Monthly Archives: September 2011
FHA loans for single family, new purchase properties have a set of requirements and regulations covering the types of homes that can be purchased with an FHA insured mortgage.
Many people envision a traditional suburban home when thinking of buying property with an FHA mortgage, but FHA-approved condo projects, town homes, row houses, and even detached (or semi-detached) housing can be approved for an FHA loan if the property meets the right standards.
Sometimes the phrase “single-family home” misleads a potential FHA borrower into thinking they can only purchase single unit properties. But according to the official site, “FHA’s single family programs are limited to one- to four-family properties that are owner-occupied principal residences. The key to being able to purchase a multi-unit property (capable of housing up to four families) is that the property is owner-occupied.
The FHA requires the borrower to certify they will use the property as the primary residence, making a legally binding statement to that effect when signing loan documents.
Did you know the FHA has a list of properties it will not approve an FHA insured mortgage for? In the case of single-family homes, the FHA won’t insure a loan for any commercial enterprise. It will not approve an FHA mortgage for hotels, boarding houses or tourist dwellings. You are not allowed to get an FHA home loan to open a bed and breakfast or a private club, and the FHA also will not approve loans for a frat or sorority house.
The FHA clearly states in HUD publication 4155.1, “FHA’s single family programs are limited to owner-occupied principal residences only.” For more information on these requirements, call the FHA at 1-800-CALL-FHA (225-5342).
FHA rules for Streamline Refinancing Loans changed in 2011, and there are updated guidelines borrowers and lenders need to know when trying to determine what the maximum loan amount might be for a particular borrower. Under the old rules (for cases assigned before April 18, 2011) there were two sets of guidelines.
One set was for FHA streamline refinancing without an appraisal. For these loans, the old system allowed refinancing maximums that did not exceed the principal outstanding balance, minus any up front mortgage insurance premium refund, plus the amount of the new up front mortgage insurance premium (UFMIP).
The old FHA streamline limits also included a “with appraisal” maximum which was based on the lower of the outstanding principal balance minus any UFMIP refund, plus closing costs and prepaid items plus the amount of the new UFMIP OR 97.75 percent of the appraised value of the property plus the new UFMIP.
But changes to the rules for FHA Streamline Refinance Loans mean all cases assigned on or after April 18, 2011 with or without an appraisal are as follows;
The maximum mortgage amount must not be higher than “the outstanding principal balance, minus any UFMIP refund, plus the new UFMIP, “according to the FHA official site. Additionally, the FHA has determined that closing costs, discount points, prepaid items, and other financing costs may not be included in the new loan. That means the borrower must pay closing costs, points and other items mentioned above out of pocket.
The FHA also adds, “Lenders may only increase the loan amount beyond the outstanding principal balance and new UFMIP by using a credit qualifying refinance with an appraisal. The outstanding principal balance may include interest charged by the servicing lender when the payoff is not received on the first day of the month, but may not include delinquent interest, late charges or escrow shortages.”
It’s true that these changes require more financial planning on the borrower’s part–saving up for closing costs and related expenses not allowed in the refinancing loan amount may force a borrower to take more prep time now for streamline refinancing than in the past, but keeping the closing costs out of the loan is actually a benefit for borrowers over the long term, as the refinanced loan principal is lower and the borrower is spared paying interest on those costs, had they been included in the loan amount.
The FHA official site reports charges against a La Crosse, Wisconsin landlord for violating the Fair Housing act, “for refusing to rent an apartment to an African American couple because of their race.”
FHA press release 11-228 says, “HUD brings the charge on behalf of the couple, alleging that Geneva Terrace, Inc. and Victoria Gerrard, the owner of Geneva Terrace Apartments, and property manager Nicolai Quinn refused to show an apartment to the complainants. Additionally, they falsely represented to the couple and other black applicants that no units were available, while informing white applicants of available units and encouraging them to apply. The Fair Housing Act prohibits housing discrimination based on race.”
What does this have to do with FHA home loans?
Refusing to rent to a qualified tenant based on racial bias isn’t the only type of violation of the Fair Housing Act. Property owners who attempt to refuse the sale of their property for the same reasons are also in violation of federal law. An owner can’t refuse to sell, nor can a lender refuse to issue credit, based racial bias, gender or other issues unrelated to a borrower’s financial qualifications to purchase.
If you’re considering a new home purchase, many will offer advice about pre-qualifying for an FHA home loan. A lot of borrowers who pre-qualify swear by this approach. It allows you to make serious choices about specific properties within your price range as determined by the pre-qualified FHA loan amount rather than finding a home, making an offer and hoping a loan can be approved for the right amount.
But what does an FHA borrower need in order to pre-qualify for an FHA insured mortgage? For this discussion we’re not talking about credit scores or how much preparation time is needed to get your finances in order, but rather what information you specifically need to approach a lender via a website, by phone or in person.
The first detail borrowers need to provide is the purpose of the loan. For new purchase home loans, this is easy. For example, if you’re filling out the pre-qualification checklist online at FHAloan.com, you would select either FHA Purchase or FHA Refinance. Once new home buyers select “FHA Purchase” you may be asked what state your home purchase is located in, your estimation of your credit rating, and related information.
