Articles and news about FHA loans and HUD requirements. FHA loans are great for first-time homebuyers.

Monthly Archives: November 2010

FHA ARM Loan Basics

The FHA offers an adjustable rate mortgage, also known as an FHA ARM loan. These loans offer an introductory interest rate which is subject to change after the initial fixed rate period. That period varies depending on the loan–there are hybrid ARM loans available that feature different periods–but once the introductory rate period has elapsed, the adjustable rate is subject to a cap that applies either year-to-year or over the lifetime of the FHA loan.

The initial interest rate is often lower than the fixed rate of conventional home loans, which is why many people consider ARM loans even in spite of the fears generated by the housing crisis of 2008.

ARM loans have four components; the index, margin, interest rate cap and the initial interest rate. As mentioned above, the ARM loan has an intial interest rate. Once that rate expires, a new interest rate is obtained by adding the margin–the fixed portion of an ARM loan–to the index. When you apply for an FHA ARM loan, the loan officer will explain the margin, which vary from bank to bank. There is no standard margin.

The FHA explains how an FHA ARM loan works, stating “As the index figure moves up or down, your interest rate will be adjusted accordingly. Acceptable index options on FHA insured ARM loan transactions are 1) the Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); or 2) the 1-year London Interbank Offered Rate (LIBOR). Increases or decreases in the interest rate will be limited by the interest rate cap structure of your loan”

The FHA offers a standard one-year ARM loan guaranty with an annual interest rate cap of one percent, and life-of-the-loan interest rate cap of five percent up or down. FHA ARM Hybrid loans have different terms which we’ll cover in another blog post.

The appeal of an FHA ARM loan includes affordability for those who don’t expect to own the home very long, and it also appeals to those who know they have more income coming down the line to help pay for the higher interest rates where applicable.

An ARM loan interest rate is also capable of going down, which is what most FHA borrowers hope for when applying for ARM loans, but it’s not good to make financial plans counting on those interest rates going down. It’s best to assume the rates will likely increase and create a new budget with that in mind.

FHA Adjustable Rate Mortgages

There are two basic types of mortgages new house hunters should know about when shopping for FHA home loans; fixed rate FHA mortgages and Adjustable Rate Mortgages or FHA ARM loans.

The FHA Adjustable Rate Mortgage is exactly what its name implies–an FHA home loan with an interest rate that can be adjusted up or down according to FHA requirements, the market and other factors.

Thanks to the 2008 housing crisis, many soon-to-be homeowners are skeptical about adjustable rate mortgages whether offered by the FHA or not;

Do I Qualify for an FHA Short Refinancing Loan?

In 2010, the FHA made changes to its refinance program to let borrowers who owe more on conventional home loans apply for something commonly known as the FHA Short Refinance program. These FHA refinancing loans are an important option for borrowers who find themselves in difficult financial situations and know they can’t avoid foreclosure by selling the home.

An FHA Short Refinancing loan makes a lot of sense for borrowers in this position. But what does it take to qualify for the loan?

To begin, these loans are not for those currently holding an FHA mortgage. The FHA short refinance program is specifically for those with conventional loans.

The homeowner must be in what the FHA calls a “negative equity position” which simply means the borrower owes more on the home than it could sell for on the market. Applicants must be living on the property as the primary residence; summer homes do not qualify for this refinancing.

The rules also list specific credit requirements. According to the FHA, “The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a

What are FHA Minimum Property Standards?

As with most government home loans, the mortgages guaranteed by the FHA have minimum property standards which must be met before the FHA will approve the loan. But taken at face value, that statement would lead some to believe the FHA maintains a set of building codes that a home must meet above and beyond (or at least separate from) state and local codes.

That was true once upon a time–until the mid 1980s, the FHA did have its own codes for different types of buildings. The program was changed, and in the words of the FHA official site, since that time, HUD has accepted the model building codes, including over 250 referenced standards, and local building codes, in lieu of separate and prescriptive HUD standards.”

That basically means FHA-guaranteed loans must be up to code and be able to pass any state or local inspection for code compliance.

But the FHA still maintains it’s own standards and requirements in a few important areas where durability is concerned. Model codes may not provide enough (or any) guidance for durability standards in key areas such as windows, doors, carpeting, exterior features like gutters, even painting. The FHA has specific requirements in order to insure the value of a property bought with an FHA loan does not decline in value for the simple lack of durability in these areas.

If state and local codes are the standard for areas apart from the durability requirements set down by the FHA, what is the standard in areas where there are no state or local building codes?

According to the FHA, a comparable nationwide building code will be applied as a standard in the absence of a state/local equivalent. Applying these standards is the responsibility of the “appropriate FHA field office”.

