Monthly Archives: January 2012
One important section of the rules for FHA loans states a borrower’s income must be verified by the lender as “effective income”. This means that the income must be stable and likely to continue.
Some types of income can’t be counted. A part-time business selling goods on eBay, for example, might not qualify. But what about other types of non-employment income like child support, alimony, or maintenance payments?
There are plenty of borrowers who receive or are eligible to start receiving these types of payments. Does the FHA recognize them as effective income?
In certain cases, yes. Alimony, maintenance payments as part of a divorce decree, and/or child support can qualify and be counted toward a borrower’s debt-to-income ratio provided the payments meet standards set by they FHA.
According to HUD4155.1, Alimony, Child Support and Maintenance Income Criteria, “Alimony, child support, or maintenance income may be considered effective, if
FHA loan rules for home purchases are different than the rules for FHA insured loans for condominium units.
Since there are unique requirements for condo loans–including a requirement that condos to be considered for FHA mortgages be on an FHA-approved list–the FHA has published a set of guidelines for condo mortgages.
One reader wrote in to ask, “Is there a list of the FHA requirements that a condo project needs to comply with in order to be listed on the FHA approved list? Where can it be obtained? Thanks.”
The list of FHA requirements for a condo to be approved and listed can be downloaded at:
What do these guidelines cover? According to the FHA, condo projects must consist of two units or more, and be covered by hazard and liability insurance. Where appropriate flood insurance must also be present.
The FHA rules do not permit condo association bylaws to contain the “right of first refusal” clause when such a clauses is designed in such a way that it violates the Fair Housing Act.
No more than 25% of a condo project’s total floor space can be used for commercial purposes and still be approved for an FHA mortgage.
Additionally, FHA rules state, “No more than 10 percent of the units may be owned by one investor.
When borrowers want to refinance an FHA mortgage, there are two basic types of refinancing to choose from; FHA cash-out refinancing loans and those with no cash to the borrower.
The FHA loan rules for cash-out refinancing are naturally more stringent than those with no money to the borrower–in cash-out transactions the borrower must qualify under FHA requirements and meet certain standards that may not be the same as for non-cash out transactions.
What are the restrictions on FHA cash-out refinancing?
For starters, according to the FHA official site at FHA.gov, “Cash out refinance transactions are only permitted on owner-occupied principal residences”. The FHA takes the owner/occupant issue quite seriously, going so far as to add an additional rule stating;
“Non-occupant co-borrowers may not be added in a cash out refinance transaction in order to meet FHA
A tricky FHA loan question came in recently asking about FHA refinancing, bankruptcy, and more. The reader asks;
“I have a situation where i have filed BK chapter 7 and had my house foreclosed, at the same time i had a money lender purchase a house for me and put it in my name and I make payments to him, I have been making payments for 21 months all on time and with taxes and insurance. I would like to refinance through a regular lender and pay off the original loan…So how do I refinance this loan and when am I eligible to qualify? It has been over two years from filing chapter 7 and it will be two years from the foreclosure in Oct 2012. Any thoughts?”
There are several issues that need addressing here. We’ll start with the bankruptcy, where FHA loan requirements state the borrower cannot apply for a new FHA home loan for a minimum of two years since the discharge date of the Chapter 7. Borrowers should not confuse the discharge date with the date of filing Chapter 7.
Borrowers are required to wait at least two years from the time of a foreclosure, and many lenders require a three-year wait rather than two. Your individual experience may vary from lender to lender, so it is best to shop around.
The other issue mentioned in the reader’s question has to do with refinancing a loan–in this case, it seems that the loan in question is not from a bank but rather a private individual who purchased the home in the name of our reader.
Assuming that is correct, FHA refinancing could be a tricky proposition. There are many issues–who is actually named on the original mortgage loan? Was there a loan in the first place? Or did the buyer pay cash for the property?
FHA rules would require the original borrower to apply for refinancing. And in a situation where a borrower is paying another person who has purchased the home in cash, there would be no original loan to refinance–the borrower would have to apply for a new purchase FHA home loan and purchase the home from the original owner in the usual way.
This is all speculation–there’s no way to know whether any of this advice applies in the specific situation without knowing much more about the details. In this unique circumstance, the borrower should contact the FHA directly to ask what the best course of action might be based on current FHA rules and the lending climate among approved FHA lenders.
Borrowers who apply for an FHA insured mortgage are required to submit application data including specific details about employment, income, and the sources of that income.
FHA income requirements aren’t limited to just dollar amounts and the history of the borrower’s employment–the sources and stability of the income listed on the application are also reviewed.
A borrower’s debt-to-income ratio, the amount of money going out versus the amount of money coming in, is calculated using only verifiable and reliable income. The FHA has rules about the nature of the income that can be used for this calculation; if a borrower has a job that isn’t “stable and reliable” when it comes to income, it won’t help the borrower for the purposes of qualifying for an FHA mortgage.
Specifically, the FHA rules as listed in HUD 4155.1 4.D.1.a state, “Income may not be used in calculating the borrower
We encourage readers to submit their questions about the FHA loan process and related issues by using our comments section; as a result we’ve gotten a large number of comments about the difference between FHA regulations and lender requirements.
For example, if the FHA requires a minimum FICO credit score, why does the lender require a higher score? Isn’t the borrower qualified at the lower, but still permissible score according to FHA loan rules?
This is where a great deal of confusion can and does occur, mainly because of an expectation that the FHA rules have the final say in such matters. But the truth is that FHA lenders are free to require higher credit scores and other criteria so long as such requirements are applied equally for all applicants, do not violate fair housing laws, and are considered “reasonable and customary” in the industry.
