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

Monthly Archives: July 2011

FHA Loans For Homes Near Airports and Runways

The location of the home an FHA loan applicant wants to purchase affects many things connected to FHA loan approval. The FHA loan limit is a good example–these limits are set by county and vary depending on the housing market in a given area.

Homes located in some counties may have requirements based on local building codes other areas don’t require. And some properties may get closer scrutiny if they are located in or near flood zones or other areas identified as prone to natural disasters.

With all that in mind, some borrowers may worry about the eligibility of a particular home for an FHA loan based on its proximity to airports or military air fields. Is a property rendered ineligible for an FHA home loan because it is in an airport noise zone or within “runway clear zones”?

According to the FHA, there once were noise requirements for single-family properties, but no longer–except for new condominium projects.

The FHA rules state, “Airport Noise Properties are not to be rejected solely because of airport influences (noise) if there is evidence of acceptance in the market and if use of the dwellings is expected to continue.”

Note the caveat in that statement–market acceptance is key. If the resale value of a home purchased with an FHA mortgage could be adversely affected by its proximity to an airport, the lender may be within his or her rights to take a second look at the loan. “Special consideration should be given to determine if there is indication that adverse changes in market attitude are taking place in the area.”

The homes located in or near runway clear zones, runway protection zones near civil airports, and military airfield “accident potential zones” are technically eligible for FHA home loans, but only when the buyer is informed of this and commits to the purchase with full disclosure.

The FHA official site says, “All dwellings are acceptable provided the prospective purchaser acknowledges awareness that the property is located in a Runway Clear Zone/Clear Zone…This notification must be provided to the prospective purchaser at the time loan application is initiated.” The FHA rules also refer to a certification which must of this acknowledgment which must accompany other loan paperwork.

FHA Loans, the Fair Housing Act, and Discrimination

Elsewhere on this blog, we’ve mentioned the policies of the FHA, Department of Housing and Urban Development, and federal law designed to protect borrowers from discriminatory practices in real estate lending and related areas.

FHA home loans are, by federal law and program requirements, intended to be available to all qualified applicants regardless of race, color, national origin, religion, sex, familial status or disability.

But some people still don’t understand the full implications of these laws, which extend to rentals and homeowners associations, not just the lending process. A July 20, 2011 press release from HUD describes charges against a Wisconsin landlord accused of violating the Fair Housing Act by “allegedly establishing different terms for a single mother

FHA Roof Requirements

One frequently asked questions about the FHA loan process is about roof requirements. When a buyer views a home and decides to make a commitment to buy using an FHA insured mortgage, the sale of the home cannot proceed until the property has been reviewed by an FHA approved fee appraiser.

It’s the appraiser’s job to look over the home, make sure it meets FHA standards, and assign it a fair market value. FHA standards include making sure the property is safe, livable, and has no obvious structural issues or defects within the scope of the appraisal. (An appraisal is not a home inspection and borrowers should never accept an appraisal as a guarantee that the home is defect-free.)

That includes the roof–FHA and HUD regulations say it must not leak or allow moisture to enter the home. The roof must also “provide reasonable future utility, durability and economy of maintenance” according to FHA rules.

The FHA official site adds, “The roof should have a remaining physical life of at least two years. If the roof has less than two years remaining life, then the appraiser must call for re-roofing or repair. The appraiser must clearly state whether the subject is to be repaired or re-roofed.”

If an appraiser notices any leaks or moisture due to roofing issues, those conditions will be noted on the appraisal report. Any noticeable holes, water damage or other problems are also noted. An FHA appraiser is not an expert on roofing, nor is the appraiser required to step onto the roof to inspect it further.

That is why the borrower must take it upon themselves to have a home inspector look over the roof and other critical areas of the property–there may be issues not immediately noticeable that an inspection would catch that do not appear on the FHA appraisal report.

FHA appraisers do not specialize in any one particular area–they are hired to review the property according to FHA requirements. They don’t enter crawlspaces, walk on roofs or perform other duties for which they have no specialized equipment or safety gear for–again, that’s the job of a home inspector. Borrowers concerned about the state of the roof or wondering about the remaining years left on the current roof should ask the inspector specifically about those issues prior to the inspection.

FHA Condo Loans: Who Approves the Condos?

FHA loan applicants looking for a condo loan have several options open to them when it comes to finding a project that is FHA-approved.

The Department of Housing and Urban Development along with the FHA maintain a list of approved condo projects eligible for FHA loans, which is searchable by city, state, and other factors. You can find that list here:

https://entp.hud.gov/idapp/html/condlook.cfm

But is the existing list the only resource FHA borrowers have to find a condo project? What if the buyer finds a suitable condo that is not yet FHA approved?

Thanks to the Housing and Economic Recovery Act (HERA) of 2008, changes have been made to the FHA condo project approval process, effective for all case numbers issued after December 7, 2009.

