By Deborah Ann Spence

Pa FHA loans -All you need to know. FHA stands for the Federal Housing Administration. Pa FHA loans are not considered Pa loans. FHA is a part of the Department of Housing and Urban Development, a federal agency dedicated to providing decent, safe, affordable housing. An FHA-insured mortgage is a type of mortgage financing. With this type of financing, the Federal Government insures lenders against loss if the borrower defaults on the loan. This insurance allows the lender to decrease the risk, thereby providing lower down payments, relaxing specific credit requirements, and making more loans to potential homebuyers.

FHA is not a lending institution.

They do not provide direct funds for mortgages. All funds are approved and disbursed directly from a FHA-approved mortgage lender.

FHA funds housing counseling agencies.

FHA has approved counseling agencies that offer free counseling to homebuyers. They can assist with poor or no credit issues.

FHA does not warrant the condition of a property.

FHA insures the lender against loss. A licensed FHA appraiser goes out and appraises the property for value only. He is not a home inspector. FHA recommends a “home inspection,” but it is not a requirement.

Pa FHA has more lenient credit requirements.

FHA understands that many borrowers have experienced some credit problems. This allows buyers with less-than-perfect credit to own homes.

FHA does not set the interest rate.

The lender sets the interest rate and points.

FHA does not have a specific first-time homebuyer program.

All Pa FHA loan programs are available to individuals seeking FHA lending with low down payments and less stringent credit qualifications, and you do not need to be a first-time homebuyer.

FHA’s qualifying ratios are 31% (income to proposed total monthly debt) and 43% (income to PITI and

Reoccurring debts). With computerized underwriting through the lender, the ratios may be increased up to 50% of the total debt ratio. Any total debt-to-income ratio over 45.00% needs an exception with compensating factors.

FHA has no restriction on the number of borrowers

They do not permit co-signers. All income and debts will be used for qualifying ratios. If a borrower wants to add an individual who will not use his income, assets, or credit, that individual cannot go on the mortgage or deed. Only those credit-worthy individuals can be on the deed, mortgage, and note.

There is no requirement to be a United States citizen.

The borrower must possess a Social Security number, a verifiable 2-year work/income history, and lawful residency.

Gifts are acceptable.

All monies for the purchase can be a gift. The donor needs to have an established relationship with the borrower. For an acceptable gift, the donor and borrower must sign the letter. Gift transfer must be done before closing and documented by providing the front and back of the donor’s cashed back. The borrower must show receipt of the funds deposited into the borrower’s account. Gifts are not permitted to be given at the closing.

Retirement assets are acceptable for reserves, but only 60% of the account will be used.

Rental income may be used to qualify.

Pa FHA permits up to 85% of the rental income to qualify. The other 15% is used for vacancy/repairs and is subtracted from the rent. $500-15% = $425.00

Bankruptcy (2 yrs.) and Foreclosure (3 yrs.) must have a waiting period with the re-establishment of GOOD credit (no lateness on any accounts). There are circumstances where exceptions can be made.

Pa FHA imposed mortgage insurance on all loans.

The “up-front mortgage insurance” (UPMIP) is 1.75% of the base mortgage amount. This is permitted to be financed, or it can be paid in cash at closing. There is also a monthly renewal premium (MIP).

55% for LTV greater than 95%

50% for LTV 95% or less

The MIP continues until the loan balance reaches 78% of the original sales price or appraised value (whichever one is lower). FHA does not permit a new appraisal to be deleted to MIP.

Pa FHA loans are assumable, depending on the creditworthiness of the new buyer. The FHA MIP is not refundable on any assumptions.

FHA permits the seller to contribute up to 6% of the sales price towards the closing costs and prepaid.

Seller contribution in access of the allowable closing costs and pre-paid will reduce the seller contribution and/or increase the buyer’s cash contribution towards the down payment.

Buyer must have contributed at least 3.5% of funds into the purchase!

Pa FHA offers 30 and 15-year fixed rates and 3/1 and 5/1-year Adjustable Rate Mortgages (Arms’). Borrower qualifies at 1% over the start rate if less than 5% down payment on Arms’. With 5% or more down, then qualify at the start rate.

3/1 ARM

Adjust annually after the initial 36 months

Max 1% increase/decrease per adjustment up or down

Max 5% lifetime cap

Min floor cap is the margin of 1.75%

5/1 ARM

Adjusts annually after the initial 60 months

Max 2% increase/decrease per adjustment up or down

Max 6% lifetime cap

Min floor cap is the margin of 1.75%

FHA Maximum Mortgage Limit for the country five country area:

(Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties)

Temp Loan Limits:

                                          1 unit                2 units               3 units                   4 units

(high balance)        $420,000               $537,650          $649,900              $807,700

(conforming)          $417,000               $533,850          $645,300             $801,950

FHA permits secondary financing but only from a family member.

