FHA Loans and Appraisals

Lets talk about one of the most important segments of the residential loan industry, a FHA loan.IMG_0779  What does FHA acronym stand for?  FHA stands for Federal Housing Administration. This was an agency that was created in 1934 to provide mortgage insurance to lenders. FHA does not originate or purchase loans rather it merely insures the loan against loss to the originating lender.  In 1965, the FHA became part of HUD. Today, FHA is a government-run residential mortgage insurance program, which is administered by HUD. HUD is an acronym that stands for the U.S. Department of Housing and Urban Development, which is a cabinet-level agency within the United States government. Its secretary is appointed by the President. HUD is the entity that oversees the FHA mortgage insurance program as well as being responsible for overseeing the nation’s public housing programs, urban renewal programs, and enforcing fair housing laws.

FHA’s purpose is to foster the availability of long-term, stable financing for houses and toGranada II Kitchen improve the housing stock of the nation. In order for an existing home to be eligible FHA-insured loan, it was required to meet a set of minimum standards for health and safety, called Minimum Property Requirements (MPRs).  Between 1996 and 2007, FHA insured loans became an increasingly smaller part of overall loan originations.  Private insurers and investors began offering programs which did not require sellers to make cosmetic repairs to properties to meet MPRs.  As a result, as of January 1, 2006, FHA revamped a portion of its property underwriting standards and appraisal protocols. These changes were meant to focus the appraiser’s and underwriter’s attention away from minor property defects and on to major problems, which may affect a property’s ability to serve as security for a long-term mortgage loan.

In 2007, as the subprime “mortgage meltdown” spread across financial markets and borrowers were finding themselves in increasing financial distress.  Properties were suddenly upside down with their loan balance higher than the appraised value.  Increasingly FHA was called upon to fill the breach as residential credit markets faced overwhelming challenges.  In April of 2009 (HUD) announced revised FHA loan limits, based on the American Recovery and Reinvestment Act of 2009 (ARRA).  As a result, FHA has captured 80% or more of the mortgage market due to easier to qualify for than conventional loans.  Thus, the FHA loan program has done its job and helped in the recovery.  However, the costs to obtain these loans has gone up.

Recent Changes for FHA Loans

With the recent increases in demand for FHA-backed mortgages and according to Mortgagee Letter 2013-04 issued by the HUD (Housing and Urban Development), consumers can expect the MIP to increase as well as the requirement to keep the insurance during the life of the loan.  Beginning on April 1, 2013, most FHA-backed mortgages will be subject to an MIP (Mortgage Insurance Premium) increase of 10 basis points annually, or 0.10 percentage points. The increase applies to all loan terms.  The Federal Housing Administration is also reversing its policy which allows FHA-backed homeowners to cancel mortgage insurance premiums once the outstanding principal balance of a FHA loan reaches 78 percent of the original balance.  Going forward, the FHA will disallow the removal of MIP throughout the life of a loan, if the loan’s starting loan balance is higher than 90% of its appraised value.

Qualifying for a FHA Loan

FHA loans are the easiest type of real estate mortgage loan to qualify for.  The FHA loan requirement guidelines for loan qualification are the most flexible of all mortgage loans that require less than 5% down payment (only 3.5%).

Some Basic FHA loan requirements include the following:

      • Two Years of steady employment, preferably with same employer.
      • Last two years Income should be the same or increasing.
      • Credit report should typically have less than two thirty-day lates in last two years with a minimum credit score of 620 or higher.
      • Bankruptcy’s must be at least two years old, with perfect credit since discharge.
      • Foreclosure’s must be at least three years old, with perfect credit since.
      • Your new mortgage payment should be approximately 30% of your gross (before taxes) income.

Please note that these criteria are subject to change and have been provided as a benchmark.  If you are interested in purchasing or refinancing your home please contact a lender for more information.

FHA Appraisals

As part of the FHA appraisal process, the appraisal provides an examination of the property for any visible, obvious and/or apparent deficiencies that may affect the livability of that property in terms of basic needs, health and safety of the property’s occupants. – HOC Reference Guide, page 1-01. This is not considered to be the equivalent of a home inspection.  To an uninformed buyer and/or seller, this FHA requirement that an appraiser must operate certain systems in the home (plumbing, electrical, HVAC) and do a visual inspection for compliance with Minimum Property Requirements (MPRs) and Minimum Property Standards (MPSs) seems very similar to what a licensed home inspector does can be misleading.

During the inspection, the appraiser will note if there are any cosmetic or required repairs.  Examples include the following:

  • Cosmetic repairs are not required (i.e. Worn floor finishes or carpeting, holes in screens, rotten or worn out countertops, etc.).
  • Required repairs are to correct deficiencies or defects which affect health and Safety, Security, and Soundness (i.e. Leaking or worn out roofs, structural defects including excessive settlement,defective paint on houses built prior to 1978, drainage problems, etc.).

One of the responsibilities of an appraiser is to report if there is a public or community sewage system available.  If either is available, the lender may require hookup to the public or community sewage system.  Connection may be required when it is feasible to connect to the public or community sewage and the lender determines it is reasonable to do so.  To be reasonable, the benchmark employed is the same as the benchmark for the hookup to a public water system.  The cost to hookup should be 3% or less of the estimate of the subject’s value to be considered reasonable.

If you are interested in buying a new home or an existing home, please contact me (Alan Lane with Keller Williams Realty at 2119 W Brandon Blvd, Brandon, Florida  33511) and I can help you find a new home in the Tampa Bay Area.  My email address is alanlane66@gmail.com or call me at 813.205.9280.  If you are just starting your search, you can search the MLS for homes on my website at this link.

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