According to the official site, “FHA will now allow lenders to determine project eligibility, review project documentation, and certify to compliance with Section 203(b) of the NHA and 24 CFR 203 of FHA

Can FHA HECM Loans Become Delinquent?

In troubled economic times, FHA borrowers can get into trouble on their mortgages because of reduced income, higher prices and other issues.

FHA and conventional borrowers know that missing one payment isn’t necessarily the road to foreclosure, but such problems should be addressed quickly to avoid going into loan default and/or foreclosure proceedings.

Those with Home Equity Conversion Mortgages wouldn’t seem to be affected in the same way, since a HECM loan is designed to give the borrower access to funds supplied using the equity in the property as the security for the loan. There are no monthly payments and the loan is satisfied once the borrower dies or sells the home–once the home is sold, the loan is paid off in full,

So how is it possible that an FHA HECM borrower could become delinquent on a loan he or she is not required to make monthly mortgage payments on?

The short answer is that it IS possible, if a home owner with a HECM does not meet the obligations spelled out in FHA requirements with regard to taxes and insurance. “The borrower shall maintain hazard insurance on the property in an amount acceptable to the Secretary and the mortgagee…the borrower must pay taxes, hazard insurance premiums, ground rents and assessments in a timely manner, except to the extent such property charges are paid by the mortgagee in accordance with

FHA Loan Down Payments

FHA insured loans feature down payments as low as 3.5%. Borrowers considering the purchase of a home with an FHA or conventional mortgage should anticipate this expense as they make a budget that includes the new home purchase. There are a variety of costs associated with a home loan including the down payment, closing costs, appraisal fees and other expenses.

The down payment can be daunting for some borrowers–having enough time to save up for the expenses of a new home purchase is one reason most real estate experts and financial planners recommend borrowers spend at least a year preparing for a home loan. But even for those who take the time to plan and save, the down payment requirement may be more than they can afford.

Is there any hope for those on strict budgets who can afford the monthly mortgage but struggle to come up with a down payment on an FHA insured home loan?

According to the FHA, down payment money can be supplied by a relative in the form of gift funds–this money is required to be deposited and proof of deposit must be shown. But gift money isn’t the only option for borrowers who need help making a down payment. The FHA also permits the applicant to use borrowed money for the down payment, subject to FHA guidelines.

According to the FHA, “Funds can be borrowed for the total required investment as long as satisfactory evidence is provided that the funds are fully secured by investment accounts or real property. Such assets may include stocks, bonds, real estate (other than the property being purchased), etc.”

The FHA also permits some kinds of signature loan money to be used as the down payment on a mortgage. The rules say “certain types of loans secured against deposited funds, such as signature loans, the cash value of life insurance policies, loans secured by 401(k)s, etc., in which repayment may be obtained through extinguishing the asset; do not require consideration of a repayment for qualifying purposes.”

In these cases, the assets securing the down payment loan amount “may not be included as assets to close or otherwise considered as available to the borrower.” FHA rules say down payment loan money cannot come from unsecured loans or credit card cash advances.

The origin of the loan money is also restricted by “interest”. If the borrower takes out a loan for an FHA loan down payment, that loan must come from a third party unconnected to the sale of the home. Anyone with a financial stake in the outcome of the sale of the property is forbidden from issuing a loan for down payment purposes–including the seller, the broker, or the lender issuing the FHA mortgage.

FHA Loans and Appraisals: Who Sets the Appraisal Fee?

The appraisal process is one of the most important steps toward buying a home with an FHA-insured mortgage. Borrowers cannot be approved for an FHA loan without the FHA appraiser doing his or her work to establish fair market value of the property and make sure the home meets FHA requirements.

Like almost everything else in the FHA insured loan process, there are rules and regulations that guide appraisers, the lender who hires them, and how the work is to be done. One area the FHA is quite clear about in the rules is the appraisal fee.

FHA does not have a fee structure or table for appraisers–there are no fixed dollar amounts for appraisal services. But that does not mean the FHA doesn’t have rules covering how high these fees can go.

According to the FHA official site, “Lenders must ensure that appraisers are compensated at rates that are reasonable and customary, and fees charged are commensurate with the respective level of service provided.”

The phrase “reasonable and customary” sounds nebulous, but FHA guidelines say an individual FHA appraiser’s fees must be on par with similar service providers. “Reasonable and customary appraisal fees reflect those fees established and negotiated by an FHA approved, self employed independent fee appraiser; or appraisal firm that may directly employ FHA approved appraisers or retain them as independent contractors, regardless of whether a lender, AMC or 3rd party vendor orders the appraisal.”

How is a fee appraiser expected to set his or her rates? As with other FHA fees, the cost must reflect actual services rendered and must not include charges for work not actually performed. “The fee should reflect the amount of research, level of difficulty and due diligence required to produce a credible, reliable and accurate appraisal report.”

Also, “…for FHA purposes, appraisers are permitted to record the appraisal fee received for performing the appraisal within the appraisal report (but must not include any AMC, other third party fees, or management or review fees charged by lenders in the fee recorded within the report).”

