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

Monthly Archives: February 2013

FHA Loan Requirements and Your Personal Data

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We sometimes get questions about certain practices required to verify and approve the information given on a borrowers FHA home loan application. Borrowers are rightly concerned about protecting their privacy and personal data; what do FHA loan rules say about lenders who ask for account numbers, Social Security information and other private information?

FHA loan applicants should know that the FHA does require these types of personal data in order to properly verify and approve the loan. According to FHA loan rules as described in HUD4155.1:

“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.”

FHA loan rules also require the lender to take certain additional steps if the borrower has provided a single approval form for “all of the above” information. HUD4155.1 states, “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.”

So the basic answer to many reader questions in this area is that yes, the lender will and should ask you for this type of information in order to process your loan. Account numbers must be verified, the lender is responsible for making sure the sources of down payment funds and other cash provided is from approved sources.

It’s also necessary to verify claims of “substantial cash reserves” or other things that may be considered compensating factors on an FHA loan or refinance loan application.

Borrowers who have additional concerns should contact the FHA directly by calling 1-800 CALL FHA.

Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section.

Will Sequestration Affect FHA Home Loans?

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On March 1, 2013, unless lawmakers act to prevent the process known as sequestration, major budget cuts, furloughs and staffing changes will go into effect across a variety of government agencies. These cuts have the potential to be quite disruptive, and many wonder whether FHA home loans, refinance loans and other programs might be negatively affected.

According to HUD Secretary Shaun Donovan, the answer is yes. Donovan’s February testimony before the Senate Committee on Appropriations included some revealing comments about sequestration and its impact on the FHA/HUD.

“Sequestration would result in 75,000 fewer households receiving foreclosure prevention, pre-purchase, rental or other counseling though HUD housing counseling grants. This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent  foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

But that isn’t all. According to Secretary Donovan, the FHA loan program could also experience issues as a result of sequestration. “ I am privileged to lead just over 9,000 HUD employees around the nation in 81 field offices around the country. Specific plans are still being reviewed and finalized, but we believe that furloughs or other personnel actions may well  be required to comply with cuts mandated by sequestration. The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

That is as specific as it gets with regard to Secretary Donovan’s testimony on how sequestration might affect FHA loan programs, but it’s a good idea to assume there may be delays in processing paperwork for FHA loans and refinancing loans where applicable. In cases where FHA approval or other involvement is needed, those delays are likely to occur when furloughs or staffing cuts affect workload factors. When additional guidance or information becomes available from the FHA or HUD, we’ll report it here.

Washington lawmakers don’t have much time left to pass legislation to ward off sequestration; if the deadline passes with no action taken, we’ll report any significant developments here.

Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section.

Reader Questions: FHA Loan Down Payments

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A reader asks, “I am thinking about purchasing a home. I’ve been to many open houses (any where I see a signs posted). If a house costs $250,000 is it possible to be approved for a home loan with no money down, if not how much down payment do I need to be approved?”

FHA guaranteed home loans sometimes get confused with the VA loan program. VA loans, available to qualified military members and veterans, are offered with a no money down option. But this is not true in the case of FHA home loans, which have a minimum down payment of 3.5%.

There is no specific, set dollar amount for the required minimum down payment, since the 3.5% is a percentage of the contract sales price of the home. Also, 3.5% is only a minimum down payment–borrowers are free to pay more money down, there is no prepayment penalty with VA home loans.

Let’s look at the FHA official site’s description of the FHA loan program, written for first-time home buyers, to get a better idea of what’s required with an FHA loan and what you can expect. The goal of the FHA loan program is:

“…To provide mortgage insurance for a person to purchase or refinance a principal residence. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.”

What are the eligibility requirements for an FHA guaranteed home loan? According to the FHA official site:

  • The borrower must meet standard FHA credit qualifications.
  • The borrower is eligible for approximately 96.5% financing. The borrower is able to finance the upfront mortgage insurance premium into the mortgage. The borrower will also be responsible for paying an annual premium.
  • Eligible properties are one-to-four unit structures.”

