Monthly Archives: December 2012
With interest rates at lows not seen in many years, many FHA borrowers are considering refinancing their existing FHA home loan even if they have previously refinanced in the last few years. While some consider the term “serial refinancing” to be negative, this practice is in vogue once more as many rush to get better interest rates than they had access to when they first applied for a mortgage loan.
Refinancing is especially popular at present due to concerns over the “fiscal cliff” and its potential to affect the average person’s bottom line through higher income taxes, the possible reduction or elimination of certain tax breaks including the mortgage interest deduction. Is now the right time to pre-qualify for an FHA refinance loan or apply for FHA streamline refinancing? That’s a choice only the borrower can make, but if you want lower interest and/or monthly payments, an FHA streamline loan could be right for you.
What are the features of an FHA streamline refinance? According to the FHA official site, streamline loans are:
…”designed to lower the monthly principal and interest payments on a current FHA-insured mortgage, and must involve no cash back to the borrower, except for minor adjustments at closing that are not to exceed $500.” One of the benefits of a streamline refinance includes the fact that FHA loan rules don’t require an appraisal.
The lender is free to require one, but the FHA does not insist on a new appraisal. Additionally, “FHA does not require repairs to be completed on streamline refinances with appraisals, with the exception of lead-based paint repairs. However, the lender may require completion of repairs as a condition of the loan.”
What happens if the lender does require an appraisal? According to FHA loan rules, “If an appraisal has been performed on a property, and the appraised value is such that the borrower would be better advised to proceed as if no appraisal had been made, then the appraisal may be ignored and not used, and lender must notate this decision on the HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary.”
Since streamline refinance loans do not permit cash back to the borrower (as mentioned above) there are no further underwriting requirements than a few basic forms needed to get the loan moving. However, the lender is free to require additional underwriting, especially if there are circumstances where the new loan may actually result in higher payments or higher interest rates. Borrowers who need to know more about these issues should discuss them with a loan officer or contact the FHA directly by calling 1-800 CALL FHA.
Do you have have questions about FHA mortgages? Ask us in the comments section.
While there are some exceptions described in the FHA loan rulebook, FHA loans for single-family homes are limited to what the FHA describes as “owner-occupied principal residences only”. The FHA describes “principal residences” as a property that “will be occupied by the borrower for the majority of the calendar year”.
We’ve covered this topic elsewhere in previous posts; what we’re discussing today is situations where the borrower may perceive a gray area in the rules–what situations are considered purchases for investment purposes versus single-family home loans as described above?
In general, any loan where the following applies to the borrower may be considered a non-investment type purchase: “FHA security instruments require a borrower to establish bona fide occupancy in a home as the borrower’s principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year.”
In addition, the rules state “…to prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance. Any person individually or jointly owning a home covered by an FHA-insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations…”
One example of the exception? According to FHA loan rules in HUD 4155.1 Chapter Four Section B, “A borrower may be eligible to obtain another FHA-insured mortgage without being required to sell an existing property covered by an FHA-insured mortgage if the borrower is
–establishing residency in an area outside reasonable commuting distance from his/her current principal residence.”
FHA loans that are considered investment purchases are described by the FHA as, “a property that is not occupied by the borrower as a principal or secondary residence.” FHA loan rules do permit loans for investment purposes under the following circumstances described in HUD 4155.1 Chapter Four: “With permission from the appropriate Homeownership Center (HOC), private investors, including nonprofit organizations that do not meet the criteria described in HUD 4155.1 4.A.6.a, may obtain FHA-insured mortgages when
–purchasing HUD Real Estate Owned (REO) properties, or
–obtaining a streamline refinance without an appraisal.
Note: In HUD REO transactions, owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property.” There are separate rules for FHA loans made on investment properties. Borrowers should know that anyone applying for an FHA loan on a single family home (as opposed to an investment property) is subject to different criteria and regulation of the loan than for investment properties.
FHA loan rules say, “For investment properties, FHA will not insure loans made solely in the name of a business entity (such as a corporation, partnership, or sole proprietorship), except for streamline refinances where the mortgage was originally insured in the name of a business. Additionally, FHA requires that one or more individuals, along with the business entity or trust, must be analyzed for creditworthiness
–the individual(s) and the business entity or trust must appear on the mortgage note, and
–if all parties appear on the property deed or title, they must also appear on the security instrument.”
Finally, one of the major differences between FHA loans for primary residences (single family homes) and investment properties is the amount of money available to borrow. According to FHA.gov, investment property loans are different; “Base mortgage calculation is 75% LTV, based on the lesser of the appraised value or the sales price” of the investment property.
