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

Monthly Archives: June 2012

FHA Loan Reader Question: Checking Credit Scores

A reader asks, “I did have bad credit at one time but I would say I have good credit now. I found out I had 2 things against me but I have taken care of them, they were small amounts but they would be the only thing against me over the past 5 years. I have paid off a car that I paid for over 5 years and also several small loans.”

“I am buying a mobile home through the owner but I want to build a house on some property that I own and I am not sure about my credit score and wanted to know if there is any way of finding out if I would be eligible for an FHA loan without applying for the loan and having my credit checked. I heard that if your credit is checked that it will go against your credit score. What should I do?”

Ask any home loan or credit counselor about how to prepare for an FHA loan application and you’ll get the same advice–all borrowers should request copies of their credit reports and examine the details carefully. Borrowers can do this in several ways–one is to request your credit report from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion). Another is to make the request via a third party company such as GoFreeCredit.

No matter which way you choose to obtain your credit information, it’s important to study the credit report for both your credit score–most lenders require a minimum of at least 620 or higher for an FHA mortgage loan–and your credit record.

Studying your credit record is crucial for several reasons, one of the most important being that you want to insure you have no erroneous or outdated information in your report. Studying your credit report is also a good way to detect signs that you’ve been a victim of identity theft–if so, you may have to open a case with the credit agency to fix your record. That takes time and won’t be accomplished in a matter of weeks. That’s why it is best to request your credit information at least a year in advance of applying for an FHA mortgage.

Knowing what is on your credit report is important regardless of whether you want to buy a new home or not–many borrowers find added peace of mind knowing exactly what’s on their credit reports as they work to gain or maintain a good credit rating.

FHA 203(H) Home Loans For Disaster Victims

There is much in the news about wildfires, tropical storms and hurricanes. Tropical Storm Debbie has brought large volumes of rain and flooding risks to Florida residents, and Colorado home owners are currently threatened by spreading fires.

In presidentially-declared disaster areas, the FHA offers a program to help victims recover. The FHA 203(h) home loan for disaster victims is described on the FHA official site as

FHA Loan Rules For 203(K) Rehab Mortgages

The FHA describes its 203(K) Rehab loan as, “the Department’s primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities.”

“Since these are the primary goals of HUD, the Department believes that Section 203(k) is an important program and we intend to continue to strongly support the program and the lenders that participate in it.

But what are the rules for an FHA 203(k)? There are some restrictions on the type of property that can be rehabbed under this program, as well as requirements for the condition of eligible properties.

For example, “To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year. The number of units on the site must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible.

The FHA allows 203(k) loans for homes intended to be converted from a single-unit property to a multi-unit, or vice-versa. According to the FHA official site, “this program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit.

These loans can also be used for mixed-use properties that combine residential and business use, but the building must meet specific FHA loan rules that govern the business use of such a structure. “A 203(k) mortgage may be originated on a ‘mixed use’ residential property provided”

“(1) The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

Damaged or destroyed properties under an FHA 203(k) must meet the following requirements: “Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.

For more information on the FHA 203(K) loan, eligible properties or other FHA loan rules, contact the FHA directly at 1-800-CALL FHA.

FHA Loan Reader Question: Non-Occupying Co-Borrowers

A reader asks, “Hello, I am interested in getting an FHA 203K mortgage to buy a fixer-upper and add repair costs on top of the loan amount. In the conditions of the FHA 203K plan, there is a stipulation that requires the homeowner to occupy the house. Must all of the people listed on the mortgage/loan live in the home? Can just one person listed live there without violating the terms?”

FHA loans do make provisions for non-occupying co-borrowers. However, there are limits which apply to these transactions that can affect the amount of the FHA home loan.

In most cases an FHA loan with a non-occupying co-borrower has a limit–for qualified borrowers the loan would be approved for 75% of the loan-to-value ratio, rather than the maximum loan amount. This rule does not apply in cases where a family member is the non-occupying co-borrower.

