Tim Storm

FHA financing has become the primary way to finance the purchase of a home when the buyer has less than 20% for down payment. Why is this? And who should get an FHA loan? There are numerous reasons, but below are some of the primary advantages that FHA financing has versus Conventional (Fannie/Freddie) financing.

1. FHA only requires 3.5% down payment. In California, a "declining market" state, the minimum down payment is generally 10%, though a buyer using Conventional financing with 10% down better have a 740 FICO.
2. The down payment can be "all gift" with FHA. With general Conventional guidelines, a buyer would need to have 20% down payment for the entire down payment to be a gift.
3. No need for approval by an outside Mortgage Insurance company when financing with FHA. For anyone with less than 20% down payment, some form of mortgage insurance will be necessary. In California it has become very difficult for all but the most pristine borrower to get mortgage insurance, even with a 15% down payment. Private mortgage insurance, even at 90% loan to value for borrowers with a 740 FICO score(if even they can get it), is still more expense than the factor used by FHA. (at least in California, a declining market state.)
4. If the down payment is coming from a 401K, FHA does not count the 401K loan payment in the overall debt to income ratios. Conventional financing does. This can really lower the amount a buyer would qualify for.
5. Non-occupying co-borrowers are allowed with FHA financing. This means a parent or family member can provide help to another family member looking to buy a home.
6. Lower interest rates for borrowers who have FICO scores less than 720 and less than 20% down. As a matter of fact, for buyers whose FICO scores are under 700 on a Conforming loan ($417,00 or less), even with 20% down should consider an FHA. If they are buying a condo the difference is even more in favor of FHA. For buyers who have 20% down on a Agency Jumbo ($417,001 to $729,750), they should at least consider FHA if their FICO drops below 720. If a Jumbo buyers FICO is under 700, FHA may become the better way to go. And once again, if the property is a condo, the differences in favor of FHA will be more pronounced.

Only a year ago FHA loan limits were so low that, at least in Orange County, CA, it was difficult to find a home that fit within FHA limits. Now FHA limits are as high as Conventional. Every deal is different and there are many things to consider. Now more than ever, a buyer needs to make sure they are getting the right type of loan when buying a home. Thoroughly examine each scenario carefully to make sure you are comparing "apples to apples."

Authored by Tim Storm, CMPS, Sr. Loan Officer with Frost Mortgage, a Direct Endorsed FHA Lender located in Irvine, CA. For information on FHA, or to be prequalified please call 877-786-4243 x 7.

It really is not that difficult to close an FHA loanas quickly as any other type of loan. But here are the steps that need to be followed in order to meet the time lines required on a purchase transaction.

Day 1- Take the loan application, run credit, get the Automated Credit Approval, request pay stubs, W2's, bank statements, drivers license and social security card copies. Actually, this entire step is normally already taken care of if the borrower has been properly PreApproved for an FHA Loan. On Day 1, the appraisal is ordered, and the escrow company is contacted to request escrow instructions and title.

The goal is to have a complete loan package ready for final underwritten approval within 7 days. The lender needs to be proactive in notifying all parties involved in the transaction of anything that is hold up the deal.

Day 7 - By now the FHA Loan package should be complete. The file is submitted to underwriting for full underwritten approval. Depending on the lender, this step can take anywhere from 1 day to many more days. Since this post is about how to close in 3 weeks or less, we'll stick with the 1 day underwritten approval. This is also where being a Direct Endorsed FHA Lender is important.

Day 8- Underwritten approval is received. There will typically be a few Prior to Loan Document conditions that are required before moving to the next step. We'll assume it takes 3 days to solve these "PTD" conditions.

Day 11 - All Prior to Loan Document conditions are submitted to underwriting.

Day 12- PTD's are signed off and Loan Doc's are prepared. Most of the time, the loan doc's are actually emailed to the escrow company where they are printed out are prepared for notarization.

Day 13 - Loan docs are signed. Depending on the time of day the loan doc's are signed, the loan docs are returned to the lender.

Day 14 - Signed docs are received by the lender. Over the next few days any Prior to Funding conditions are resolved and funding is prepared.

Day 16 - By now the FHA loan should be funded.

There are of course things that can cause complications in any deal, but if the lendersticks to a strict time line, then there will be plenty of time resolve most issues that arise. If the borrower has been properly PreApproved before making an offer, then most borrower issues should have already been resolved.

The goal is to make the purchase transaction is smooth and easy as possible.

Authored by Tim Storm, CMPS, Sr. Loan Officer with Frost Mortgage, a Direct Endorsed FHA Lender located in Irvine, CA. For information on FHA, or to be prequalified please call 877-786-4243 x 7.

In Orange County, CA the 2009 loan limits are $625,500 for an FHA mortgage. This is a big increase from the low limits FHA used to have in Orange County. Until March of 2008, when FHA implemented a temporary increase for the remainder of 2008, the maximum FHA loan was only $362,790.

A $625,500 loan will buy a nice home in Orange County. A home buyer can purchase a home for approximately $650,000 with only a 3.5% down payment. Realistically, even a buyer with a 10% down payment may need to take a serious look at FHA for their loan. It has become very difficult, especially on Conventional loans over $417,000, to get PMI (Mortgage Insurance) when there is only 10% for down payment. To make matters worse, if the borrowers FICO score is under 700 they may need 20% down on a Conventional loan.

