Monthly Archives: June 2011
Real estate can be a confusing business for those not used to dealing with the daily ins and outs of the industry. But a first-time FHA borrower isn’t the only one likely to have some initial trouble navigating the rules and regulations covering real estate transactions, FHA loan requirements and other issues. A first-time applicant for refinancing also has plenty of questions about the process.
One of the most frequently asked questions about refinancing involves an important ownership issue. Suppose a borrower purchased a home with an FHA insured loan, and either had the loan assumed, added someone to the title, or otherwise brought another person into property ownership without having them named on the original FHA loan? Can someone apply for an FHA refinancing loan if they own the property but was not named on the original note?
The short answer is yes. As long as a borrower has legal title to the property they want to refinance with an FHA loan product, they are permitted to apply. Borrowers don’t have to hold an FHA guaranteed mortgage loan to apply for FHA refinancing.
The real issue is what type of refinancing loan a borrower can apply for; the borrower who purchased a home with an FHA mortgage and decides to refinance it may be eligible for FHA streamline refinancing such as an Interest Rate Reduction Refinancing Loan. But the borrower who did not have a previous FHA loan would have to apply for credit-qualifying FHA refinance loans instead of a streamline loan.
Streamline loans use the previously submitted credit qualifying data in many cases. Some streamline loans may require additional credit checks depending on the circumstances, but the no-credit-check FHA refinancing loan is an option if the borrower chooses those terms and conditions.
Someone with legal title to the property but not named on the original FHA home loan paperwork will be required to meet typical FHA standards for a new loan–credit history must be submitted and other customary loan application paperwork. The new borrower isn’t “penalized” for not being on the original mortgage, it’s simply a case of applying for the new line of credit.
When a home is appraised by an FHA appraiser, there may be
In previous blog posts, we’ve discussed the different types of FHA loans available and the various types of properties that can be purchased with an FHA insured home loan. Those properties include typical suburban houses, manufactured homes, multi-family units and condominiums.
FHA condominium loans are more complex than other loans because the FHA has requirements when it comes to these loans. Borrowers can’t purchase just any condominium unit–it has to be on the FHA’s list of approved condominium projects in order to be considered for an FHA mortgage. That’s one reason why the FHA publishes a searchable list of approved condo projects on its website at https://entp.hud.gov/idapp/html/condlook.cfm.
What does it take for a condominium project to be approved by the FHA so a borrower can apply for a loan to buy one of its units? According to FHA guidelines, “to be eligible for FHA mortgage insurance, the project must have been declared and exists in full compliance with applicable State law requirements of the jurisdiction in which the condominium project is located and with all other applicable laws and regulations.”
A condo project will not be approved by the FHA unless it has a minimum of two units, and is covered by hazard, liability and other insurance where applicable. Any space dedicated to commercial use must not be larger than 25 percent of the total floor space, and investor ownership of the property cannot exceed 10%. Additionally, at least half the units must be sold prior to the FHA’s endorsement of the first loan for a unit in that building.
Condo hotels are not eligible to be placed on the FHA approved condo project list, nor are timeshares, houseboat projects or condos that feature “more than one dwelling per condo unit”.
FHA loan applicants who are interested in an FHA condo loan are encouraged to use the approved condo list as a way to start searching for the right building in a particular area. The list can save a house hunter much time and energy–why look for buildings you aren’t sure are on the list?
The search tool at https://entp.hud.gov/idapp/html/condlook.cfm allows you to look up approved condo projects by condo name, state, zip code and other factors.
There are many different types of FHA insured home loans to choose from. Buying a home or refinancing one isn’t a one-size-fits-all process, and FHA guaranteed loans come in a variety of types to accommodate the various needs different house hunters or current home owners bring to the lender.
The two most basic types of FHA home loans are new purchase loans and refinancing loans. New purchase FHA loans, by name alone, may seem to indicate that these loans are intended only for new construction houses, but new purchase simply refers to the type of transaction (a “new to you” home purchase), not the age or condition of the property itself.
FHA refinancing is, as the name implies, a home loan intended to pay off an old home loan and start a new one on the same property. Refinancing loans can include FHA-to-FHA refinancing or conventional-to-FHA refinancing. There are cash-out refinancing loans and loans designed to help borrowers lower monthly payments, interest rates, or both with no cash back to the borrower. There are also Home Equity Conversion Mortgages designed for seniors 62 and older who want to get cash for the equity built up in the home.
There are two basic types of loan terms for FHA insured mortgages, fixed and adjustable rate mortgages. Fixed rate loans have interest rates that never change, while Adjustable Rate FHA loans have specific adjustment periods where interest rates may increase or decrease depending on market conditions and/or other factors.
One type of adjustable rate FHA mortgage is called the Graduated Payment Mortgage, which features loan terms that include low initial monthly mortgage payments which increase over time. The idea behind the GPM as the loan is commonly called, is that payments increase along with the income of the borrower. These loans are designed for those who anticipate rising income over the five to ten years following the closing of the deal on a new home.
