Monthly Archives: March 2013
Good Friday is a common day off for many people. The Friday before the Easter weekend has many vendors, businesses and even the stock market takes a day off on this day. But if you’re looking for an FHA mortgage, you might be surprised to learn that you can talk to a lender, get prequalified and fill out FHA loan paperwork depending on the company–Good Friday is NOT a federal holiday so many financial institutions are open today.
Because the markets which affect FHA loan mortgage rates are closed on Good Friday, the rates published on Thursday are likely the ones you will have access to today unless the lender reprices or issues a revised rate sheet on Friday.
Of course, for those who wish to prequalify online, there’s no need to wonder if the bank is open or not–just fill out the forms and a representative will get with you when they are reviewed and processed.
Good Friday does mean the closure of some local branches of the FHA depending on the location and the tradition in that area. If you need assistance from the FHA directly call 1-800 CALL FHA. If you want to prequalify for an FHA loan, go to FHALoan.com (a private website, not a government agency).
FHA streamline refinance loans allow a borrower who has an existing FHA mortgage to refinance with no FHA-required credit check or FHA-required appraisal. FHA streamline loans work on the concept that the borrower has already qualified for the original FHA loan, so that qualifying data is used to get the home owner into the streamline refinance loan.
These loans have certain rules that apply which don’t necessarily apply to other types of refinancing. For example, the purpose of the loan can come under scrutiny–the borrower must, in most cases, get a reduced mortgage payment or interest rate as a result of the new loan. Additionally, FHA loan rules state:
“A transaction for the purpose of reducing the mortgage term must be underwritten and closed as a rate and term (no cash-out) refinance transaction”. According to FHA loan rules in HUD 4155.1 Chapter Six Section C, the loan to be refinanced must also be current. Chapter Six says:
“A delinquent mortgage is not eligible for streamline refinancing until the loan is brought current.”
Some borrowers want to know if they can refinance an existing FHA adjustable rate mortgage (ARM for short) to another ARM loan using an FHA streamline loan. FHA rules in these circumstances are clear;
“An Adjustable Rate Mortgage (ARM) may be refinanced to another ARM, provided that there is a net tangible benefit to the borrower.” ARM to ARM loans can only be made for principal residences.
FHA borrowers can also refinance existing FHA ARM loans to fixed-rate mortgages. In these cases, the rule that there must be a lower interest rate may not apply because the ARM loan may have a lower rate at the time of the loan than the fixed rate mortgage. More information on that issue and others like it can be found on the FHA official site at www.FHA.gov.
Do you have questions on FHA refinancing loans? Ask us in the comments section.
A common question in any home loan situation is, “How long is my mortgage?”
This depends greatly on the type of loan you apply for, the term you agree upon, and how much you pay each month over the lifetime of the loan. In general, FHA mortgages are either 15-year or 30-year loans. The maximum amount of time you can be legally obligated to the original new purchase FHA home loan is 30 years.
According to the FHA official site, “The maximum mortgage term may not exceed 30 years from the date that amortization begins. In the case of adjustable rate mortgages (ARMs), the term must be for 30 years. FHA does not require that loan terms be in five year multiples.”
Some types of refinancing (certain FHA Streamline Refinances without an appraisal, for example) do require shorter terms. Here are the FHA loan rules for Streamline Refinance loans and the maximum loan term as found in HUD 4155.1:
“The streamline refinance mortgage term is the lesser of
• 30 years, or
• the remaining term of the mortgage plus 12 years.”
It’s important to note that a borrower’s 30-year commitment to the original mortgage would change in the event he or she pays more than the minimum mortgage payment due each month–change in the sense that an early payoff can shorten the loan term.
There is no penalty for early payoff with an FHA home loan, so the borrower is free to pay more each month or whenever it’s felt necessary. Paying more can reduce the amount of time you spend making mortgage payments.
As mentioned above, the borrower’s loan term will also change when the mortgage is refinanced. The terms of your new mortgage depend on the nature of the refinancing–speak to a lender for more information on the type of refinance loan you’re interested in and what the commitment might be for the new loan.
Do you have questions about FHA home loans? Ask us in the comments section.
Sometimes an FHA loan transaction involves the sale of a home between family members. In such cases there are FHA loan rules that may apply depending on the circumstances. A reader asks, “If I buy a house from a relative is it true that I have to have 15% down payment for FHA loan?”
A quick read of HUD 4155.1 Chapter 2 Section B reveals some special rules that apply in circumstances like these. This situation is known as an “identity of interest” transaction. The FHA defines “identity of interest” as, “a sale between parties with family or business relationships”.
What do FHA loan rules say about such sales? “The maximum loan-to-value (LTV) factor for identity-of-interest transactions on principal residences is restricted to 85%.” That means that yes, the borrower is required to make a 15% down payment in such cases. But the FHA also permits exceptions to this rule, including a situation where the FHA loan applicant has been living on the property as a tenant prior to the sale.