Do you have questions about FHA loans? Ask us in the comments section.
From time to time we get questions about FHA loans including variations on the commonly asked, “How long do I have to spend on the job to get an FHA loan?”
The short answer is that FHA loan rules require the lender to verify at least two years of employment, though not necessarily two years with the SAME employer.
According to HUD 4155.1 Chapter One Section B, “The lender must obtain a Verification of Employment (VOE), and the borrower’s most recent pay stub” as part of this verification. But there are alternatives to this; FHA loan rules say “As an alternative to obtaining a written VOE, the lender may obtain the borrower’ s:
• original pay stub(s) covering the most recent 30-day period, and
• original IRS W-2 forms from the previous two years. (Note: Any copy of the IRS W-2 not submitted with the borrower’s tax return is considered an “original”. The original may be photocopied and returned to the borrower.)”
FHA loan rules add that the lender is “required to verify the applicant’s employment history for the previous two years. However, direct verification is not required if all of the following conditions are met:
• the current employer confirms a two-year employment history (this may include a pay stub indicating a hiring date)
• the lender only uses base pay (no overtime or bonus pay) to qualify the borrower and
• the borrower signs Form IRS 4506 or Form IRS 8821 for the previous two tax years.”
What about situations where the FHA loan applicant hasn’t been with the same employer for the last two years? FHA rules have the answer in HUD 4155.1 Chapter One Section B:
“If the borrower was not employed with the same employer for the previous two years, and/or the above conditions cannot be met, the lender must verify the most recent two years of employment history by obtaining
• copies of W-2s
• written VOEs, or
• electronic verification acceptable to FHA.”
The rules also say “No explanation is required” for gaps in an FHA loan applicant’s employment provided it is “six months or less during the most recent two years.”
Again, borrowers do not have to spend two years with the same employer to meet FHA employment requirements, but verification of employment is necessary in any case as described above. It’s also important to remember that these standards are FHA minimums; your lender may have more strict standards depending on the type of loan or other factors.
Do you have questions about FHA loans? Ask us in the comments section
FHA loan applications are designed to give the lender the information needed to start the approval process. It’s true that a loan application can be lengthy–it’s a major line of credit, after all. What does the bank need from the borrower to move forward? The application is designed to help the lender obtain a range of details including:
• general mortgage credit analysis documents
• evidence of Social Security Number
• verification of deposit
• verification of employment (VOE)
• federal income tax returns, and
• appraisal documentation.
That’s reprinted from the FHA loan rulebook for lenders, HUD 4155.1, which adds, “Lenders must obtain the most recent documents required to perform the mortgage credit analysis. “Most recent” refers to the most recent document available at the time the loan application is made.” As you can see, FHA loan rules are serious about this process.
“General mortgage credit analysis documents” refers to items like your credit reports, which must be obtained directly from the reporting agency and cannot come from the borrower. Social Security number evidence may be as simple as providing a xerox copy of your Social Security card or filling out the number on the credit application form. Your lender will tell you what is needed in this case if it isn’t listed on the application itself.
“Verification of deposit” may include bank statements or other documents; it could also be a matter of providing an account number for the loan officer to check. “Verification of employment” may be done by the lender by calling the phone numbers provided on the application form, but your lender could also require a pay stub or other proof of employment from you. Federal tax returns should always be delivered as copies–don’t give the lender originals as you may need them again later for another loan application for a new home or refinancing loan.
Appraisal documentation may come at a different state in the loan application process depending on how you go about it–ask your loan officer about this if you have any questions. Every bank may have a different set of procedures for this step–your current loan officer may need something different than a previous lender.
This collection is not an exhaustive list of the things needed for an FHA mortgage loan application, but it does give you a good idea of how the process should work. If you have further questions, as a loan officer or contact the FHA directly at 1-800 CALL FHA.
Do you have questions about FHA home loans? Ask us in the comments section.
If you are new to the house hunting process, there are some guidelines you should know that directly affect your search for a home to buy with an FHA guaranteed mortgage. Some of these guidelines are in place for your protection, some have been created to prevent tampering with the loan approval process–or the appearance of such tampering.
For example: one common bit of “legal advice” you can get from any reputable source on contracts and credit agreements includes the warning never to sign a contract with blank spaces or agreements that seem to be incomplete. This is sound advice–what is to prevent one party or the other from filling in those blank spaces later with terms that are favorable only to that person or persons?