A similar program is called the Growing Equity Mortgage, also aimed at those who currently have low monthly incomes but expect them to increase over time. Payments start small and grow over the lifetime of the loan according to the contract and FHA requirements. Borrowers who expect increases in pay over the loan term are right for this type of mortgage.
The FHA has made an important announcement that could affect the loan limit on new FHA mortgages in some areas on or after October 1, 2011.
According to FHA.gov, “Barring Congressional action, Federal Housing Administration (FHA) loan limits will revert back to loan limits determined under the Housing and Economic Recovery Act (HERA) for loans insured by FHA on or after October 1, 2011. As a result, FHA loan limits would likely decline in 669 of the 3,334 counties or county equivalents that are eligible for FHA insurance.”
During the housing crisis of 2008, the FHA temporarily increased FHA loan limits. According to the FHA announcement, “The Economic Stimulus Act (ESA) enacted in February 2008 stipulated that FHA loan limits be set temporarily at 125 percent of the median house price in each area. The FHA loan limits could not exceed 175 percent of the 2008 GSE conforming mortgage limit of $417,000; nor be lower than 65 percent of the same 2008 GSE conforming loan limit for a residence of applicable size for any given area. Also, ESA stipulated that mortgage limits for Alaska, Guam, Hawaii, and the Virgin Islands be adjusted up to 150 percent of the national ceiling.”
What were the FHA loan limit rules like prior to the 2008 changes? According to FHA.gov, “Prior to 2008, the National Housing Act, as amended in 1998 Mortgagee Letter 1998-28, required that FHA mortgage limits be set at 95 percent of the median house price in that area.”
“However, FHA loan limits could not exceed 87 percent or go lower than 48 percent of the conforming mortgage limit established by the Government Sponsored Enterprises (GSE) in any given area. For the high-cost states and territories (Alaska, Guam, Hawaii, and the Virgin Islands), the National Housing Act allowed mortgage limits to be 150 percent of the national ceiling.”
The housing troubles of 2008 brought many temporary measures to try to fix the problem or at least temporarily offer some form of relief. FHA loan limit changes were part of that effort, but unless Congress acts to prevent it, 669 counties will experience a “decline” in FHA loan limits in October–the maximum amount of money an FHA loan applicant would be able to borrow (if qualified) for an FHA-insured mortgage in these affected counties would decrease.
Many of the affected housing markets are on the east and west coast, but parts of Florida, Illinois, Texas and other states would also see lower maximum loan limits.
It’s important to note that these potential changes in FHA loan limits are not set in stone as of the time of this writing–Congress could act to prevent loan limits from declining, passing another set of temporary measures while it considers the impact of such declines. We’ll continue to explore this issue in future blog posts.
We’ve had a lot of recent questions about how bankruptcy and related issues can affect a borrower’s chances to be approved for an FHA home loan. The good news is that filing for bankruptcy does not automatically disqualify a borrower from getting an FHA insured loan.
Just like any other loan applicant, the FHA and lender examine several factors when deciding to approve an FHA loan. A borrower must be able to show stable income and a record of dependable payments regardless of a bankruptcy filing, so a borrower’s habits and track record in the wake of a Chapter 7 or Chapter 13 bankruptcy proceeding is just as important as a “typical” FHA loan applicant’s.
How does a bankruptcy affect a borrower’s eligibility for an FHA mortgage?
The short answer is that much depends on the type of bankruptcy, how much time has passed and as stated above, the borrower’s credit record in the wake of the bankruptcy. For Chapter 7 cases, where assets have been liquidated, FHA rules state that at least two years must pass before the borrower can apply for a home loan insured by the FHA.
It’s important to point out that the FHA requirement is only part of the picture–a lender may ask for three years or longer before allowing a borrower to re-apply. Some lenders are willing to work with a qualified borrower after the FHA two-year minimum, but they are not required to do so.
FHA rules add the following: “An elapsed period of less than two years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited a documented ability to manage his or her financial affairs in a responsible manner.”
When it comes to
FHA home loans are not just for typical suburban homes. There are a wide variety of house hunters, all looking for different types of properties to suit their needs.
The two bedroom home in the ‘burbs may not be right for borrowers looking for a new home close to work in the city, or for those interested in a different type of residence than a standard house. FHA insured mortgages are available for condos, duplexes and manufactured homes.
They are also, in some cases, available for property with commercial use. In some cases, a borrower might be interested in buying a home that is zoned in a commercial district, or there might be a need for a small storefront or commercial office space. FHA requirements do allow for such purchases as long as they fall within certain guidelines.
According to the FHA, “Properties zoned for commercial use are acceptable only if they are predominately residential in nature”.
That means no more than 25 percent of the total floor space can be non-residential. The FHA also says the use of such property as a residence (in an area with commercial zoning) must be legal, or “legal nonconforming”.