Can I Get an FHA Loan Even Though Iíve had a Foreclosure or Declared Bankruptcy?

Conventional loans can be unforgiving when it comes to credit scores, credit history, bankruptcy and foreclosure. In the current housing market, credit requirements on conventional loans are tougher than ever. One of the reasons government home loans are so popular is because FHA guaranteed loans are more lenient and flexible where credit is concerned.

The FHA even allows applicants to re-establish credit with an FHA loan even if they have previously declared bankruptcy or had a foreclosure. There are strict rules that cover these situations, but for those who qualify, the FHA mortgage is an excellent way to start over, reestablish credit and become a homeowner once more.

What does the FHA require in cases of bankruptcy? In keeping with the FHA requirements that lenders issue credit only to those who have established reliable payment patterns, applicants must apply no earlier than two years since the bankruptcy has been discharged and all judgmental associated with that bankruptcy must be paid in full. If there are outstanding tax liens, they must be satisfied or there must be an established repayment plan with the IRS or the appropriate State Department of Revenue.

In the case of foreclosure, the FHA rules state the buyer must wait a minimum of three years since foreclosure proceedings or a deed-in-lieu of foreclosure.

These rules apply whether you are applying for a new FHA mortgage or you’re trying to assume an FHA home loan. Assuming an existing loan still requires a credit check and other underwriting required by the FHA. In the meantime, any other documentation you can provide to show proof of on-time bill payments since resolving a bankruptcy or foreclosure can be important. Even at its most lenient, the FHA still requires proof the borrower is a good credit risk after an applicant’s
successful recovery from a wost-case financial situation.

Can I Get an FHA Loan Even Though I

Conventional loans can be unforgiving when it comes to credit scores, credit history, bankruptcy and foreclosure. In the current housing market, credit requirements on conventional loans are tougher than ever. One of the reasons government home loans are so popular is because FHA guaranteed loans are more lenient and flexible where credit is concerned.

The FHA even allows applicants to re-establish credit with an FHA loan even if they have previously declared bankruptcy or had a foreclosure. There are strict rules that cover these situations, but for those who qualify, the FHA mortgage is an excellent way to start over, reestablish credit and become a homeowner once more.

What does the FHA require in cases of bankruptcy? In keeping with the FHA requirements that lenders issue credit only to those who have established reliable payment patterns, applicants must apply no earlier than two years since the bankruptcy has been discharged and all judgmental associated with that bankruptcy must be paid in full. If there are outstanding tax liens, they must be satisfied or there must be an established repayment plan with the IRS or the appropriate State Department of Revenue.

In the case of foreclosure, the FHA rules state the buyer must wait a minimum of three years since foreclosure proceedings or a deed-in-lieu of foreclosure.

These rules apply whether you are applying for a new FHA mortgage or you’re trying to assume an FHA home loan. Assuming an existing loan still requires a credit check and other underwriting required by the FHA. In the meantime, any other documentation you can provide to show proof of on-time bill payments since resolving a bankruptcy or foreclosure can be important. Even at its most lenient, the FHA still requires proof the borrower is a good credit risk after an applicant’s
successful recovery from a wost-case financial situation.

Are FHA Loans Assumable?

An FHA loan assumption is a situation where a new FHA borrower takes over or assumes the debt on an existing FHA home loan started by another borrower. According to the FHA official site, the specific definition of an FHA loan assumption reads, “Assumption of an FHA-insured mortgage is a servicing function where the responsibility of the mortgage is acquired by another person through either Simple or Creditworthiness process.”

Those two options, “simple” and “creditworthiness” can be confusing to new borrowers at first, but these two terms are simple to understand. If an FHA borrower wants to assume an FHA mortgage originated December 1, 1986 or earlier, the “simple” process is used. This means the loan can be assumed without prior approval from the FHA.

For all loans originated after December 1, 1986, the rules are different because the Department of Housing and Urban Development put restrictions on loan assumption. The Creditworthiness loan assumption process requires the person assuming the loan to have their credit history reviewed as with other FHA home loans.

Depending on the date of the original FHA loan, there are occupancy requirements that range from 12 months to the lifetime of the assumed loan. For many assumed loans, the borrower must not be an investor–that is, someone who doesn’t intend to live on the property full time. (Such restrictions usually coincide with the “lifetime of the loan” occupancy requirement). In other cases investors are discouraged, but not prohibited from assuming an FHA loan by the terms of the assumption.

