FHA Mortgage Insurance Section 203(b)

FHA Mortgage Insurance Section 203(b)

FHA mortgage insurance programs help all buyers, but seems to be aimed at the low to moderate income families. What it does is lower some of the costs of their mortgage loans.

What this insurance does for you, the first time home buyer, is that it encourages the mortgage companies to make

You, the first time home buyer may have done what’s necessary to put yourself into a position to get a home loan, but you may not yet be in what’s called the conforming market. Conventional loans done in the conforming market have different underwriting requirements than FHA loans. Your goal should be to get yourself into the conforming market so you can get the best of all worlds.

Let me tell you another little story. Little did I realize when I was buying my first home, that I was to become an FHA home buyer. I heard the words FHA but it meant little to me. I wanted to buy a house and really did not care how I got it.

So, when I bought my first home, in my case the seller paid the FHA mortgage insurance for me. On a sale price of $19,000 the 1.5% FHA mortgage insurance was only $285. I was so blinded by the fact I was buying a home I never gave it any thought. You though, you must be aware of these costs. Since housing prices are much higher now than in 1978 when I bought my home, this can become an issue.

With the average home in many areas at $150,000 and above this translates into quite a sum of money. For example, the $150,000 sale price would be $2,250 of FHA mortgage insurance. This must be paid at the closing by any of 3 parties.

1) The buyer can pay it

2) The seller can pay it

3) The lender can give a credit and pay it for you

In the large majority of FHA home loans, I’ve been able to help people get the seller to pay it for the buyer. This is the most cost effective way if it’s done right.

This insurance has become a centerpiece of the FHA home loan programs. It helped save homeowners from default in the 1930's. Also, it helped returning veterans in the 1940's and 1950's by helping them buy homes in the suburbs. Really it has shaped the mortgage finance system of today.

FHA mortgage insurance is still an important tool through which the Federal Government expands home ownership in many communities today.

Almost every person that gets this insurance on their home loan is a first time home buyer.

There are several other features the 203(b) loan has.

Down payment requirements can be low

If you look at the conventional loan products, the down payment requirements start at 5%. There are some that have 3% and even offer zero down but you really pay for this in the interest rate.

Have you ever heard the saying “there’s no free lunch in this world”? It’s true. There’s not.

No matter if you use the FHA mortgage insurance loan product or go conventional with a zero money down, someone’s going to pay for the risks involved.

Remember that the lenders have to be induced to do loans for first time home buyers so we have the FHA mortgage insurance to do that. In a conventional loan, with no money down or even 3% down they pay a much higher interest rate.

The insurance allows buyers to borrow up to 97% of the value of the home purchase, in some cases even 100%. (Watch on this website for FHA loans 203(h) for disaster victims to get 100% financing).

Most if not all closing costs can be financed

On conventional loans, the borrower must pay the closing costs at the time of purchase. This often equals 2-3 percent of the price of the home. The FHA mortgage insurance program allows up to 6% to be used towards the buyers closing costs, pre-paids and escrows. This is HUGE!

Little did I realize when buying my first home that’s what happened. Now I’m able to help others learn how this is done and even teach them how to get this included in their overall mortgage. Using the sellers money, your money or a combination thereof this can make it possible for you to buy a house with little or no money down.

Again, the FHA mortgage insurance that’s paid up front at closing helps you get this done. Then the remaining premium is included in your monthly payment. One thing that I believe is a down side to this loan product is you never get to stop paying this FHA mortgage insurance. This is collected right down to your last payment.

This is not the case on conforming loans when mortgage insurance stops getting collected when you pay down the balance below 80% of the value of the home.

Some Fees are limited

FHA rules impose limits on some of the fees that mortgage companies can charge which also helps first time home buyers. For example, the loan origination fee is limited to 1% of the loan amount. Processing fees cannot be charged either. Some lenders have processing fees of $500 or more.

HUD Limits the amount of the loan that can be insured

Just to make sure this program is not abused and restricted to first time home buyers with low to moderate income, FHA sets limits on the dollar value of the mortgage loan.

Each state and county has its own limit and must be researched before trying to get this kind of a loan product.

If you’re working with a good loan officer he’ll know what’s available to you in your area. Trust me, I’ve never seen the limits where they cannot meet your needs.

Keep in mind that FHA mortgage insurance and 203(b) loans are designed to help you become a home owner.

If you want to learn more how these loans work, feel free to contact me. ________________________________________________________________

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