A lender could not charge 50% interest, for example, on an FHA mortgage–such rates are neither reasonable nor common in the lending industry. But charging a slightly higher or slightly lower interest rate based on a borrower’s financial qualifications IS both reasonable and customary.
If your FICO score is in a certain range, you may be eligible for more competitive terms; if your credit is in a different range, you may not be qualified for an FHA loan with a particular lender unless you have “compensating factors” such as a larger down payment, large cash reserves or other factors.
Those with credit scores near the bare minimum are encouraged to contact the FHA directly and get information on housing and credit counseling-learning how to raise your credit score is an important part of getting ready for any loan application.
The bottom line is that FHA loans do have requirements, minimums, and guidelines that must be followed, but FHA lenders cannot be forced to offer all FHA loan products or issue loans that fall outside the lender’s usual qualifying ratios as appropriate to the market.
Shopping around for the right lender is important in the FHA home loan process. If one lender won’t offer you the terms you need, try another one–you may be surprised at what you find when you shop for a home the same way many people comparison shop for a loan new or used vehicle.
When a house hunter wants to buy a home with an FHA insured mortgage, he or she may find a seller willing to offer incentives–known as seller concessions–to make the deal more attractive.
Seller concessions can include interest rate buydowns, discount points or other contributions that are related to closing costs. At the time of this writing, FHA loan rules state that these concessions can total no more than six percent of the sales price.
Any more than six percent is considered an inducement to purchase the property and the FHA requires an adjustment in the loan amount.
According to the FHA official site, “Each dollar exceeding FHA
There have been many reader questions in the last six months about bankruptcy, foreclosure, and the required waiting period for new FHA home loans after these procedures.
One reader asks, “When does the waiting period began per FHA Guidelines? If you included a conventional loan in a Chapter 7 bankruptcy, does the waiting period began at the discharge date? Or does the waiting period began at the trustee sale?”
The short answer is that after Chapter 7 bankruptcy, the borrower must wait out the minimum “seasoning” period plus any additional amount required by the lender–three years in many cases though some lenders may be willing to work with qualified borrowers after the FHA two-year minimum for Chapter 7. This waiting period begins from the time the bankruptcy is discharged.
Since bankruptcy and foreclosure are among our most frequently asked questions, here’s some additional information on waiting periods and other requirements for both Chapter 13 and Chapter 7 bankruptcy:
CHAPTER 13 BANKRUPTCY WAITING PERIODS
FHA rules allow a lender to consider approving an FHA loan application from a borrower who is still paying on a Chapter 13 Bankruptcy–but only if those payments have been made and verified for a period of at least one year. Additionally. the court trustee’s written approval is also required. The borrower must provide a detailed explanation of the bankruptcy with the loan application, and must have good credit, employment history and other financial qualifications.
CHAPTER 7 BANKRUPTCY WAITING PERIODS
At least 24 months must have elapsed since the discharge date of a Chapter 7 Bankruptcy. The discharge date should not be confused with the date bankruptcy was filed. As with Chapter 13 bankruptcy, FHA regulations demand a full explanation to be submitted with the FHA home loan application. To get a new FHA insured mortgage loan after Chapter 7, the borrower must qualify financially, have good credit since the Chapter 7 was filed and meet FHA employment requirements.
Many readers write in with questions similar to the one we received this week, which includes the following:
“I am recently divorced. While married, went through two bankruptcies (both discharged) have/had issues with back taxes (installment plans made and determined to be paid in full by ex per divorce decree). Have moved to another state, working (1.5 years), full time student. Was living with children, have moved into an apartment paying $600.00 per month (comfortably), because I could not get qualified for a loan. Have two major credit cards (visa/master credit cards not debts) established in my name for 1.9 years, never late, never over limit. Credit score is 620. Is there a main reason why, I did not or cannot be approved for a FHA loan?”
Before addressing an issue like this in general terms it’s important to point out that individual circumstances vary when it comes to FHA mortgages and there’s no way to say for sure what an individual lender’s reasons might be for turning down an FHA loan application.
That said, the reader’s comments raise several issues that should be addressed whenever a borrower wants to apply for an FHA home loan. The first is that it’s important to shop around for a lender–borrowers who are denied an FHA loan from one bank should consider another financial institution. While it is true that the application process can be lengthy, a borrower may discover one bank is willing to work with him or her where another is not.
Money issues like bankruptcy and unpaid federal debts can slow down or even stop the loan process in some cases. The FHA rules are strict about debts owed to the federal government and if the borrower has owed money to the government in the past or is still paying on federal debt, it’s important to provide paperwork showing the current status of that debt.
Credit scores are a tricky issue. The credit score mentioned in the reader comments is close to or at the minimum score required by the FHA and/or many financial institutions. A borrower who has a low or minimum credit score may find it tougher to locate an FHA lender willing to extend credit unless the borrower has compensating factors such as savings, a larger down payment or other advantages.
Again, none of these things mentioned should be construed as direct comments on this borrower’s situation–it is impossible to know “from a distance” what specific reasons a lender might have for turning down an FHA loan application. But there are many things to examine when applying–borrowers concerned about their ability to qualify for a home loan should get some advice from an FHA-approved housing counselor about credit, federal debt, and related issues prior. Learn more at http://portal.hud.gov/hudportal/HUD?src=/i_want_to/talk_to_a_housing_counselor
Sometimes, shopping around for a participating FHA lender is a bit more complex that you might think. There are basic issues related to competitive interest rates, getting the most favorable terms, even the simple chemistry between the borrower and the bank can be an issue. But what about situations where the borrower feels the lender hasn’t quite done right in terms of customer service?
One reader left this comment;
“I owned my home for 12 years (FHA loan) and sold it December 2010. I am now told that I have NO CREDIT SCORE!!! I paid cash for car and have no credit cards. I