The FHA takes the advice a step further, incorporating it into the rules and regulations of the FHA loan process. The FHA loan rulebook, HUD 41551.1 Chapter One Section B states clearly;
“Lenders may not have borrowers sign
• documents in blank
• incomplete documents, or
• blank sheets of paper.”
This is just one example. Another is the FHA loan rule which states that lenders can’t accept credit reports, employment verification or related documentation that does not come directly from the source. According to Chapter One Section B;
“Lenders may not accept or use documents relating to the credit, employment, or income of borrowers that have been handled by, or transmitted from or through the equipment of interested third parties, such as
• real estate agents
• builders, or
Additionally, “The mortgage loan application package must contain all documentation that supports the lender’s decision to approve the mortgage loan.”
There is even a requirement for the age of such documentation. Did you know the FHA has a rule in this area? In HUD4155.1 Chapter One Section B there is a section titled, “Maximum Age of Mortgage Loan Application Documentation” which advises the lender, “At loan closing, all documents in the mortgage loan application may be up to 120 days old, or 180 days old for new construction, unless
• a different time frame is specified in this handbook or in other applicable HUD instructions, or
• the nature of the documents is such that their validity for underwriting purposes is not affected by the prescribed time frame, such as
? divorce decrees, or ? tax returns.
If the age of documents exceeds the above limits, the lender must obtain updated written verification of the documentation.”
These requirements are for your protection and the lender’s. Knowing these rules can help borrowers understand the FHA loan process better and plan ahead for situations that may require the reference of these rules and others. An informed borrower is a satisfied one.
Do you have questions about FHA home loans? Ask us in the comments section.
Today we pause from our usual posts on FHA loan-related topics to spend time with friends and family for the holidays. We wish you all a safe and fun December 25, no matter what traditions you observe. Happy holidays from all of us–we’ll be back tomorrow to talk FHA loans, answer reader questions and look at the issues. Thank you for reading!
The FHA and HUD have issued revised and updated guidance for borrowers and lenders regarding its flood zone determination policy.
On December 11, 2012, the FHA official site was updated to include Mortgagee Letter 2012-28, which is intended to overrule a previous Mortgagee Letter issued in 2010 on the subject. At one time, those applying for FHA loans were not affected by a mandatory flood zone determination policy. In the past lenders were “strongly encouraged” to get a flood zone determination for home purchased with an FHA insured mortgage.
That policy was revised, and is now updated and re-stated in FHA Mortgagee Letter 2012-28.
According to the new mortgagee letter, “FHA requires all mortgagees obtain a flood zone determination on all properties. The documentation provided to evidence the flood zone determination and retained in the case binder must clearly indicate that the flood zone determination service is for the life of the loan.” Additionally, the FHA also restates its position on homes located within a Coastal Barrier Resource System–these properties cannot be purchased with an FHA loan.
Specifically, the new Mortgagee Letter says, “Properties within a designated Coastal Barrier Resource System (CBRS) unit are not eligible for an FHA-insured mortgage. HUD will incorporate this restated and updated guidance into the relevant FHA Single Family On-Line Handbook. The new guidance noted above is effective for all case numbers assigned sixty days after date of Mortgagee Letter.”
The Coastal Barrier Resource System issue is not something that necessarily originated with FHA policy. According to a previous FHA mortgagee letter, “FHA is now consistent with the Coastal Barrier Resources Act (CBRA) by prohibiting FHA Mortgage Insurance for properties located within designated coastal barriers.” As you can see by this quote, federal law prompted the revision of the original FHA loan rules with regard to properties located in these areas.
For more information about this latest updated policy, contact the FHA directly at 1-800 CALL FHA.
Do you have questions on FHA mortgages? As us in the comments section.
When you want to buy a home with an FHA loan, unless you’re having a house built to spec, chances are good that appliances like a washer/dryer, stove, refrigerator and other items could be included in the purchase.
In some cases this is not a problem, but depending on what the buyer and seller agree will “come with the house” as part of the purchase, could such items reduce the amount of your FHA loan?
There’s an FHA loan rule about something known as an “inducement to purchase”. A seller is permitted to make a contribution to some financial aspects of the FHA loan (but not the down payment) in order to make the deal more attractive.
Those contributions are limited as part of “the six percent rule”. According to FHA loan rules, a third party may offer “up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.”
But elsewhere in the FHA loan rulebook, there are controls placed on what the seller may offer. “Personal property given by a seller and/or another interested third party to consummate the sale of a property results in a reduction in the mortgage amount. The value of the item(s) must be deducted from the lesser of the sales price or appraised value of the property before applying the LTV factor.”