There are NO prepayment penalties on any FHA loan.

The late charge for a FHA loan is 4%.

Although no reserves are required on a 1 to 2-family property, 3-month reserves are required on a 3 to 4-family property.

Pa FHA Loans-Property resold within the last 12 months:

1. Only owners of record can sell properties that will be financed using FHA-insured mortgages.
2. Any property resale may NOT OCCUR 90 OR FEWER DAYS FROM THE LAST SALE to be eligible for FHA financing.
3. FHA will require additional documentation validating the property value for a resale between 91 and 180 days when the new sale price exceeds the previous sales price by 100% or more. I, e: a new appraisal and documented proof of any improvements to the property. The new second appraisal’s cost must be paid by the lender or seller (not by the buyer).
4. Exceptions to the 90-day restriction are properties acquired by an employer or relocation agency in connection with the relocation of an employee. HUD-owned properties and new construction are also exempt.

FHA now permits “AS IS” appraisals for existing properties.

This is only true when minor property deficiencies do not affect the occupants’ safety or the property’s security and soundness. It is the lender’s responsibility to determine if these minor deficiencies are acceptable.

Examples are:

• Missing handrails
• Cracked or damaged exit doors that are otherwise operable
• Cracked window glass
• Defective paint surfaces in homes constructed post-1978
• Minor plumbing leaks
• Defective floor finish or covering
• Evidence of previous (non-active) Destroying Insect/Organism damage where there is no evidence of unrepaired structural damage, Rotten or worn out countertops
• Damaged plaster, sheetrock, or other wall and ceiling materials in homes constructed post-1978
• Poor workmanship
• Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
• Crawl space with debris and trash
• Lack of an all-weather driveway service
• Required repairs are:
• Inadequate access/egress from bedrooms to exterior of home
• Leaking or worn-out roofs
• Evidence of structural problems
• Defective paint surfaces in homes constructed pre-1978
• Defective exterior paint surfaces pre-1978 where the finish is unprotected

Pa FHA no longer mandates inspection for the following:

• Wood destroying Insects/Organisms
• Unless there is evidence of active infestation
• Required by state or local jurisdiction
• If customary to the area or at the lender’s discretion
• Well (individual water system)
• Unless required by state or local jurisdiction
• If knowledge that the well may be contaminated
• Unless the water system relies on a purification system due to contaminants
• Septic
• If mandated by state or local jurisdiction
• Flat or unobservable roof

Example of FHA financing:

Divide by 12                                                                             = $                     88.46

Pa FHA will not insure any borrower where the property is obtained or to be used as an investment. Borrowers may own a house with FHA financing that will not be sold. Still, they must relocate, increase family size, divorce, or be a cosigner on an existing mortgage where they did not occupy the property.

NEW CHANGES JANUARY 1, 2009:

The down payment is 3.50%, effective January 1, 2009. Borrower’s cash investment must be 3.50% of the sales price

Max cash-out refinance is limited to 85% of the value.

FHA has done away with certain “seller-funded” down payment-assisted programs such as the AmeriDream and Genesis programs.

Max CLTV with secondary financing is limited to 100% except government subordinated liens (soft second), which are not limited to 100% CLTV.

ATTENTION: Single – Family Servicing Managers

On May 1, 2003, the Department of Housing and Urban Development published a final rule in  The Federal Register amending the mortgage insurance regulations to prevent the practice of flipping on properties that will be financed with the Federal Housing Administration (FHA) insured mortgages.  Property flipping is when a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.  These changes to existing credit policies, in effect for all mortgage loan applications signed on or after June 2, 2003, will eliminate the most egregious examples of predatory flips of properties within the FHA mortgage insurance programs and, thus, preclude home purchasers using FHA financing from becoming victims of predatory flipping activity. 

This Mortgagee Letter provides a synopsis of the final rule and specific guidance to assist lenders in complying with these new requirements.  We also urge mortgage lenders and appraisers to review the published final rule.

Highlights of Final Rule

The final rule requires that: a) only owners of record can sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or less days from the last sale to be eligible for FHA financing; and c) that for resales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by 100 percent or more, FHA will require additional documentation validating the property’s value.  In addition, the rule provides flexibility for FHA to examine and require additional evidence of appraised value when properties are resold within 12 months. 

