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

Monthly Archives: October 2011

FHA Rehab Loans

The FHA 203(k) Rehab loan allows buyers and current home owners to “finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.”

The 203(k) can help raise the value of a property or simply make the home more comfortable for those who aren’t interested in selling.

Many people think of the 203(k) only when considering large projects, but did you know there’s a smaller version of the 203(k) allowed by the FHA? According to the HUD official site, “For less extensive repairs/improvements” borrowers are encouraged to apply for a Streamlined 203(k).

According to the rules of an FHA 203(K), the property must be at least one year old–the 203(k) isn’t meant for new construction homes. According to the rules, any house eligible for the rehab loan can be used as follows. “A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed.”

The FHA adds an important set of qualifiers to the 203(k) rules. The cost of the rehab must be at least $5,000, but the rules state, “the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.”

An FHA 203(k) offers plenty additional choices to improve a home, including the removal of safety hazards, improving efficiency, and in some cases even landscape improvements. Ask your lender about the option for a Streamline 203(k) if you need to contemplate a smaller project that still qualifies for this FHA loan option.

Factors That Affect Your FHA Loan Amount

FHA loan applicants naturally want to know how much mortgage they are qualified to get–how much can an FHA borrower receive on an FHA insured home loan?

The answer isn’t as simple as a fixed dollar amount. There are many things that factor in to the final FHA home loan amount and not all of them are connected to the sale price of the home. Your FHA loan amount is influenced by the current state of the housing market, the interest rate on the loan, the asking price on the property and the fair market value of the home.

The first and most obvious factor that can affect an FHA home loan amount is the borrower’s qualifications. How much are you qualified to borrow based on your income and debt load? Pre-qualifying for an FHA home loan is a very good idea–you’ll get an estimate of what you’re able to afford and can shop for a property within your price range.

Another factor is the asking price of the home. The seller’s price is not the final word, of course, the borrower and the seller must negotiate a final price. Those negotiations are not truly complete until the borrower knows what the FHA appraiser says the home is worth; the fair market value of the property. Once the FHA appraisal is finished and the value of the property is determined, buyer and seller may need to go back to the bargaining table if the price is higher than the value of the home.

The reason for this is because the FHA won’t insure a loan for more than the fair market value, regardless of the selling price. The borrower may choose to pay the difference out of pocket, or try to get the seller to discuss his or her price once more.

FHA loans are also affected by the by-county loan limits established for each housing market, and the FHA loan amount is also influenced by what the borrower includes in the loan amount. You may be able to include some closing costs into the home loan, which will affect the final amount. Another factor that influences FHA loan amounts is the number of units in the property.

Your loan limit may be higher for a multi-unit property than for a condo or single unit home. There are many things that influence the final loan amount. Ask your loan officer for more information on factors that might be unique to your situation or housing market.

FHA Loans and Rental Income

There are many frequently asked questions about FHA loans in connection with rental properties. Some borrowers purchase a home with an FHA insured mortgage and live there for a while, then decide to explore their options for renting the existing home out and purchasing a new one to live in.

One of the most common questions in this case has to do with qualifying income for a new FHA loan. “Can I rent my current home and use the income to qualify for a new FHA mortgage?”

According to the FHA official site, there was concern that borrowers might exaggerate the amount of rental income received on the first property. To address those concerns, the FHA instituted a new policy which took effect in late 2008. “Beginning with case number assignments on or after September 19, 2008, and until further notice, the underwriting analysis may not consider any rental income from the property being vacated” except under circumstances listed in the new rules.

Under the rules, rental income may be considered on the first property when the FHA loan applicant is “relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.” In these cases there must be a “properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year

When an FHA Loan Application is Denied

Transparency in the lending process and informed borrowing are two of the most important issues related to the “front end” of FHA loans. Before you commit to buy, even before you turn in an FHA home loan application, it’s crucial to know what your rights as a borrower are and how those rights affect every step of the FHA loan process.

Did you know you’re entitled to an explanation as to why an FHA loan application was denied? According to the FHA official site, the Equal Credit Opportunity Act (ECOA) governs lender responsibilities in this area.

“If your application is denied, ECOA requires your lender or mortgage broker to give you a statement of the specific reasons why it denied your application or tell you how you can obtain such a statement. The notice will also tell you which federal agency to contact if you think the lender or mortgage broker has illegally discriminated against you.”

The anti-discrimination aspect of this ECOA rule is a major factor, but it’s not the only one. How can a borrower know what to work on so that he or she may become eligible for an FHA loan in the future? Borrowers should know the specific reasons why they are ineligible for an FHA mortgage.