This is the basic information a borrower needs to get started. It’s important to know you should begin preparing for any type of home loan at least a year in advance, saving up for appraisal fees, checking your credit report and FICO scores, paring down your debt-to-income ratio, etc. The earlier you start planning for your new home, the better.

Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section.

FHA Loans, Prepayments and Due-On-Sale Clauses

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When shopping for a home, some borrowers come into the house hunt with a strategy that includes paying or pre-paying a chunk of the mortgage loan up front. This isn’ necessarily a down payment per se, but it is something to consider when setting a budget for a home loan and the anticipated mortgage loan payments. Does the FHA allow such a strategy? Can borrowers pay down the loan principal?

FHA home loans do feature the ability to pre-pay a portion of the loan. This can be helpful for many reasons including lowering mortgage payments and saving money over the lifetime of the loan by reducing the principal and the amount of interest paid on that principal.

According to HUD 4155.2 Chapter Three, Section A, “A borrower may prepay a mortgage in whole or in part.” But there are some guidelines the borrower should know about prepayments.

According to the same chapter, if an FHA mortgage was insured prior to August 2, 1985, “the borrower must provide 30 days written notice of prepayment to the lender or be charged one extra month’s interest, and the payment must reach the lender by the first of the month”.

That’s an important aspect of the rules to be aware of, as is this rule for FHA loans insured on or after August 2, 1985. It says, “advance notice of prepayment is not required, and if the payment is received after the first day of the month, the lender may,at its option, collect the remainder of that month’s interest.”

FHA guaranteed mortgages may not feature prepayment penalties or due-on-sale clauses according to HUD 4155.2 Chapter Three, except for cases in which FHA approves a due-on-sale clause in connection with tax-exempt bond financing by state or local governments, or the implementation of statutory restrictions on assumptions.”

That raises another question–are FHA loans assumable? According to Chapter Three, yes. However, FHA loan assumption is not necessarily automatic. Here’s what chapter three says:

“If the loan application was signed by the borrower before December 1, 1986, the FHA-insured mortgage generally contains no restrictions on assumability. For a mortgage where the application was signed on or after December 1, 1986, the loan may be assumable depending on a creditworthiness review of the assumptor(s).”

Do you have questions about FHA mortgages? Ask us in the comments section.

 

FHA Loan Limits For High Cost Counties: FHA Loan Questions

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Many borrowers want to know why FHA home loans are available for the same size and type of properties, but in larger or smaller amounts depending on the market. Why aren’t FHA loan amounts standardized?

The basic answer to this is that all housing markets are different, and the costs in one market are not necessarily the same for another. A two-bedroom home with a garage in Bangor, Maine might not cost the same to build or finance as a similar home in Cleveland, Ohio. The same goes for properties located on either coast—how much would that two-bedroom home build and sell for in Los Angeles or New York?

To address these issues, the FHA has created a table that lists the FHA loan limits for counties where the costs of buying a home are higher than normal. This is discussed in the FHA loan rulebook, HUD 4155.1 Chapter One under the section titled Maximum Loan Limits, Mortgage Amounts and Mortgage Terms. It says in part:

“Section 203(b)(2)(A) of the National Housing Act states that mortgage limits in high cost areas (the ceiling) may increase to 150 percent of the dollar amount limitation as described under Section 305(a)(2) of Freddie Mac for a residence of applicable size.

In these high cost areas, the loan limit is equal to the lesser of

• 115 percent of the area median house price, or

• the statutory ceiling for the high cost areas.

Section 214 of the NHA provides that mortgage limits for Alaska, Hawaii, Guam, and the Virgin Islands may be adjusted up to 150 percent of the new FHA ceilings.”

In addition to these higher loan amounts, the FHA also has rules in place that govern how much money can be approved for an FHA mortgage loan in general. “A mortgage that is to be insured by FHA cannot exceed a certain percentage of property value. The maximum LTV ratios vary depending upon the

• type of borrower

• type of transaction (purchase or refinance), and

• stage of construction.”

For more information on these limits, speak to a loan officer or contact the FHA directly at 1-800 CALL FHA.

Do you have questions about FHA loans or refinance loans? Ask us in the comments section.