Sale by the owner of Record

To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of the record, and the transaction may not involve any sale or assignment of the sales contract. This requirement applies to all FHA purchase money mortgages regardless of the time between resales.

The mortgage lender must obtain documentation verifying that the seller owns the record and submit this to HUD as part of the insurance endorsement binder; it is to be placed behind the appraisal on the left side of the case binder.  This documentation may include, but is not limited to, a property history report, a copy of the recorded deed from the seller, or other documentation, such as a copy of a property tax bill, title commitment, or binder, demonstrating the seller’s ownership of the property and the date it was acquired.    

Resales Occurring 90 Days or Less Following Acquisition

If a property is resold 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage insured by FHA.  FHA defines the seller’s date of acquisition as the date of settlement on the seller’s purchase of that property.  The resale date is the date of execution of the sales contract by the buyer that will result in a mortgage to be insured by FHA.

Pa FHA Loan Ten Compensating Factors

Listed below are the only FHA-approved compensating factors that can be used to justify the approval of mortgage loans with ratios exceeding 31/43. 

Any compensating factor used to justify mortgage approval must be supported by documentation.

• The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 10 – 12 months. 
• The borrower is making a down payment of 10% or more towards purchasing the property.  This should not usually come from gift funds. 
• The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward using credit. 
• Previous credit history shows that the borrower can devote a significant portion of his or her income to housing expenses. 
• The borrower receives documented compensation or income not reflected in effective income but directly affecting the ability to pay the mortgage.  This can include food stamps and similar public benefits. 
• There is a minimal increase in borrower’s housing expenses – 10% or less
• The borrower has substantial documented cash reserves (3+ months’ PITI) after closing.  Not all assets can be counted towards these reserves.  Potential issues may include gifts, borrowed funds, retirement funds, property equity and refinance proceeds
• The borrower has substantial non-taxable income – provided that no adjustment (grossing up) was made earlier in the ratio computation. 
• The borrower has a potential for increased earnings, as indicated by job training or education in the borrower’s profession.  Income that is not expected to be received for at least three years can qualify as an FHA compensating factor.  Of course it cannot be considered regular income.
• The home is being purchased due to the relocation of the primary wage – earner.  The secondary wage – earner has an established employment history and is expected to return to work.  Reasonable prospects must exist for securing employment in a similar occupation in the new area.  The underwriter must document the availability of such a possible job.

As an example

a property acquired by the seller is not eligible for a mortgage to be insured for toe buyer unless the seller has owned that property for at least 90 days.  The seller must also be the owner of record. 

Resales Occurring Between 91 and 180 Days Following Acquisition

If the resale date is between 91 and 180 days following acquisition by the seller, the lender is required to obtain a second appraisal made by another appraiser if the resale price is 100 percent or more over the price paid by the seller when the property was acquired. 

As an example, if a property is resold for $ 80,000 within six months of the seller’s acquisition of that property for $ 40,000, the mortgage lender must obtain a second independent appraisal supporting the $ 80,000 sales price.  The mortgage lender may also provide documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value but must still obtain the second appraisal.  The cost of the second appraisal may not be charged to the homebuyer. 

FHA also reserves the right to revise the resale percentage level at which this second appraisal is required by publishing a notice in the Federal Register.

Resales Occurring Between 91 Days and 12 Months Following Acquisition

If the resale date is more than 90 days after the date of acquisition by the seller but before the end of the twelfth month following the date of acquisition, FHA reserves the right to require additional documentation from the lender to support the resale value if the resale price is 5 percent or greater than the lowest sales price of the property during the preceding 12 months.  I am familiar with FHA’s discretion; such documentation may include, but is not limited to, an appraisal from another appraiser. 

FHA will announce its determination to require the additional appraisal and other value documentation, such as an automated valuation method (AVM), through a Federal Register issuance.  This requirement may be established nationwide or regional, at FHA’s discretion. 

Exceptions to 90 – day Restriction

The final rule exempts properties acquired by an employer or relocation agency in connection with the relocation of an employee from the time restriction on resales.  Resales by HUD under its Real Estate Owned (REC) program are not subject to the time restrictions.  However, any subsequent resale of such a property must meet the 90 – day threshold in order for the mortgage to be eligible as security for FHA insurance.  The Homeownership Centers (ITOCs) do not have the authority to waive the regulatory requirements set forth in the final rule.

The restrictions established by the final rule are not intended to apply when a builder is selling a newly built home or is building a home for a homebuyer wishing to use FHA – insured financing.  HUD will more fully address this issue through issuance of the Federal Register notice provided for in $ 203.3a(b) (4) (iv) of the final rule.

