 203(k)
A purchase rehabilitation loan (purchase rehab) is a great option for buyers who are looking to improve their property immediately upon purchase. This mortgage loan provides the funds to purchase your home and the funds to complete your improvement project all in one loan, one application, one set of fees, one closing, and one convenient monthly payment.
A purchase rehab loan could be used for a variety of improvements such as adding a family room or bedroom, remodeling a kitchen or bathroom, making general upgrades to an older property, or even completing a total teardown and rebuild.
Section 245 Graduated Payment Mortgage
A graduated payment mortgage (GPM) has a monthly payment that starts out at the lowest level and increases at a specific rate. Payments for the first five years are low, and cover only part of the interest due, with the unpaid amount added to the principal balance. After that time, the loan is recalculated with the new payments staying the same from that point on. In this loan, the interest rate is not adjustable and does not change during the term of the loan. What actually changes is the amount of the monthly mortgage payment.
A GPM is offered by the FHA to borrowers who might have trouble qualifying for regular loan payments, but who expect their income to increase. This loan is for the buyer who expects to be earning more after a few years and can make a higher payment at that time. GPMs are available in 30-year and 15-year amortization and for both conforming and jumbo loans. The interest rate for a GPM is traditionally .5% to .75% higher than the interest rate for a straight fixed-rate mortgage. The higher note rate and scheduled negative amortization of the GPM makes the cost of the mortgage more expensive to the borrower.
Energy Efficient Mortgage
The Energy Efficient Mortgages Program (EEM) helps homebuyers or homeowners save money on utility bills by enabling them to finance the cost of adding energy-efficiency features to new or existing housing. The program provides mortgage insurance for the purchase or refinance of a principal residence that incorporates the cost of energy efficient improvements into the loan.
Section 255 Reverse Annuity Mortgages
Reverse Annuity Mortgages are also called Home Equity Conversion Mortgages (HECM). It is a program for homeowners (62 years and older), who have paid off their mortgages or have only small mortgage balances remaining. The program has three options for homeowners: (1) borrow against the equity in their homes in a lump sum, (2) borrow on a monthly basis for a fixed term or for as long as they live in the home, or (3) borrow as a line of credit.
The borrower is not required to make payments as long as the borrower lives in the home. The loan is paid off when the property is sold. FHA collects an insurance premium from all borrowers to provide mortgage coverage that will cover any shortfall if the proceeds from the sale of the property are not sufficient to cover the loan amount. Senior citizens are charged 2% of the home’s value as an up-front payment plus 1/2% on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower’s principal balance. FHA’s reverse mortgage insurance makes this program less expensive to borrowers than the smaller reverse mortgage programs run by private companies without FHA insurance.