Does that rule apply to ALL personal property like a stove, a dishwasher or other appliances? Not necessarily. FHA loan rules say, “Depending on local custom or law, certain items may be considered part of the real estate transaction with no adjustment to the sales price or appraised value. The table below describes how to determine if personal property affects the sales price or appraised value.”
These rules are found in HUD 4155.1 Chapter Two, Section A, which also provides a handy table to show what may or may not reduce the amount of an FHA loan in this area:
If you are not sure whether your situation is affected by these rules, discuss your transaction with the FHA directly by calling 1-800 CALL FHA. You can also discuss it with your loan officer, who can explain what is typical in your housing market and what may required an adjustment of the loan amount.
Got questions on how FHA loans work? Ask us in the comments section.
FHA loan rules state that a borrower must provide a minimum down payment–3.5%–as a requirement of FHA loan approval for a single-family property. For some borrowers, that down payment takes up a good amount of the available cash on hand.
What can a borrower do when he or she can afford a down payment, but may struggle to come up with some of the cash needed for closing costs, pre-paid expenses or other costs of an FHA loan?
The FHA has a rule stating that the borrower can have assistance in this area in the form of a third party contribution. FHA loan rules state that the seller, “or third party” may contribute, “up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.”
That six percent contribution may also include third party payment for permanent and temporary interest rate buydowns, “and other payment supplements” according to the FHA rules. It may also be used to pay the Up Front Mortgage Insurance Premium or what the FHA calls “mortgage payment protection insurance.”
The six percent figure is an important one to note–contributions over six percent as described above are considered something the FHA terms “inducements to purchase” and the rules of single-family FHA home loans state that a loan can be reduced by the exact dollar amount of that inducement to purchase.
One area that is not included in all this is the payment of a real estate commission–if the seller pays such real estate commissions or fees, that dollar amount is NOT counted toward the six percent.
Finally, these contributions can’t always be counted on; borrowers in the planning stages should not assume that a seller will definitely kick in money towards the six percent as a way to sweeten the deal. The best policy when planning for a new home purchase is to budget and save the cash for these expenses wherever possible. If a borrower has a third party willing to contribute and knows this ahead of time, that’s one thing; counting on the good graces of a house seller you don’t know is not a sound financial plan.
In all of this you will notice the FHA does not mention down payments–the borrower is responsible for the down payment and cannot use a six percent contribution towards it. The six percent contributions by a third party or the seller must only be used in the ways described above or as the FHA might allow. To get more information on what’s permitted, contact the FHA directly at 1-800 CALL FHA.
Do you have questions about how FHA loans work? Ask us in the comments section.
In today’s world, protecting your identity, personal information, credit card numbers and Social Security data is crucial. There are plenty of warnings of identity fraud scams across all types of business, but lending and credit are especially vulnerable areas. Borrowers should always take steps to protect themselves against scammers; beware of third parties who contact you requesting your personal data by phone, e-mail, or even in person.
All that said, there are some standard operating procedures borrowers should be prepared for that are NOT attempts to harvest your personal data. The key to knowing which is which–a scam versus a legitimate business transaction–is often how and when these procedures occur.
For example, FHA loan rules state that a lender may need or require something called a “blanket authorization” in order to do a proper credit check or employment verification as part of the FHA loan process. From the FHA official site:
“The lender may ask the borrower to sign a general authorization form that gives the lender blanket authority to verify information needed to process the mortgage loan application, such as
• past and present employment records
• bank accounts, and
• stock holdings.
If using a blanket authorization form, the lender
• must attach a copy of the authorization to each verification sent, and
• may use self-adhesive signature labels for laser printed verifications.”
That information is found in the FHA loan rulebook HUD 4155.1, Chapter One, Section B. This blanket authorization gives the lender permission to follow up on all application data without constantly referring back to the borrower for approval. Otherwise the loan process could slow down to a crawl. But the context of this blanket authorization is key–the borrower has reached out to the lender, ideally after having looked at two or three financial institutions to see which one has offered the most competitive rates and terms. The borrower will have a name, contact information and address for the lender.
The lender has not, in most cases, come TO the borrower. There is advertising, marketing e-mail, and other forms of contact from a legitimate company, but at the end of the day, the borrower has selected the financial institution after researching it (ideally).
The borrower who is pressured into a transaction should not give his or her personal data. The borrower who freely chooses to commit to an FHA loan should feel assured that such blanket authorization is safe–and if there is any doubt, a call to the FHA at 1-800 CALL FHA can clear up questions or address concerns.