 

FHA Loan Reader Questions: What Is Needed To Qualify?

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A reader asks, “What is needed to qualify for a FHA loan?”

That is a very general question–almost too general, but there is one very important starting point borrowers should know about when getting started with the FHA home loan process. Credit history is a major part of any home loan and some types of FHA refinancing loans. Without a solid record of on-time bill payments for at least one year or more, a lender is hard-pressed to justify approving a mortgage credit application.

Let’s examine with the FHA loan rulebook says about credit. According to HUD 4155.1, Chapter One, Section A, the home loan underwriting process pays a lot of attention to credit issues. “The purpose of underwriting is to

  • determine a borrower’s ability and willingness to repay a mortgage debt to limit the probability of default and collection actions, and
  • examine the property offered as security to determine if it is sufficient collateral.”

The FHA loan rulebook also adds that the loan officer or underwriter, “evaluates the four C’s of credit to determine a borrower’s creditworthiness.” What are these “four C’s?

• credit history

• capacity to repay

• cash assets available to close the mortgage

• collateral.

FHA loan rules state that the agency’s “general credit policy” includes requirements for the lender to actively consider the nature of the borrower’s income, how much income might be needed to qualify (versus debts and other factors) plus any compensating factors that might be present that work in a borrower’s favor.

Borrowers should take a close look at their credit scores, credit reports, and history of bill payment over the last year or more to insure they are truly ready for an FHA home loan application. Those who need further assistance can contact the FHA directly at 1-800 CALL FHA for a referral to an FHA approved housing counselor who can assist in these areas and more.

Do you have questions about FHA home loans or refinancing loans? Ask us in the comments section.

FHA Refinance Loan Questions: Credit Requirements

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A reader asks, “My divorce was final last March. My ex got the house. He’s suppose to be getting it refinanced but has been turned down twice for the Streamline. What are we missing? It was “transferred” to him through divorce, he has all documents showing he’s made the payments since we bought the house 5 years ago to present. And what’s the “non-credit” qualifying requirement? From what I’ve read, he should be good to go with that but the lenders, or lack thereof, keep turning him down due to debt/income ratio.”

Reader questions like these are common; unfortunately there are too many variables that could affect a refinance loan application to answer this reader’s query specifically.

What variables could be at work in situations like these? Any number of things including a Streamline Refinance loan that has resulted in higher payments due to add-ons such as energy efficient improvements, discount point or other items. A borrower who has identity theft issues on a credit report may find a refinance loan application held up while those issues are addressed.

Other problems that could affect a refinance loan application in these instances could be simple lack of communication–does the lender have the most current documents, including applicable legal paperwork showing ownership? Are there electronic records that have not yet caught up with the most current status of ownership? As you can see there are many unanswered questions.

The most telling part of the reader question in this particular case is the final line–the applicant has been turned down due to a high debt-to-income ratio.

That may or may not indicate that the borrower was required to undergo a new credit check as part of the streamline refinance loan. In such cases, if the lender determines the debt-to-income ratio is too high, it may indeed warrant a denial of credit depending on the circumstances.

The best course of action in these cases is to discuss all the specifics of the situation with an FHA approved housing counselor who may be able recommend a course of action to reduce the debt to income ratio and other credit improving actions the borrower might need to take. As we always recommend in these cases, don’t waste time or money on third-party agencies that promise to repair your credit for you for a fee–these services often don’t provide anything more than the borrower can do on his or her own.

Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section.

FHA Loans and Closing Costs–What You Should Know

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FHA loans require a minimum down payment, but those funds are not the only money needed at closing time. Borrowers should know and budget for a variety of expenses that are due on or before closing time.

That’s one reason why finance experts recommend taking a year or more to prepare for any type of home loan–saving for these expenses can make things financially easier once the home buying process begins. But what are the costs and expenses a borrower will need to close the deal?

Fortunately the FHA loan rulebook spells out the items needed at closing time–these must be paid for on or before the deal closes.

The FHA Loan rulebook, HUD 4144.1, says, “In addition to the minimum downpayment requirement described in HUD 4155.1 5.B.1.a, additional borrower expenses must be included in the total amount of cash that the borrower must provide at mortgage settlement.”