This is not the case with an FHA loan. On FHA loans over $417,000, even a borrower with a 620 FICO score can buy a $650,000 home with 3.5% down.

FHA Works with more than 3.5% Down Payment

That should seem obvious. In situations where the buyers FICO score is below 700, or worse, below 680, the interest rate can really jump up on a Conventional loan at 90% and 85% loan to value. On an FHA loan, there is generally not a difference in interest rate for someone with a FICO of 720 or 620. Anyone having a tough time trying to do a Conventional loan with 10% down or even 15% down, should check out what an FHA loan can do for them.

Authored by Tim Storm, CMPS, Sr. Loan Officer with Frost Mortgage, a Direct Endorsed FHA Lender located in Irvine, CA. For information on FHA, or to be prequalified please call 877-786-4243 x 7.

A week ago, the Treasury announced that they had a target mortgage rate in mind of 4.5%. Mortgage rates are already very low, as evidenced by a sudden increase in refinance activity. Orange County cities such as Irvine, Tustin, Orange and Newport Beach are seeing a big rise in refinances, helped by the fact that a larger percentage of homeowners have equity in their home, as compared to some other California Counties, like Riverside and San Bernardino.

Lower rates will definitely spur more activity in sales, as seems to already be happening. The LA Times recently reported an interesting thing that happened after the Treasury's announcement. Some potential home buyers actually hopped back "on the fence", thinking there may be a specific 4.5% loan program coming that would benefit them. At the time of this writing, a 30 year fixed rate is essentially at 4.875% (5.185% APR). Mortgage rates and lower property values have already created more affordability than we've seen in years. It would be crazy to sit out much longer.

The Government has already put into place a $7,500 Tax Credit for First Time HomeBuyers, which, when combined with low rates, is getting the attention of home buyers. As we head into 2009, momentum that is already beginning to build should continue. With Conforming and FHA mortgage limits set at $625,500 for Orange County. Since FHA will only require a 3.5% down payment in 2009, an Orange County home buyer can purchase a $645,000 home with only 3.5% down. Plus, the down payment can be a gift, or even a loan from a 401K. There are a lot of homes that fall within those parameters.

2009 should be a great year as so many renters realize they are able to buy a home for essentially the same payment they pay for rent, after tax benefits are considered.

Authored by Tim Storm, CMPS, Sr. Loan Officer with Frost Mortgage, a Direct Endorsed FHA Lender located in Irvine, CA. For information on FHA, or to be prequalified please call 877-786-4243 x 7.

So how much of a difference will a significant interest rate drop make for Orange County, CA home buyers? For some people it will be a mean lower payment. For others, the increased buying power will afford them a better home, extra bedroom, bigger yard, or whatever it is that will meet a home buyers needs.

It is estimated that a .5% drop in interest rates will result in approximately a $15,000 to $25,000 higher purchase price without increasing the monthly payment, depending on the actual purchase price the buyer is targeting.

Below are 3 scenarios, each based on an FHA loan, which only currently only requires a 3% down payment. Effective January 1, 2009, FHA will require a 3.5% down payment. FHA has become the loan of choice for Orange County, CA home buyers who have less than 10% for down payment.

Scenario #1

Let's assume John and Lisa make a combined $6,000 a month in gross income. They will be able to get a loan from their 401K for the down payment and plan to have the seller pay closing costs. They would qualify for a purchase price of approximately $325,000. (See image to right.) At a rate of 5.5% (5.682% APR) the total payment, including taxes and insurance, would be $2,357. With a rate drop of .5% to a new rate of 5% (5.196% APR) they would be able to buy a $340,000 home and still have the same payment.

If they chose to stay with a $325,000 price, then their payment would be approximately $100 less, or $1,200 per year.

Scenario #2

Let's assume Mike and Sally make a combined $8,500 per month. Their down payment will come from a combination of savings and gift from family. At the same 5.5% rate, they would have a payment of $3,263 if they bought a home for $450,000 with 3% down. But with a rate of 5% their purchase price would be $470,000 while still maintaining the same payment. I nice $20,000 increase in purchase power. The payment savings would be $137 per month if they decided to stay at the same price.

Scenario #3

Now let's assume Carl and Susie are looking to purchase a home in Irvine, CA in the $600,000 range. Their combined income is $12,000 per month, and at a rate of 5.5% their total payment would be $4,351. A rate drop to 5% would allow them to increase their purchase price to $625,000 without increasing their monthly payment. A $25,000 increase in purchase power. If they decided to stay with the same price, their monthly payment would be $183 lower.

Interest rates have already come down significantly over the past few months and now is a great time to buy a home. Low mortgage rates are already increasing the number of home buyers making offers for the first time. This is the first time in many years in Orange County, CA that a renter can look at a Rent vs Own analysis (with a 30 year fixed rate and 3% down), and without making outrageous assumptions, see the huge advantage of owning a home.

Authored by Tim Storm, CMPS, Sr. Loan Officer with Frost Mortgage, a Direct Endorsed FHA Lender located in Irvine, CA.