On Friday afternoon, the Reverse Mortgage Stabilization Act was signed into law by President Barack Obama just days after his speech outside of Phoenix addressing ways to improve the housing market. The bill, initially drafted by Rep. Mike Fitzpatrick (R-PA.) and Rep. Denny Heck (D-WA.), passed through the House and Senate in June and July respectively and is only one of 22 pieces of legislation to pass in this session of congress. How will this change the way reverse mortgages work? Read on to find out.
Your skills have advanced greatly, my eager mortgage student. You’ve been studying up and learning at an incredible rate. It’s great to see that, too, because if you’re reading a blog series titled Know Your Mortgage, I imagine you’re a newcomer to the mortgage world or eager to gain a deeper understanding of that world, much like myself. I’m a serial renter, partially because jumping into the world of home ownership seems more intimidating than jumping into a pool for the first time, not knowing how to swim. But that’s why we’re doing this blog! So you can learn how to swim before you dive in the deep end, and, odds are, when you’re ready to cannonball into your first house, you’ll be applying for an FHA loan. Let’s discuss them, shall we?
We Shall. What’s an FHA Loan?
To start, the “FHA” in FHA loan stands for Federal Housing Administration. It’s a federal agency in the Department of Housing and Urban Development (HUD). The FHA doesn’t build houses, lend money or do any sort of planning in that regard, but it does set the standards for underwriting loans and insuring loans from private lenders.
Okay, but Seriously, How’s an FHA Loan Different from Other Loans?
The qualifications and perks are different, but the options are the same. You can get a 30 or 15 year fixed-rate mortgage or an adjustable-rate mortgage with FHA loans, with all the benefits the FHA has set aside for those who qualify. Where FHA differs from their loan counterparts is that they are designed to be a bit more affordable, keeping first-time home buyers in mind. The qualifications are easier, and your credit doesn’t have to be perfect. FHA loans usually get you a smaller down payment on a house than you would normally pay, and you can refinance with less home equity than you would with normal loans. This can be done when you refinance with an FHA Streamline.
Wait, What Does Streamline Mean?
According to the HUD’s page on Streamline, it “refers only to the amount of documentation and underwriting that the lender must perform, and does not mean that there are no costs involved in the transaction.” They go on to list the basic requirements to qualify, which are: the loan must already be an FHA to be streamlined, all payments must be up to date, and the understanding that no cash can be taken out from a Streamlined refinance.
It is also important to note that the Streamlined refinance will result in lower monthly principal and interest payments (possibly converting your ARM into a fixed-rate mortgage).
Sounds Pretty Good.
It is pretty good if you qualify. The coolest thing about the FHA loan is it doesn’t require a home appraisal. This is to help people who are underwater on their mortgage, because your original purchase price will stay the same after you’ve streamlined. There’s even a certain sweet spot you can time for your FHA streamline closing so that it will cost you less. Conventional loan’s interest is calculated daily, but the interest on an FHA loan is calculated monthly. With that in mind, if you were to close the loan in the middle or the end of the month, you can avoid paying two months of interest and just pay one.
If you’re about to jump into being a first-time homeowner, it never hurts to check if you qualify for the benefits an FHA loan has. Check it out, and if you have any further questions about anything FHA related let us know below.