Monday, 08 April 2013
FHA financing is the best way to finance a HUD Home for most buyers.
FHA has certain advantages over conventional financing:
· The total down payment for an FHA loan is only 3.5% of the sale price. (This number may increase in the near future. The down payment amount may also change to reflect risk factors in credit score. Check with your loan officer for the most up-to-date information.)
· Debt-to-Income Ratios are generally higher with FHA loans. Buyers can qualify with 29% Front End Ratio and 40% Back End Ratio , compared with similar conventional products that limit borrowers to 33-36% on the back end. Borrowers have more borrowing power with an FHA loan.
o Example (front end): Monthly Income x 29% = Maximum PITI (principal, interest, taxes, and insurance). For a monthly income of $3, 000, that means that $870 is the maximum mortgage payment for qualifying purposes.
o Example (back end): Monthly Income x 40% = Maximum PITI (principal, interest, taxes, and insurance). For a monthly income of $3,000, that means that $1,200 is the maximum mortgage payment for qualifying purposes.
· FHA lets the buyer negotiate a 3% seller assist toward closing costs. In many cases, a borrower needs no more than 3% of the total sale price as a total cash-out-of-pocket investment. There are other alliances and programs that will let the seller pick up the whole tab. Some of these plans are under close scrutiny by the U.S. Internal Revenue Service.
· FHA is more lenient with credit issues than conventional lenders. Even bankruptcy discharges can work with FHA if good credit follows the discharge. FHA underwriters give much credence to letters of explanation about credit recitals.
HUD Homes offered with FHA financing offer special incentives to buyers. HUD Homes eligible for FHA 203(b) financing have reduced closing costs because there is NO APPRAISAL fee. Lenders are required to use the appraisal that HUD has on file if the appraisal is less than 150 days old. (If you sell a HUD Home near the end of the 150-day window, you can make a written request to HUD to extend appraisal validity 30 days, to 180 days. That request must be in writing two weeks before the 150 day appraisal expiration date.)
Keep in mind an important fact about FHA financing for HUD Homes:
FHA will only finance a maximum loan amount that corresponds to HUD’s asking price. If a buyer is inclined to “bid up” a property and finance that property with FHA financing, he will have to make up the difference between the asking price and the bid amount with additional down payment monies.For instance: A buyer expects that there will be competing bids for a house at 123 Main Street. HUD’s list price is $85,000. The buyer is confident that the real value of the property is closer to $100,000. He bids $90,000. His down payment will increase from 3.5% of $85,000 ($2,975 down payment) to that amount PLUS an additional $5,000 ($6,912 down payment).