Date of Property Acquisition Determined by the Appraiser

In addition, mortgage lenders may rely on information provided by the appraiser in compliance with the updated Standard Rule 1-5 of the Uniform Standards of Professional Appraisal Practice (USPAP). This rule requires appraisers to analyze any prior sales of the subject property tnat occurred within specific time periods, now set for the previous three years for one – to four-family residential properties.

As a result, the information on the Uniform Residential Appraisal Report (URAR) describing the date, price, and data for Prior Sales for the subject property and the comparables is to include all transactions that occurred within three years of the appraisal date.  I strongly feel that appraisers are responsible for considering and analyzing any prior sales of the appraised property and the comparables within three years of the appraisal date.

Therefore, I believe that the URAR completed by the appraiser shows the most recent sale of the property to have occurred at least one year earlier; no additional documentation is required from the mortgage lender.  The mortgage lender remains accountable for verifying that the seller owns the record and may rely on information developed by the appraiser for this purpose if provided.  However, if the lender obtains conflicting information before loan settlement, it must resolve the discrepancy and document the file accordingly.

Summary of Property Flipping Regulations In Effect June 2, 2003
Prior Sale Occurred	0-90 days	91-180 days
Eligibility for FHA Financing	Not Eligible	Eligible provided:
	Exceptions include relocation agencies and resales by employees and sales by HUD of Real Estate Owned.	Resale price to FHA mortgagors is less than 100% greater than previous sale or
	The HOCs cannot grant exceptions.	If 100% or more greater than previous sale, second appraisal supports value.

More Resources

Certainly! In addition to FHA loans, various resources and options are available for potential homeowners to explore. Here’s a summary of some of these resources:

Conventional Loans:

In my research and knowledge, traditional mortgage loans offered by private lenders without government backing. They often have competitive interest rates and flexible terms but may require a higher credit score and a larger down payment than FHA loans.

VA Loans:

If you’re a veteran or an active-duty service member, VA loans provide favorable terms, including no down payment and competitive interest rates. The U.S. Department of Veterans Affairs guarantees them.

USDA Loans:

The USDA loans are designed for low- to moderate-income borrowers in rural areas. They offer zero down payment options and competitive interest rates, making them an affordable choice for eligible buyers.

State and Local Homebuyer Programs:

Many states, cities, and counties offer assistance programs to first-time homebuyers. These programs may provide down payment assistance, grants, or tax incentives to make homeownership more accessible.

Down Payment Assistance Programs:

Various organizations and nonprofits offer grants or loans to help homebuyers cover their down payment and closing costs. These programs can significantly reduce the upfront financial burden.

Mortgage Credit Certificates (MCCs):

MCCs are tax credits that help lower a homeowner’s federal income tax liability. I want to let you know that it is often used in conjunction with a conventional mortgage.

Homebuyer Education Programs:

These programs provide workshops and resources to educate potential homebuyers about home-buying, financial management, and maintenance responsibilities.

Credit Counseling Services:

If you’re improving your credit score, credit counseling services can guide you in managing debt, improving credit, and achieving a more substantial financial profile.

Neighborhood Stabilization Programs:

These initiatives aim to revitalize communities by offering incentives for purchasing properties in distressed or underserved areas.

Energy-Efficiency and Green Financing Programs:

Some lenders offer special mortgage programs for energy-efficient homes or for making energy-efficient improvements to a home you’re purchasing.

Employer Assistance:

Some employers offer homeownership assistance as part of their benefits package. This could include down payment assistance, grants, or favorable home loan options.

Non-Bank Lenders:

Besides traditional banks, consider exploring mortgage options from credit unions, online, and community-based lenders. They might offer unique loan products and competitive rates.

Fannie Mae and Freddie Mac Programs:

These government-sponsored enterprises offer various loan programs, such as Fannie Mae’s HomeReady and Freddie Mac’s Home Possible, which provide flexible eligibility criteria and down payment options.

Home Equity Loans and Lines of Credit:

If you’re already a homeowner, these options allow you to use the equity in your current property to finance a new one.

Researching and exploring the options available in your specific region and based on your financial situation is essential. Consulting with mortgage professionals, housing counselors, and financial advisors can help you determine the best resources and mortgage options for your needs.

Disclosures:

We want to note that Pa Fha loans are considered FHA loans, as it is a Federal Program. However, for users’ understanding, we use Pa FHA loans for non-specific terminology. Please reference our article on common real estate terms.

It is essential to consult a professional for more information and the most accurate information regarding any loan program. This article is a generic guide to help users on a basic level.

This article may or may not have updated information on the FHA loan program. We encourage you not to use this article as factual knowledge.