You’ll then be asked more detailed information (depending on the website) which may include questions about the zip code, the sale price of the home, whether you’re interested in a fixed or adjustable interest rate, and more.
You’ll likely be asked about your gross income, whether you’ve had a mortgage payment recently, and whether you’ve declared bankruptcy or had other judgments against you. In most cases none of this information is used at face value to determine whether or not to approve a loan amount, it’s often to give a financial institution rep a basic idea of your needs, your history, and how the bank might be able to help.
The most important part about pre-qualifying for an FHA home loan is to set aside enough time to fill out the online form properly or to give a financial institution rep the chance to ask you the right questions. It doesn’t pay to be in a hurry or be pressed for time when trying to pre-qualify.
Give yourself at least an hour just in case you need more time to answer the pre-qualification questions. Whether you fill out a form online or speak to a representative, don’t expect to get an instant answer on a loan amount–you’ll need to give the lender enough time to review your data once the questions are answered—they will get back to you with more information once the details have been processed.
The FHA has issued clarification on FHA insured mortgages with terms of 15 years or less and a Loan To Value Ratio of less than 78 percent or less. FHA loans with case numbers assigned on or after April 18, 2011 are affected by this clarification, which refers to the cancellation of the annual mortgage insurance premium or MIP.
Earlier in 2011, the FHA issued Mortgagee Letter 2011-10 which clarified and updated FHA loan rules for MIP for affected FHA loan types. When it was issued, it did not address “forward” loans with terms 15 years or less as described above. According to the FHA, “Currently the annual MIP is canceled for mortgages with amortization terms of 15 years or less when the LTV reaches 78 percent.”
FHA Mortgagee Letter 11-35 was issued to let borrowers and lenders know, “Therefore, this Mortgagee Letter confirms that Annual Mortgage Insurance Premiums are not charged for all forward mortgages with amortization terms of 15 years or less, and LTVs at or below 78 percent at the time of origination”, information accidentally left out of the original revision to FHA loan MIP revisions in Mortgagee Letter 2011-10.
The new FHA guidance says, “Additionally, when the changes to the annual MIP were made to HUD Handbook 4155.2 through Mortgagee Letter 2011-10, Section 7.3.c was inadvertently left out of the list of affected topics.”
“Therefore, this Mortgagee Letter clarifies that the references to the automatic termination of MIP in Section 7.3.c of HUD Handbook 4155.2 will be updated to reflect that the annual MIP terminates for mortgages with amortization terms of 15 years or less when the LTV reaches 78 percent and that no annual MIP is charged when the initial LTV for such mortgages is at or below 78 percent.”
FHA says there are “no other changes” to Annual Mortgage Insurance Premiums, and there are “no changes to the Upfront Mortgage Insurance Premium (UFMIP).”
Home buying can be an intimidating process, especially for first-time house hunters. That’s one reason why the FHA has a network of housing counselors and an assistance hotline available; if you’re looking for an FHA home loan and need help getting started, that assistance is definitely available.
At the FHA official site, you’ll read the following; “Want advice on buying a home, renting, default, foreclosure avoidance, credit issues or reverse mortgages? HUD sponsors housing counseling agencies throughout the country to provide free or low cost advice.”
When you call the FHA at (800) 569-4287, you’ll get access to a phone-based search system that can refer you to a housing counseling agency near you. You can also search for a housing counseling agency near you online at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm by using the interactive map of the USA to pinpoint your location. These agencies are FHA-approved and borrowers can choose the one most convenient for them based on location.
It’s important to note that not all housing counseling services are free. Some are fee-based, and according to FHA guidelines must charge “reasonable and customary” costs for services rendered. The services for house hunters may require a fee, but some FHA-approved housing counseling is free by law. Those free services include foreclosure avoidance counseling and homelessness prevention.
For the services that do require a fee, the FHA rules state housing counseling agencies are “permitted to charge reasonable and customary fees…for forms of housing counseling and education services, including pre-purchase, reverse mortgage, rental, and non-delinquency post-purchase counseling services…”
Fees may only be charged when conditions are met including a requirement that fee-based counseling be provided without charge for people “who demonstrate they cannot afford the fees”.
In addition, the FHA-approved counseling agency must tell you the costs of your counseling services in advance and the fees must be “commensurate with the level of services provided.” The FHA advises borrowers to contact the nearest FHA/HUD office if you are working with an FHA-approved agency that does not comply with these rules.
Borrowers new to FHA loans soon learn about the requirements to qualify for the loans, which include what the FHA calls a “minimum cash investment”, which is essentially a down payment of at least 3.5% of “the lesser of the appraised value of the property or the sales price.”
But the down payment isn’t the only thing required as a minimum cash investment–something that cannot be rolled into the loan or otherwise financed.