When it comes to FHA loan applications denied for credit reasons, another federal law called the Fair Credit Reporting Act (FCRA) has a specific rule addressing that situation. FCRA requires a lender or mortgage broker that denies your loan application to tell you whether it based its decision on information contained in your credit report. If that information was a reason for the denial, the notice will tell you where you can get a free copy of the credit report.”

This is important for several reasons, including the borrower exercising his or her rights to dispute the information found in credit reports. Knowing all this can go a long way toward peace of mind in the FHA loan application process–fully understanding your rights as a borrower is just as important as knowing the interest rates and terms of a new home loan.

How Long Does It Take To Process an FHA Loan Application?

A frequently asked question about FHA home loans concerns the length of time it takes to learn whether the loan application has been approved or not. This is a part of the FHA loan process that can be stressful for some borrowers, especially those who have never applied before and don’t know what to expect.

The simple answer is that FHA requirements include a rule that the lender must take action on your application and let you know about that action no later than 30 days after the application has been completed and turned in. FHA rules emphasize the application must be complete for this rule to take effect.

But what does that mean?

Some borrowers mistakenly think submitting partial information on credit data, employment history or other information might protect them from having an application rejected due to poor credit or past financial mistakes. “What the lender doesn’t know won’t hurt…”

But this is not true–the lender cannot process a credit application that is not completely filled out, and the FHA’s “30 day rule” does not apply in cases where incomplete forms have been given back to the lender. Any gaps in the application data could cause serious delays in the processing of an FHA loan application.

According to the FHA official site, “Your application will not be considered complete, and the 30 day period will not begin, until you provide to your lender or mortgage broker all of the material and information requested.”

Borrowers concerned about past credit issues–especially where defaults, bankruptcy, evictions or other issues are concerned–should contact the FHA for advice and housing counseling before filling out an FHA loan application. Borrowers who take a proactive approach to these issues may find ways of resolving such concerns and improving their chances at an FHA mortgage.

FHA Loans and Non-Purchasing Spouses

One FHA loan frequently asked question relates to married FHA borrowers with non-purchasing or non-occupying spouses. When an FHA borrower applies for a loan and the spouse does not co-sign or co-borrower, are there situations where the spouse could be required to sign the loan?

According to FHA loan rules, this issue depends greatly on state law. The FHA itself has no requirement for a non-borrowing spouse to sign, but states which require certain types of documentation for “valid and enforceable” loans could need a signature from the non-borrowing spouse. But what kind of signature?

In these cases, the state law usually requires a signature to indicate the non-borrowing spouse’s status in connection with the loan. The non-borrower isn’t obligated by law to become financially responsible–just to state they are or are not co-borrowers where applicable.

The FHA official site says, “If required by state law in order to perfect a valid and enforceable first lien, the non-purchasing spouse or non-borrowing party with ownership interest in the property may be required to sign either the security instrument or documentation indicating that the individual is either…relinquishing all rights to the property or retaining an ownership interest in the property (when the purchasing/borrowing party is applying for the loan and credit qualifies for the loan on his or her own).”

Anyone who becomes a co-borrower on the FHA the loan must submit credit and employment data the same as the primary borrower. If a non-purchasing spouse changes his or her mind and wants to become part of the loan, the application must be revised to include the new borrower’s data for verification in the usual ways.

FHA Streamline Refinancing Rules: Adding and Removing Borrowers

When an FHA borrower wants to refinance an FHA mortgage using FHA streamline refinancing, there are sometimes questions about adding or removing a borrower from the title.

This may be needed for several reasons. If a borrower is getting a divorce, for example, refinancing the property under a single name would make sense. The same goes for a single borrower who is refinancing in connection with getting married–he or she might want to add the spouse to the title.

When does the FHA allow the borrower to add or remove another person to the title during an FHA streamline loan?

According to the FHA official site, adding a borrower is simple. “Individuals may be added to the title on a streamline refinance without a credit worthiness review, and triggering the due-on-sale clause.” Because an FHA streamline refinancing loan has no cash back to the borrower and is used to lower interest rates and/or monthly payments, there is no credit check required. The borrower adds a name to the title–and the accompanying financial obligation to that person–with no additional steps other than what’s needed to add the name.

Removing a borrower from the title is a bit more complex. According to FHA rules, “Individuals may be deleted from the title on a streamline refinance only under the circumstances described in Handbook 4155.1, 6.C.2.d:

a) When an assumption of a mortgage not containing a due-on-sale clause occurred more than six months previously and the assumptor can document that he or she has made the mortgage payments during this interim period; or

b) Following an assumption of a mortgage in which the transferability restriction (due-on-sale clause) was not triggered, such as in a property transfer resulting from a divorce decree or by devise or descent, and the assumption or quit-claim of interest occurred more than six months previously and the remaining owner-occupant can demonstrate that he or she has made the mortgage payments during this time.”