Assumed loans don’t automatically relieve the original owner of financial responsibility for the loan. If the original borrower chooses to let a family member assume the loan in order to avoid foreclosure, for example, and the person who assumed the loan defaults on the mortgage, the original borrower can be adversely affected. Novation, where the lender releases the original mortgage holder, must be requested and approved or the original loan holder remains liable.

How to Avoid Foreclosure on FHA Loans

In tough economic times, many home owners struggle to keep up with their mortgage payments. The first time an FHA borrower misses a mortgage payment, the collection agencies won’t come knocking on the door, but that first missed payment is a slippery slope that leads toward FHA mortgage default and eventually foreclosure. There are many programs designed to help keep a buyer in their home, but those who act quickly may not even need the most recent Obama mortgage program or government home loan bailout plan.

The FHA advises borrowers to get in touch with a HUD-approved counseling agency the moment it’s clear the borrower will have trouble making the next mortgage payment on time. FHA loan counseling is available at 1-800-569-4287 or TDD: 1-800-483-2209.

There are a number of programs that can help including revised payment plans called Special Forbearance. The Special Forbearance program can temporarily reduce or even suspend mortgage payments. This program is especially for those who have had an “Involuntary reduction in your Income or Increase In living expenses.”

Another FHA program is Mortgage Modification, which can extend the term of the your FHA home loan to reduce the amount of your monthly payments. Borrowers are eligible for this program if they are recovering from financial problems but have less net income than they did before the debt crisis.

Yet another option is called the Partial Claim, where the lender helps the FHA mortgage holder to get an interest-free loan from the Department of Housing and Urban Development to bring your overdue or delinquent payments back to current status.

In all of these cases, one of the most important pieces of advice from the FHA is to keep living in the home. Do not walk away from the mortgage and the property, or you may not be eligible for any help at all to prevent foreclosure. The earlier you seek help, the easier it will be for the lender and the FHA to provide assistance where needed.

How Much is the FHA Debt-to-Income Ratio?

The FHA has a maximum debt to income ratio set for FHA loans. When a borrower applies for an FHA mortgage, they must list all debts and lines of credit in detail as well as all possible approved income sources. With this information, the lender and FHA can calculate what a borrower’s debt picture is and issue a percentage of debt to the amount of income listed.

For FHA home loans, the rules are clearly spelled out. According to the FHA official site, “The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt.” Compare those percentages to those of a conventional home loan, where in most cases the borrower gets only 28% of the income to put toward housing, and 36% of the income to put towards housing expenses and other indebtedness.

It’s easy to assume these numbers are very unforgiving, but the FHA does offer some flexibility in the debt-to-income ratio requirements under the right circumstances.

An FHA loan applicant may be given some leeway with debt-to-income ratios when they have a large down payment, net worth that shows the lender’s flexibility is justified, or the buyer has the ability to pay more because of a large savings account or other cash reserves. There is also some flexibility allowed by FHA guidelines for borrowers applying for less than the maximum FHA loan terms. Does the borrower anticipate a decrease in monthly housing expenses? That can also change the situation.

It’s best to have a detailed conversation with the loan officer about these issues so he or she can re-calculate the debt to income amounts or work on making the FHA loan terms more flexible in this area.

An Introduction to the FHA Debt-to-Income Ratio

FHA loans require many things from the borrower. The credit report, residence history, employment history and a list of all current outstanding debt must all be furnished to give the lender and the FHA a good picture of the borrower as a credit risk. When it comes to government home loans, all the information is needed since credit scores are not the determining factor in whether or not the FHA mortgage is approved.

An FHA borrower with good credit, a solid work history and a track record of on-time payments would seem to be a shoo-in for an FHA home loan. But there’s one thing that can offset the good things for the borrower if his or her debt-to-income ratio isn’t within the limits for an FHA loan.

The FHA requires a calculation of the debt to income ratio in order to see how much loan an applicant can reasonably afford. Too much debt and not enough income could spell trouble for the borrower later on; the FHA’s system is designed to prevent overly optimistic borrowers from getting in over their heads; it’s also designed to reduce the risk of default and foreclosure for the lender.

That’s one reason why the FHA (and the lender) requires so much detailed financial information on the loan application. It’s important to see the whole
picture–and not just to calculate how much debt the borrower may already have. If an FHA loan applicant has income they forget to include such as military bonuses, allowances, or other additional sources of income, it can make the debt-to-income ratio seem more severe than it really is.

It’s crucial to list all potential sources of income on the FHA loan application as well as the debts and outstanding credit card balances. A reenlistment bonus may be considered a one-time incentive by some, but if that bonus is paid out in installments over the course of the enlistment, it may be considered as additional income if the FHA approves. Special pay such as hazardous duty pay or language proficiency pay should also not be overlooked.