The appraisal fee must be in compliance with the Real Estate Settlement Procedures Act, meaning the entire fee must be disclosed to the borrower in typical documentation like the HUD-1 Settlement Statement and other required paperwork.

FHA Streamline Refinance Loans and Mortgage Term Reductions

FHA loans are available with terms of 15 and 30 years. Borrowers can choose shorter loans with higher payments, or they can choose a longer loan term and lower payments depending on what their financial priorities are.

The shorter-term loan with higher monthly payments can result in less money being paid in interest over the lifetime of the loan, but for many borrowers the higher monthly obligation isn’t as affordable.

Choosing the right loan term for your financial goals and monthly budget can be tricky. Some choose the longer loan term to maintain their monthly budget, but as people progress in their careers it may be more affordable later to take on those higher payments. Some decide simply to pay more than the monthly amount due, but others may seek a refinanced loan at the shorter duration and more competitive interest rate.

For those who choose refinancing, there’s a frequently asked question–can the borrower get an FHA Streamline Refinance Loan for the purposes of reducing the mortgage term?

According to FHA rules, “A transaction for the purpose of reducing the mortgage term may not be closed as a streamline refinance”. Instead, these loans, “must be underwritten and closed as a credit qualifying rate and term (no cash out) refinance”.

There’s a reason why the loan can’t be processed as a streamline loan. According to FHA regulations, streamline loans must show “a net tangible benefit to the mortgagor as a result of the streamline refinance transaction, with or without an appraisal.” Those tangible benefits can include a reduction to the principal and interest of the loan, or a move from an adjustable rate mortgage to an FHA fixed-rate loan.

According to a recent update in FHA Streamline Refinance loan rules, “Reducing the term of the mortgage, in and of itself, is not a net tangible benefit.”

This means borrowers who seek a refinancing loan to reduce the mortgage term must qualify for the new loan the same way they did with the original mortgage, with a credit check and other qualifying procedures.

FHA Loans And Appraisal Expiration Dates

When a buyer finds a home to purchase using an FHA insured mortgage, the property must be appraised to establish the market value and make sure the home meets FHA standards before the loan can be approved.

Once the home has been appraised and approved for sale, the borrower and lender can work out an agreed closing date. But FHA appraisals have an expiration date–they don’t remain valid indefinitely due to housing market changes and other variables.

One common question about the appraisal process is whether the FHA allows an appraisal to be extended if it expires prior to the closing date. The short answer is that the appraisal may be extended for thirty days to allow the loan to close, “If a sales contract is signed or the borrower is approved for a loan prior to the appraisal expiration date”.

FHA rules state that loan approval becomes official “when the lender’s Direct Endorsement underwriter signs the FHA Loan Underwriting and Transmittal Summary, Form HUD-92900-LT. The loan must close within 150 days (120 day validity period for original report plus 30 day extension), if the appraisal has not been updated with an Appraisal Update Report”.

If the loan has been updated with that Appraisal Update Report, the loan is required to close within 240 days. The FHA places a restriction on these appraisal extensions–they can only be issued once, and cannot be used by a lender other than the one named in the original appraisal report, “unless the appraiser incorporates the original report by attachment rather than by reference per Advisory Opinion 3 of the USPAP.”

These rules are different for the sale of HUD-owned properties. According to FHA requirements, “a valid REO sales contract must be ratified within 120 days of the appraisal effective date, or the lender must order a new appraisal, or Appraisal Update Report (Mortgagee Letter 10-08). The 30 day extension is not allowed when the original appraisal is updated via an Appraisal Update Report.”

FHA Requirements For Condo Units

In our last blog post we discussed FHA rules on condo units that affect their eligibility for FHA mortgages.

The FHA does not approve condo loans for any property that features deed restrictions which penalize the borrower for selling or transferring ownership of the condo to someone else. FHA regulations state that any property purchased with an FHA mortgage must be freely transferable without penalty.

But those aren’t the only requirements on FHA condo loans.

FHA rules include provisions for proper documentation (in conjunction with applicable state law) of homeowner’s agreements, and statements of understanding between condo owners about shared responsibility for property management.

FHA borrowers new to condominium ownership might not know that the responsibilities of condo ownership include shared duties and costs such as facility maintenance, code compliance, roof repair, sidewalk and driveway upkeep, etc. Condo owners would be jointly responsible in most cases for such issues.

When purchasing a condo, regardless of whether you have a conventional loan, VA mortgage or FHA insured loan, you enter into a group association with your fellow owners.

In some cases, city building codes may require fixes, repairs or upgrades to the property; the condo owners share the expense as agreed upon. The FHA requires such agreements to be spelled out in writing and submitted. The FHA also requires approved condo projects to furnish proof of hazard insurance.

According to the FHA rules, “The insurance policy must be in either the individual homeowners name(s) or the Home Owners Agreement.