The specific language of the FHA loan rule and the exception to that rule is as follows:
“A family member purchases another family member’s home as a principal residence. If the property is sold from one family member to another and is the seller’s investment property, the maximum mortgage is the lesser of
–85% of the appraised value, or
–the appropriate LTV factor applied to the sales price, plus or minus required adjustments.
Note: The 85% limit may be waived if the family member has been a tenant in the property for at least six months immediately predating the sales contract. A lease or other written evidence must be submitted to verify occupancy.”
If the reader has such evidence available, it may be submitted to the lender as proof that the 15% down payment rule may be waived. However, the borrower is still responsible for making a down payment according to FHA loan rules–it’s just lower than 15%. The minimum required investment for most FHA loans is 3.5%.
If you have questions about FHA loans or FHA refinance loans, ask us in the comments section.
A reader asks, “Are all FHA loans , down payments, and everything regarding my future home have to be dealt with an authorized lender or can I deal with FHA directly? If this is the case, where do I have to send all paperwork?”
The answer to this question is fairly simple–all FHA loans and FHA refinance loans are handled via a participating lender. Borrowers must apply via the lender, who processes the paperwork and submits it to the FHA where appropriate.
The FHA single-family mortgage loan program does not feature a “direct application” process where the borrower submits loan paperwork to the FHA. This is part of a common misconception about the FHA loan program.
The FHA does not lend money directly to borrowers, set or maintain interest rates, or accept payments on FHA mortgage loans.
All of these things are handled by the lender. Addressing the reader’s specific question about FHA loan paperwork, the paperwork is filled out either online or on paper and submitted to the participating lender. The lender and borrower negotiate an interest rate (again, the rate is NOT set by the FHA) the borrower gets a calculation on the down payment which is a minimum of 3.5%, and work out other details as needed. Borrowers do not deal with the FHA directly in these areas.
Borrowers who experience difficulty with a participating lender or who are turned down for an FHA loan can try other lenders–this is true of new purchase loans and refinancing loans alike. Nothing ties the borrower to a specific lender unless there has been a borrower-signed binding agreement such as a purchase contract or loan agreement specifically stating otherwise. For more information on issues like these, 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.
A reader asks, “My sister in law borrows some fund from her 401(k) to refinance her home. She certainly has to back the fund back to her 401(k). The lender says this monthly payment shall be counted when computing her Debt to Income Ratio. According to the FHA, the following list of financial obligations should not be used to calculate the debt to income ratio:
Other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds). I notice that this blog was written in year 2011. Do these rules still apply at present or have there been any changes so far?
It’s true that the FHA has guidelines about how to view a 401K when it comes to calculating the debt-to-income ratio. According to HUD 4155.1:
“Obligations not considered debt, and therefore not subtracted from gross income, include
- Federal, state, and local taxes
- Federal Insurance Contributions Act (FICA) or other retirementcontributions, such as 401(k) accounts (including repayment of debt secured by these funds)”
Also, the same rulebook adds,
“Up to 60% of the value of assets such as Individual Retirement Accounts (IRA), thrift savings plans, 401(k) and Keogh accounts may be included in the underwriting analysis, unless the borrower provides conclusive evidence that a higher percentage may be withdrawn, after subtracting any
–Federal income tax,
In such cases, redemption evidence is required by the lender, and the portion of the 401K not used to meet closing requirements can be considered cash reserves.
What is very important to note is the portion of the reader question that concerns paying back the money withdrawn from the 401K. “The lender says this monthly payment shall be counted when computing her Debt to Income Ratio.” The lender may be interpreting the new need to pay back the funds to her 401K as a recurring debt.
It’s a very good idea to ask about lender standards in situations like these, as the lender is free to require more strict standards in such areas than the FHA minimums or basic guidelines as mentioned above. (As long as such standards are applied in accordance with the Fair Housing Act and other relevant laws.)
For more information on this issue, contact the FHA directly for assistance.
Do you have questions about FHA loans or refinance loans? Ask us in the comments section.
One of the most commonly asked questions about FHA loans is “How much will my down payment be?” The answer to that question depends on how much your home loan is and whether you’re paying the minimum 3.5% down payment or a larger amount.
Regardless of how much you pay, the FHA has rules about HOW the downpayment is made. Did you know there are “acceptable sources” for down payment funds as well as “unacceptable sources”?
For example, a borrower is free to use money saved in a checking, savings, or investment account. But the borrower cannot use cash advance loans or payday loans to make the down payment. In fact, any “non-collateralized” loan is not an acceptable source of down payment funds.
The FHA rules in these circumstances extends to gift funds, which are acceptable sources of down payment money as long as it is properly documented. The lender will require evidence of gift funds as described in HUD 4155.1 Chapter Five:
“The lender must document any gift funds through a gift letter, signed by the donor and borrower. The gift letter must
–show the donor’s name, address, telephone number
–specify the dollar amount of the gift, and state the nature of the donor’s relationship to the borrower, and that no repayment is required.”
Note the last line–the gift funds must be a legitimate gift, not a loan disguised as one.
