FHA Loans

A private lender makes the loan, and the Federal Housing Administration insures it. FHA is part of the U.S. Department of Housing and Urban Development (HUD). Because FHA covers the lender against loss, lenders can approve files that wouldn't fit conventional rules. The rules live in HUD Handbook 4000.1, and you pay for the insurance through MIP.

Randy Mathis, NMLS# 1516760, arranges FHA purchase and refinance loans through Lumin Lending Inc., licensed in 15 states with access to 100+ lenders. FHA sets the floor and each lender adds its own overlays. Shopping lenders is how I find a home for a borderline file.

FHA isn't a first-time buyer program, and HUD sets no income cap. Lots of my FHA files are refinances. Some are Streamlines for existing FHA borrowers. Others are cash-out or rate-and-term refinances for homeowners whose credit fits FHA better than conventional.

FHA looks at the same things every lender does. It just puts more weight on your recent track record than on a single number.

Credit. HUD uses your Minimum Decision Credit Score. At 580 and above you're eligible for maximum financing. From 500 to 579 you're limited to 90% loan-to-value. Below 500, FHA won't insure the loan. Lenders can and do set higher floors.

Income and debts. Most FHA files run through FHA's TOTAL Mortgage Scorecard. It can approve higher debt-to-income ratios than conventional when the rest of the file is strong. Manually underwritten files start at 31% for housing and 43% for total debt, with more allowed when compensating factors are documented.

Assets. Your whole down payment can be a documented gift from a family member, employer or close friend. The seller can contribute up to 6% of the price toward your costs. Ask about down payment assistance: on select FHA and USDA first mortgages, some programs offer it; availability varies.

The property. The home must be your primary residence, and you must move in within 60 days of closing. The FHA appraiser checks the value and basic health and safety standards.

There are four ways to refinance with FHA. Which one fits depends on your current loan, your equity and whether you want cash.

FHA Streamline refinance

If you have an FHA loan now, this is the first thing I check. The non-credit-qualifying version doesn't require a new appraisal or income documentation under HUD's non-credit-qualifying rules. You need at least 210 days since closing and six payments made. The new loan must deliver a net tangible benefit, and cash back is limited to $500. If your FHA loan is less than three years old, part of the upfront MIP you paid is credited toward the new one.

Rate-and-term refinance

This changes your rate or term when your current loan isn't FHA, or when you want a fully underwritten FHA-to-FHA refinance. The new loan can reach 97.75% of the home's value on an owner-occupied primary residence. That makes it work for homeowners with very little equity.

Cash-out refinance

You can borrow up to 80% of the appraised value and take the difference in cash. You must have lived in the home as your primary residence for the previous 12 months. FHA's credit flexibility carries over, so it works when your score would make a conventional cash-out expensive. MIP comes with it.

Refinancing out of FHA

Once you have about 20% equity and better credit, a conventional refinance at 80% loan-to-value or below removes mortgage insurance entirely. I price that against a Streamline every time. The winner depends on your rate, your equity and how long you plan to stay. Divide the closing costs by the monthly savings to find your break-even, or run it yourself on the refinance calculator.

FHA's bad reputation is undeserved. It still has real costs.

• MIP is the price of flexibility. You pay an upfront premium and an annual one. With less than 10% down, the annual premium never ends unless you refinance.
• Primary residence only. No second homes, and no rentals other than a 2 to 4 unit home you live in.
• Loan limits can be lower. In many counties the FHA limit sits below the conforming limit, which can push a higher-priced home into conventional.
• Property condition matters. The appraiser can require repairs before closing, which makes some fixer-uppers harder to finance.