As you can see, removing a borrower puts the burden of proof on the FHA borrower that he or she is financially able to handle the obligations of the loan–and has done so prior to the removal of the other name(s) on the title. FHA borrowers planning to request this procedure should plan ahead and be able to show documentation of their payments on the loan–canceled checks and other paperwork will come in handy here.

Getting Ready For An FHA Home Loan

Buying a home is a big decision.

There are many factors to consider when trying to prepare for the commitment of home ownership, and an FHA loan applicant can learn a great deal by examining an FHA loan application and using an FHA mortgage calculator to learn what kind of financial details come into play.

FHA loan pre-qualifying questions at sites like FHA.com (a private company, not a government website) ask some very important starter questions you can use to begin your research.

For example, do you know how much you’re willing to spend on the home? Many borrowers at the beginning of the research process have a hard time judging what prices are fair for homes in their area and which ones might need some negotiation. Anyone who feels at a loss for such information can start by examining the FHA loan limits for their area at https://entp.hud.gov/idapp/html/hicostlook.cfm.

Knowing the maximum possible FHA loan is a good place to start. You can then compare that maximum with the house prices in your area. Cross-referencing a list of available homes for sale and comparing with the FHA limit is a good way to get familiar with the conditions in your local housing market.

The FHA loan limits are very helpful, but so is knowing whether you can qualify for such limits. If you don’t know your current credit score or have concerns about past credit issues, start by pulling your credit report and begin working on your credit details as early as possible. Credit counseling help is available and the Ginnie Mae official site offers plenty of resources and advice to get you started.

Buying a home is one of the most important financial decisions you can make, so starting your research early is the best move–you can save a lot of time and resources down the road with some early preparation today.

Does the FHA Provide Down Payment Assistance?

Recently we posted about FHA rules for down payments. For all FHA new purchase home loans, there is a minimum down payment of 3.5%. Borrowers are required to make this down payment above and beyond any closing costs and related fees that may be required to be paid up front.

Some borrowers may have a difficult time coming up with cash to make down payments, and while the FHA does allow loan applicants to borrow money for a down payment, it must come from a third party with no financial interest in the FHA insured loan transaction and must be secured by “real property” rather than a credit card cash advance or signature loan.

Some borrowers ask if the FHA also offers a down payment assistance program to help borrowers with their up front expenses, but according to the FHA official site, “HUD has no direct grant programs for down payment or closing cost assistance. However, HUD does provide funding to state and local governments for this purpose.”

That means a borrower may be able to turn to a state or local program in the area where they wish to purchase the home for assistance. This type of FHA insured loan down payment help is not guaranteed, and programs may vary from zip code to zip code. The FHA has a list of state resources at http://www.hud.gov/buying/localbuying.cfm that can help you start your search.

It’s important to note that not all states may offer such assistance, and qualifying factors for those that do may vary from program to program. There may even be private or non-profit organizations with programs that can help. The Arizona Habitat For Humanity program, for example, may have different features than the Montana Homeownership Network. The type of assistance may also vary. Some programs may offer tax credits to new home buyers while others offer matched savings accounts for future home purchases or other forms of assistance.

Can I Add A Borrower To My FHA Home Loan?

One common question about FHA home loans involves adding borrowers to the loan. Some house hunters begin their search for a home by themselves, but along the way decide they wish to co-borrow with someone else.

The reasons vary–some borrowers get engaged to be married, others decide they’d rather share the expense of buying and owning a home with someone else, others want to purchase property with a family member.

Whatever the reasons, adding someone to an FHA loan depends greatly on where a borrower is in the application process.

FHA loan rules state that all borrowers must submit loan application data. No one can be added to an FHA loan without submitting their credit and employment details and other required information the same as the primary borrower. Lenders must have time to review the information and verify employment, income, credit history, etc.

There’s nothing wrong with adding a borrower, but FHA rules also state that an FHA loan must close “in the same manner in which it was underwritten and approved” which means if a borrower applies for and is approved for an FHA mortgage, at closing time he or she must finalize the loan in the same way it was applied for. A co-signer or co-borrower cannot sign on a loan they did not apply for.

FHA instructions to the lender state, “FHA may withhold endorsement of the loan if there are additional signatures on the security instruments and/or mortgage note of individuals not reviewed during mortgage credit analysis, except for a non-purchasing spouse or any requirements of a state or local jurisdiction necessary to perfect the lien.”

Any borrower who wants to add a co-borrower or co-signer must (except as described above) have the lender re-work the loan to include the new borrower or signer. When all paperwork is submitted with the additional borrower properly documented, reviewed, and approved, the loan could then move forward.