According to HUD Handbook 4155.1, “the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement.”. FHA requirements also state that any money used to cover these minimum costs must come from “acceptable sources”. FHA rules state the lender is responsible for verifying that all money for these expenses comes from acceptable sources and are properly documented.
For example, the down payment for an FHA home loan can come from a borrower’s private savings or checking accounts. The FHA lists acceptable sources that include earnest money deposits, cash saved at home, or “cash accumulated with private savings club”.
A borrower is also free, under FHA loan rules, to cash in stocks, savings bonds, IRAs, even 401K accounts to come up with the down payment and other up-front expenses.
In addition to all these acceptable sources, there are also down payment funding sources that are not acceptable, or are likely to be disapproved by a lender once proper documentation is established. For example, down payment funds that come from some types of signature loans, cash advances from credit cards or other types of unsecured financing.
Loan proceeds used to make a down payment must be secured and issued by an independent third party. A signature loan issued with funds already deposited as the security for that loan could be considered acceptable, but may not be supplied by the lender, real estate agent or other interested party involved in the FHA loan transaction.
Borrowers who apply for an FHA home loan are required to list all sources of income on the application. This is required for multiple reasons; the lender must calculate the applicant’s debt-to-income ratio to see if the borrower is able to afford the new mortgage payments if approved for the FHA loan. A borrower who has too much going out and not enough going in won’t qualify for an FHA loan.
But there’s another reason for the requirement; an FHA lender is required to verify that the employment and income listed on the FHA loan application is genuine. The lender can’t simply accept on good faith that the data listed on the form is true. When the borrower is notified he or she has been approved for an FHA insured mortgage, that approval has come only after the lender has done “due diligence” in verifying the details on the application.
Some borrowers who want FHA loans don’t have “current employment” for a variety of reasons. Does this disqualify an FHA loan applicant automatically? Do seasonal workers, medical professionals completing residencies, and teachers waiting for the new school year to begin get the short shrift on an FHA loan simply because their employment hasn’t started yet?
FHA rules allow for “future employment” to be considered as verifiable income for an FHA loan if that employment meets FHA standards. The most important hurdle to clear in such cases is that the employment must begin with 60 days of the closing of the loan. Specifically, the FHA rules say future employment, or “projected income” is “acceptable for qualifying purposes for a borrower scheduled to start a new job within 60 days of loan closing if there is a guaranteed, non-revocable contract for employment.”
In addition, “The lender must verify that the borrower will have sufficient income or cash reserves to support the mortgage payment and any other obligations between loan closing and the start of employment.”
FHA rules say the loan cannot be approved if it closes more than 60 days before the applicant starts the new employment, and in any case the lender must verify the employment has begun within the 60 day period following the close of the loan.
FHA condo loans differ greatly in some respects from typical, single-dwelling properties that make up a large portion of the FHA insured mortgage loans. Condos are unique properties–the multiple individual owners residing in a shared building have different agreements, covenants and requirements for condo living than their suburban home-dwelling counterparts.
But in some cases, rules for FHA condo loans resemble suburban home loans a great deal. For example, FHA loans allow a borrower to purchase a mixed-use property under a set of conditions which include the requirement that no more than 25% of the total floor space be used for non-residential or commercial purposes.
When it comes to these mixed-use mortgages insured by the FHA,
Some FHA loan applicants are surprised to learn that FHA loans are available for condominiums. A condo, by definition, is a building that offers titles for individual units within the common structure. The FHA has rules for condo loans, including a requirement that the condo be on a list of projects approved by the FHA.
Some building owners decide to convert their property into condominiums so they can sell the individual units. The FHA will consider such conversion projects for approval provided the condo units meet FHA standards. Such standards include a “one unit, one residence” requirement; each unit must be a separate entity and must be sold and occupied as such.
FHA loan applicants looking for condo projects often wonder if the FHA will insure condo units in a conversion project that has not been completed yet.
According to the FHA official site, “Conversion to condominiums occurs in those projects which involve changing the title of an existing structure generally under one title, to property that is separated into units so that the title to most units can be held separately. In the event that FHA is insuring a mortgage on a unit and an undivided interest in the common elements on a project undergoing conversion, remodeling or rehabilitation, the entire condominium project, including the common facilities must be 100 percent completely built before any mortgage may be endorsed.”
Part of the reason for this has to do with FHA condo standards–if the unit for sale in a finished conversion project can’t meet minimum property requirements for example, such a situation could put the borrower’s investment at risk, or even his or her safety. The FHA also requires a fully finished project to insure the entire property meets FHA requirements, not just individual units. The overall condition of the rest of the project could affect the resale value of the unit sold with an FHA insured mortgage.
FHA rules require a condo project to be in compliance with applicable state law, “including good standing with the State, and with all other applicable laws and regulations.”
The FHA rules add, “The condominium project must be primarily residential, contain at least two (2) dwelling units and can be detached, semi-detached, a row house, a walk-up, mid-rise, high-rise, including those with or without an elevator, or manufactured housing.” There is no way to determine whether a condo conversion project meets basic requirements until the work has been declared complete, hence the rules mentioned here about condo conversion.