In addition to loans 203b and 251 for individual homes of one to four families, FHA loans take several other forms.
Known as Section 234c Loans, FHA Co-ownership Loans have much in common with 30-year fixed rate FHA home loan programs for single-family homes. However, the 30-year fixed-rate loan is the only FHA-backed financing option for condominium purchases. To qualify, a Section 234c loan must be applied to the purchase of a condominium unit in a subdivision of five or more units. Ownership requirements are less stringent for Section 234c loans, but the program requires that at least 80% of FHA-insured loans be granted to homeowners.
Secure refinance loan.
FHA secured refinance loans convert conventional mortgages, including loans that have fallen into delinquency due to upward interest rate adjustments on conventional MRAs, in fixed-rate loans backed by FHA. If you opt for refinancing, the upper borrowing limit is 85% LTV. For cashless refinancing, the upper limit is 97.75% LTV.
FHA Streamline Refinance.
FHA refinances loans are designed to refinance existing FHA loans without house valuation and relatively low closing costs (usually less than 4% of the principal). The requirements of the program are pretty indulgent on paper – for example, you can technically refinance a house deep underwater, and there is no formal threshold for income or employment. However, most lenders require a decent credit (FICO at 620 or better) and a job audit. Loans can not be seriously delinquent either. To qualify, your new loan must drop your monthly payment by at least 5% (for example, from $ 1,000 to $ 950). Some lenders offer the possibility of including closing costs in the principal of the loan,
Real Estate Equity Conversion Mortgages (HECMs or Reverse Mortgages).
Also known as reverse mortgages, HECM loans help seniors who live in a home (aged 62 or older) to operate their home without selling their home and moving. Unusually for a mortgage product, HECMs do not require monthly payments. Instead, they are ideal sources of tax-free money for borrowers with fixed incomes and limited assets. However, because of their significant legal and financial implications, it is best not to subscribe to a HECM before consulting a lawyer or financial advisor.
Installment Payment Loan.
Installment payment loans, or Section 245 loans, initially have very low monthly payments. During the first 5 to 10 years of the life of the loan, these payments increase gradually at rates between 2% and 7, 5% per annum. At the end of the growth period, they stabilize and remain constant until the end of the term. Graduated payment loans are ideal for borrowers who expect their income to increase significantly over time.
Equity Loan Growth.
Known as Section 245a loans, increasing equity loans are essentially more versatile and financially indulgent versions of installment loans. They are valid for most types of housing, including cooperative housing and existing homes planned for renovation or rehabilitation. The annual increase in payments is more gradual than the progressive payment option – annual increases are capped at 5%. The terms are also shorter – 22 years is the maximum.
Benefits of FHA Loans vs. Conventional Loans
Here is a summary of the main advantages of FHA loans over conventional loans:
- Looser underwriting (credit score) requirements
- Lower payment requirements (as low as 3, 5% for borrowers with FICO at 580 or better)
- Assumability (can be transferred from the seller to the buyer with a minimum of friction)
- Increase in closing costs higher paid by the seller
- Lower interest rates
- Looser DTI and the housing ratio requirements
Disadvantages of FHA Loans vs. Conventional Loans
And the crucial disadvantages of FHA loans compared to conventional loans:
- Initial payment of mortgage insurance required by the Law on Purchase Loans and Non-Streamlined Refinancing Loans (1.75% of loan size)
- Increase current mortgage insurance premiums (up to 1.05% of the loan size each year)
- Can not cancel mortgage insurance except by simplified refinancing
- Reduced guaranteed loan limits in low-cost markets (disadvantageous for high-end buyers in these regions)
- The houses must be occupied by the owner, the principal residences