The Basics of FHA Real Estate Mortgages for Investors

As an investor, it's important to know the details of HUD/FHA programs so you can deal effectively with buyers and sellers, particularly in the area of foreclosures. Owner-occupants have first choice on these properties, but when repossessed properties don't sell, you can pick up some real bargains. So, my advice is to study the basic information I provide in this article, and then gain as much knowledge as possible from the HUD/FHA web sites. That way, when opportunities do arise, you'll be ready to seize them. Basic Information on FHA The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD).

The purpose of the FHA is to insure lenders who make loans. Established in the 1930s, this governmental agency's aim is to make it easier for people to achieve the American dreamowning a home.

Looking deeper into the purpose of the FHA, you'll find that its function is to provide mortgage insurance for a person to purchase or refinance a principal residence. In other words, the mortgage loans are funded by private lending institutions (mortgage companies, banks, savings and loan associations, etc.), and those mortgages are then insured by HUD.

This arrangement has several benefits for prospective home owners: Low down payments Low closing costs Easy credit qualifying

FHA has programs for: First-home buyers Seniors Fixer uppers Manufactured housing and mobile homes Energy efficiency, etc.

In this article, I'll look at only three of these programthe first-time buyer, fixer-upper, and manufactured housing programs. First-Home Buyer Programs These programs have the following eligibility requirements: The borrower must meet standard FHA credit qualifications (judged by the individual's credit record). The borrower is eligible for approximately 97% financing. The borrower is able to finance the upfront mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium.

Within this category, the eligible properties are one-to-four unit structures. As of this writing, the highest maximum FHA mortgage is $362,790 while the lowest maximum amount is $200,160. The 203(k) Program for Fixer Uppers This program provides loans to allow you to buy or refinance a property. In the loan, you can also include the cost of making the repairs and improvements. The loans are provided through approved mortgage lenders nationwide. They're available to buyers wanting to occupy the home.

The down payment requirement for an owner-occupant (or a nonprofit organization or government agency) equals about 3% of the acquisition and repair costs of the property. There are several steps to obtaining such a loan:

The buyer locates a fixer-upper and signs a sales contract after doing a feasibility analysis of the property with a realtor. The contract should state that the buyer is seeking a 203(k) loan. It should also state the contract is contingent on loan approval based on additional required repairs by the FHA or the lender. The homebuyer then selects an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done. The proposal should include a detailed cost estimate on each repair or improvement of the project. The appraisal determines the value of the property after renovation.

If the borrower passes the lender's credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan also includes a contingency reserve of 10% to 20% of the total remodeling costs. It's used to cover any extra work not included in the original proposal.

At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.

The mortgage payments and remodeling begin after the loan closes.

The borrower can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it's estimated to take to complete the rehab.

Escrowed funds are released to the contractor during construction through a series of draw requests for completed work.

To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines there will be no liens on the property. Manufactured/Mobile Homes According to HUD, a manufactured home...

..."is built to the Manufactured Home Construction and Safety Standards (HUD Code) and displays a red certification label on the exterior of each transportable section. Manufactured homes are built in the controlled environment of a manufacturing plant and are transported in one or more sections on a permanent chassis." Source http://www.fha.com

For this segment of the market, many lending institutions provide conventional and government-insured financing plans for buyers. The most common method of financing a manufactured home is through a retail installment contract, available through a retailer. Some lending institutions offering conventional, long-term real estate mortgages may require the homes to be placed on approved foundations.

Manufactured homes are eligible for government-insured loans offered by the Federal Housing Administration (FHA), the Veterans Administration (VA), and the Rural Housing Services (RHS) under the U.S. Department of Agriculture.

Key Point: Study the details of each FHA program carefully so you're fully prepared to seize foreclosure opportunities when they occur.

Jack Sternberg