When looking at gift funds as a source of your down payment, the FHA says that charitable organizations may–under some circumstances–offer down payment assistance. That help is subject to restrictions, some of which are described in Chapter Five:
“FHA does not “approve” downpayment assistance programs administered by charitable organizations, such as nonprofits. FHA also does not allow nonprofit entities to provide gifts to pay off:
Lenders must ensure that a gift provided by a charitable organization meets the appropriate FHA requirements, and that the transfer of funds is properly documented.”
For more information on acceptable sources of down payment funds, speak to a loan officer or contact the FHA directly at 1-800 CALL FHA.
Do you have questions about FHA loans? Ask us in the comments section.
A reader asks, “What about Child Support? My mortgage broker said that if it doesn’t come up on credit report it will not count as a deduction. However it does reflect on my paycheck every 2 weeks. My question is this considered a voluntary deduction at that point or was I misinformed?”
FHA loan rules require a borrower’s debt-to-income ratio to be within certain limits in order to qualify for an FHA home loan, and while it’s true that FHA rules do take compensating factors into account, the amount the borrower is obligated to pay every month before the mortgage amount is important.
What do the rules say about debt such as child support, alimony, etc.?
The FHA official site says, “Most recurring obligations, including child support and alimony are considered in computing debt-to-income ratios.
Debts lasting less than ten months must be counted if the amount of the debt affects the borrower’s ability to make the mortgage payment during the months immediately after loan closing; this is especially true if the borrower will have limited or no cash assets after loan closing.”
This information is found in one of the FHA’s many frequently asked questions lists, which also adds, “Because of the tax consequences of alimony payments, the lender may choose to treat the monthly alimony obligation as a reduction from the borrower’s gross income in calculating qualifying ratios, rather than as a monthly obligation.”
The lender’s standards may play a part in how these types of debts are calculated or reviewed, but there are also federal laws such as the Fair Housing Act and other standards that may apply depending on the situation. In cases where there is doubt, it’s best to contact the FHA directly to inquire how the rules may apply in your specific situation. Contact the FHA at 1-800 CALL FHA for more information.
Do you have questions about FHA mortgages? Ask us in the comments section.
We answer a lot of reader questions about FHA loans. One of them most common involves the FHA occupancy regulations for single family loans. Readers want to know if they can rent out a house purchased with an FHA loan under the single-family mortgage program. Is this possible? Are FHA single-family mortgages available for vacation homes or other limited-occupancy residences?
A look at the FHA loan rulebook clears up these questions quickly According to HUD 4155.1, Chapter Four Section B, we learn the following under the section titled Eligibility Requirements For Principal Residences:
“This topic contains information on eligibility requirements for principal residences, including
• a definition of principal residence
• the FHA requirement for establishing owner occupancy
• FHA-insured Mortgages on principal residences and investment properties,
• exceptions to the FHA policy limiting the number of mortgages per borrower.”
The rules go on to state, “At least one borrower must occupy the property and sign the security instrument and the mortgage note in order for the property to be considered owner-occupied. 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.”
What does the FHA consider a “principal residence”? According to Chapter Four, “A principal residence is a property that will be occupied by the borrower for the majority of the calendar year.”
What is to stop a borrower from staying in the property for the one-year minimum, converting it to a rental unit, and purchasing another home with an FHA loan? Chapter Four Section B has the answer:
“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.”
For more information on these rules, contact the FHA directly.
Do you have questions about FHA loans or FHA refinance loan requirements? Ask us in the comments section.
A reader asks, “My mom is trying to sell her house and when it was built it was on septic. When my parents bought the house in 1988, the neighborhood had been subsidized and city sewer was installed but not to their house that was already there prior to subsidizing.”
“Now to get it on city sewer is gonna cost 13,000 dollars that she doesn’t have. A potential buyer has put a bid on the house and is applying for an FHA insured loan and they are saying it HAS to be hooked to city sewer. Is this correct or does her existing system which is up to codes and works appropriately acceptable?”
The answer to this question may well depend on state or local building codes. In these cases the borrower must consult the local authority to learn what can or must be done. FHA loan requirements are not the only ones which must be observed when applying for an FHA insured mortgage loan–the local and state building codes also apply.
FHA loan rules cannot and do not override building codes.
Instead, the FHA minimum property requirements should be viewed as additional protections and regulations which must be observed in addition to the existing local guidelines. In some cases there may be a waiver, exceptions or other possibilities depending on the circumstances, but again, the borrower must find out what local or state laws apply.
Let’s examine a quote from HUD 4910.1 Minimum Standards For Housing, which says the following:
“The Department of Housing and Urban Development does not assume responsibility for enforcing or determining compliance with local codes and regulations or for making interpretations regarding their application for purposes of the local government. However, if compliance with the provisions of a local code is required in accordance with 24 CFR 200.925 or .926, then the Department is responsible for determining compliance and issuing interpretations for the Department’s purposes.”
For more information on FHA minimum property requirements, contact the FHA directly.
Do you have questions about FHA loans or FHA refinance loans? Ask us in the comments section.