These additional expenses include (but are not limited to):

  • closing costs
  • prepaid items
  • discount points
  • non-realty or personal property
  • upfront mortgage insurance premium amounts
  • repairs and improvements
  • real estate broker fees
  • mortgage broker fees
  • premium pricing on FHA-insured mortgages
  • yield spread premiums

That list comes directly from the FHA loan rulebook. Along with the requirement for these items to be paid, there is also a rule that says the borrower must be fully informed about these fees. HUD 4155.1 says, “Lenders must include the sum of all fees and charges from origination-related charges in Box 1 on page 2 of the Good Faith Estimate (GFE).”

Additionally, “The GFE requires that lenders provide an aggregated cost for origination services.” Borrowers can’t be left in the dark about the actual costs and expenses related to their FHA home loan. The borrower is expected to read and understand this paperwork, but if there are any questions, the borrower should definitely get clarification from the lender or the FHA prior to closing the deal. For information on any aspect of FHA home loans or refinancing loan procedures in this area, contact the FHA at 1-800 CALL FHA for assistance.

Do you have questions about FHA home loans or refinance loans? Ask us in the comments section.

The New FHA MIP Rules

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We’ve written more than one blog post recently on the changes to the FHA mortgage insurance policy. Because of the potential for confusion over these changes, we’re attempting to explain these changes one important detail at a time.

When the FHA announced its changes and made them official, it issued a mortgagee letter which includes the following information:

“For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP for the maximum duration permitted under statute. For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.”

To help borrowers better understand these changes, the FHA also published a table that shows the old MIP versus the new MIP, which takes effect for all FHA loans as described above with case numbers assigned on June 3 2013 and beyond.

Here’s that table:

FHA MIP Revisions

As we’ve reported before, the new FHA MIP terms are not changing for any FHA loan with case numbers assigned prior to the date mentioned above. The FHA is not changing any current borrower’s MIP terms, only requiring a new term for the loans with case numbers assigned on or after June 3 2013.

We re-emphasize this to reassure our readers and to clear up any confusion that may surround this issue. For more information on this issue, contact the FHA directly by calling 1-800 CALL FHA.

Do you have questions about FHA loans or refinance loans? Ask us in the comments section.

 

FHA Loan Questions: When Do The New FHA Mortgage Insurance Premiums Take Effect?

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A recent FHA press release announced changes to the FHA mortgage insurance policy, including higher MIP and other changes.

According to the FHA official site. “FHA will increase its annual mortgage insurance premium (MIP) for most new mortgages by 10 basis points or by 0.10 percent.  FHA will increase premiums on jumbo mortgages ($625,500 or larger) by 5 basis points or 0.05 percent, to the maximum authorized annual mortgage insurance premium.  These premium increases exclude certain streamline refinance transactions. FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan.”

Those are significant changes to the FHA loan program, but who is affected by these changes and when do they take effect?

Some borrowers who already have FHA home loans are concerned that the MIP changes might affect their payments. Is this true? Will FHA make these new rules apply retroactively to existing FHA mortgages?

Not according to FHA Mortgagee Letter 2013-04, which says “The section of this Mortgagee Letter that increases the annual MIP is effective for case numbers assigned on or after April 1, 2013, except as noted below.” The exception mentioned in that sentence applies to what the FHA describes as follows:

“This Mortgagee Letter increases the annual MIP on all forward mortgages previously announced in ML 2012-4, except single family forward streamline refinance transactions that are refinancing existing FHA loans that were endorsed on or before May 31, 2009; the rate for those streamline transactions remains at the level announced in ML 2012-4.” (Emphasis ours)

The date when the new “life-of-the-loan” MIP requirement begins? According to the FHA, the date for loans “with FHA case numbers assigned on or after June 3, 2013,” is when “FHA will collect the annual MIP for the maximum duration permitted under statute.”

To read the other Mortgagee Letters referenced here, see the FHA official site Mortgagee Letters page.

Do you have questions about FHA home loans or refinance loans? Ask us in the comments section.