FHA loan rules say parents and children who qualify for an FHA mortgage may be approved the maximum amount of FHA financing available.

FHA Home Loans and “Qualifying Ratios”

One frequently asked question about FHA home loans goes something like this: “Why do different banks seem to have different standards for FHA home loans?” It’s a legitimate question–some lenders require different credit scores than others, some are stricter about certain types of credit issues or require longer wait times after bankruptcy or foreclosure. Why?

The FHA loan rulebook for lenders, HUD 4155.1, has a section in Chapter Four called “Qualifying Ratios” which can help borrowers understand why some of these variances may occur. Every bank has its own set of standards, based on the need to effectively manage risks in lending while allowing credit access to the largest number of qualified borrowers the company can support. What do the FHA rules require a lender to take into consideration when reviewing an FHA mortgage loan application?

According to HUD 4155.1 Chapter Four, Section F:

“Each loan is a separate and unique transaction, and there may be multiple factors that demonstrate a borrower

FHA Loan Limits and Term Rules For Streamline Refinancing Loans

FHA Streamline Refinancing Loans offer qualified borrowers a distinct advantage–there is reduced paperwork for FHA Streamline Loans, the borrower may in some cases be able to get the refinancing loan without an appraisal, and the result can be lower mortgage payments.

FHA loan rules say of streamline loans, “Streamline refinances

FHA Loan Rules For Employment and Income

FHA home loans require the borrower to submit employment information to the lender for verification. This is done for several reasons to include documenting the borrower’s income, stability of that income, and how long that income has been ongoing.

FHA Loan rules, as described in HUD 4155.1 Chapter Four, Section D, state the following about income and employment:

“To be eligible for a mortgage, FHA does not require a minimum length of time that a borrower must have held a position of employment. However, the lender must verify the borrower

FHA Loan Reader Question: Unpaid Debts and FHA Loan Applications

A reader asks, “Can a I obtain an FHA loan with an unpaid charge-off reported on my credit report for over $10,000? I tried to pay/settle the debt, but the bank refuses to accept any payment because the account is in transition. The statute of limits has expired for the the bank to pursue debt collection; however, it has not been seven years for the account to be completely removed from my credit. I

Can I Buy a HUD Home With an FHA 203(k) Fixer-Upper Loan?

The FHA official site has a special section for buyers interesting in purchasing HUD homes–properties that were once purchased with an FHA guaranteed mortgage but later foreclosed upon and now owned by FHA/HUD.

According to the FHA page “About Buying HUD Homes”, these properties are single-family homes with one to four units, offered for sale to “recover the loss on the foreclosure claim.”

Anyone can purchase a HUD home; “If you have the cash or can qualify for a loan (subject to certain restrictions) you may buy a HUD Home. HUD Homes are initially offered to owner-occupant purchasers (people who are buying the home as their primary residence). Following the priority period for owner occupants, unsold properties are available to all buyers, including investors.”

Since HUD homes are foreclosed properties, they may or may not be in good condition. The FHA offers home loans to let buyers purchases such properties, but warns borrowers that it does not guarantee their condition.

A home inspection is a very important part of the home buying process for any FHA home loan or conventional mortgage, but even more so with the purchase of a foreclosed property.

Some borrowers are fully aware that a HUD home will need extensive repairs in some cases, which is why the FHA offers a 203(k) rehab loan to qualified borrowers for the purchase of HUD-owned properties. The FHA says the following about 203(K) loans for HUD homes:

“If you are interested in acquiring a HUD Home that is in need of repair, you may be interested in applying for an FHA 203(k) Rehabilitation Loan. When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods.”

FHA 203(K) loans help a borrower avoid this. “The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.”

The FHA and HUD list available properties on the official HUD Homes For Sale page, also known as the HUD Home Store.

Do you have a question about FHA guaranteed home loans? Ask us in the comments section.