When it comes to commercial property versus private residential property, much depends on the appraiser. According to the FHA official site, “The appraiser’s site analysis must accurately reflect the attitude of the typical purchaser. Predominantly commercial or business locations, or locations subject to noise or other influences adversely affecting the use and enjoyment of the typical owner or occupant should be avoided. The appraiser must address the effect of the applicable zoning ordinances on the value of the property.”
When it comes to getting an FHA home loan for a property in a commercial zone, there’s no short answer. The appraiser is given flexibility to determine whether an FHA home loan would be appropriate for the property, which means the buyer must accept that such decisions are made on a case-by-case basis.
The FHA can and does approve loans on commercially zoned buildings deemed “primarily residential” in nature–something the borrower should always keep in mind when viewing such mixed-use buildings.
The down payment issue is one that brings many would-be conventional borrowers to an FHA lender. After seeing what some conventional loans require for a down payment, the FHA minimum 3.5% is a definite advantage to a first-time home buyer. But when a borrower is doing research on FHA loans versus conventional equivalents, sometimes the details can be a bit confusing.
One area some have trouble understanding (at first) is the difference between the required 3.5% FHA loan down payment for a typical home purchase and the $100 down payment required on some HUD home purchases.
A HUD home purchase is not the same as taking out an FHA mortgage in the usual way. HUD homes are properties owned by the Department of Housing and Urban Development–homes that have been foreclosed upon and put back on the market to offset the government’s loss due to having to pay a claim to the lender on that particular property. HUD homes are inexpensive and according to the FHA official site, may feature a down payment as low as $100 depending on the location and condition of the property.
HUD homes are sold as-is and may require work to get them into a condition acceptable to the buyer. They can be financed with some FHA loan products under the right circumstances.
For a typical FHA mortgage loan, the minimum down payment on a home available on the ordinary real estate market is 3.5%, subject to additional requirements and FHA regulations depending on the type of mortgage and other factors.
FHA loan applicants should know that the amount of a required down payment will show up on the initial Good Faith Estimate as required by law, plus the HUD-1 Settlement Statement. These two documents are required to insure the borrower knows exactly what they must pay and when so that there are no surprises in the transaction or “gotcha” fees or charges the buyer was uninformed about.
In addition to the down payment, all closing costs, pre-paid items, up front mortgage insurance premiums and other fees are listed. The borrower must be informed of these costs prior to closing the deal.
If you’re new to FHA home loans, it’s easy to get confused by the different types of FHA insured mortgages available. There are FHA 203(b) loans, the FHA 203(k) and a host of others.
Some borrowers are ready, after seeing the alphabet soup of different programs a borrower could apply for, to throw up their hands and just ask for “the FHA loan everybody applies for when they want a new home.”
That loan is known as the FHA 203(b), the single-family mortgage insurance program most commonly used all over America. According to the FHA official site, the FHA 203(b) “may be used to purchase or refinance a new or existing one-to-four family home in both urban and rural areas including manufactured homes on permanent foundations. Typically, lenders offer terms at 15 or 30 years, and interest rates are negotiated between the borrower and lender.”
Borrowers who have looked at conventional mortgages and compare them with the FHA 203(b) learn several things. The 203(b) is easier to qualify for because the FHA backs the loan, giving protection to the lender.
Thanks to this protection, the FHA Frequently Asked Questions section at FHA.gov says, “…you don’t have to have a perfect credit score to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it’s easier for you to qualify for an FHA loan than a conventional loan.”
FHA loans do not come with zero down payment offers, but the down payment that is required is comparatively lower than many conventional loans. FHA mortgages require a down payment as low as 3.5%, which the FHA allows to come from an employer, family member or charitable organization in the form of a gift if the borrower chooses to accept outside help for the loan.
In spite of what some assume, the FHA does not set interest rates on FHA mortgages, but according to HUD, “FHA loans have competitive interest rates because the Federal government insures the loans. Always compare an FHA loan with other loan types.”
All FHA loan money comes from participating lenders and the FHA does not provide “direct financing”. But it does require agency approval before a bank can issue an FHA home loan–the FHA and HUD work with lenders to insure quality, regulatory compliance, and fairness in the lending process.
There are plenty of other FHA insured home loans available besides the 203(b), it’s just one of many–but it’s the first thing many borrowers think of when they want to buy a home with an FHA mortgage–even if they don’t know the technical name for the loan.
2011 has been a bad year for storms and floods. In the past several months, Illinois, Minnesota, Missouri and many other states have been hit with tornadoes and flooding. Some areas get minor damage, while others are declared Presidential disaster areas. Recently the President also had to make a disaster declaration for parts of Montana and Vermont as storms and flooding there forced people from their homes.
HUD Secretary Shaun Donovan has also made some announcements of his own, stating that HUD will rush federal disaster assistance to these areas to support home owners and low-income renters there. FHA borrowers affected by these storms should know help is on the way.
According to recent press releases from HUD, Secretary Donovan says,