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

Monthly Archives: April 2013

FHA Loan Answers: How Long Is An FHA Loan?

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One common FHA loan question is fairly simple and straightforward; how long can an FHA loan be?

In general, FHA loans are available for 15 or 30 year terms. FHA loan rules as spelled out in HUD 4155.1 state that there is a maximum loan term–one that depends on the type of transaction and other factors.

“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.” FHA loan rules add, “Some programs require a shorter term, including certain streamline refinances made without appraisals.”

For FHA Streamline Refinances made without an appraisal, FHA loan rules state, “The streamline refinance mortgage term is the lesser of

• 30 years, or
• the remaining term of the mortgage plus 12 years.”

It’s important for all FHA borrowers to know that there is no penalty allowed for overpayments on an FHA mortgage, nor is there a penalty for paying off the mortgage early. Borrowers are encouraged to make additional payments or pay more than the minimum amount due on the loan each month–doing so can save the borrower money in interest payments over the lifetime of the loan.

It’s also worth pointing out that the maximum loan term–15 or 30 years unless otherwise specified–has nothing to do with the maximum loan amount. Some borrowers might wonder if agreeing to pay more on their mortgage payments every month–which in turn saves money in interest payments–might give them the opportunity to borrow more based on the savings on interest. But FHA loans are calculated with the assumption that the loan is to be carried through to the full term of the loan based on the written agreement.

It’s the borrower’s choice to pay more or not every month, but that choice will not affect the maximum FHA loan available to the borrower on that transaction. For more information on FHA loan issues like these, contact the FHA directly at 1-800 CALL FHA.

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

Deadline For New FHA MIP Policy Approaches

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The deadline for a new FHA mortgage insurance premium policy is approaching; beginning on June 3, 2013 most FHA loans endorsed on or after that date will be affected by the following changes as described in FHA Mortgagee Letter 2013-04:

“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.”

That basically means that many affected FHA loans will feature annual MIP for the duration of the loan rather than cancelling the MIP after a certain point. Other FHA loans will  have MIP where there was none required previously.

Additionally, Mortgagee Letter 2013-04 states, “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.”

Also, “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.”

Here is a table reprinted from the FHA official site, which shows the affected loans and how the new MIP structure affects those loans with case numbers assigned on or after June 3 2013:

FHA MIP TALBE 2013

If you have questions about FHA MIP, speak with a loan officer or contact the FHA directly for further assistance.

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

FHA Loan Reader Questions: Can My Spouse Apply Alone For An FHA Loan?

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A reader asks, “I am married and I have an extremely high debt to income ratio. On the other hand my husband has less credit but double my income and very low debt to income ratio. Is it possible that an he qualify using only his income and credit to qualify for an FHA loan?”

There are several factors which may apply in a situation like this. Borrowers should know that when applying for FHA home loans, credit scores, employment history, verifiable income and other factors will figure into loan approval.

That said, assuming all the above requirements are met, the basic question is whether a borrower can apply for an FHA loan independently of the spouse. This depends on community property laws which may apply in the state where the loan is issued.

Community property laws concern the disposition of debts and property within the context of a marriage. Community property states generally may require both spouses to be obligated together on a real estate loan.

For this reason, borrowers should discuss community property issues with the lender and/or a lawyer where appropriate to make sure all rights and responsibilities are understood. In many cases a simple discussion of community property laws with the lender may suffice–if the borrower simply needs information. If the borrower needs legal advice, consulting a lawyer is the best course of action.

Unfortunately there are no quick answers to this question–not all states have community property laws, and those laws may differ from state to state. For more information on this issue, speak to a loan officer or the FHA directly by calling 1-800 CALL FHA.

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

FHA Loans and Non-Traditional Credit

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One commonly asked question about FHA mortgage loans involves the eligibility of borrowers who don’t have what are considered “traditional” credit histories. Can a borrower with little or no credit still qualify for an FHA loan?

FHA loan rules do make provisions for those who have little credit history that can be researched via a typical credit bureau report. In cases like these, the lender is required to review certain types of documentation to verify the borrower is a good credit risk.

According to HUD 4155.1, “In order for the underwriter to determine that a borrower has sufficient credit references to help evaluate bill paying habits, the credit history must…include three credit references” including at least one of the following:

  • Rental housing payments (subject to independent verification if the borrower is a renter)
  • Utility company reference (if not included in the rental housing payment)” which can include gas, electricity, water,  land-line home telephone service, and cable TV.”

FHA loan rules add that if the loan applicant is renting property from a relative, “the lender should request independent documents to prove regularity of payments, such as cancelled checks.”

Additional documentation may also be required in the form of the following, according to HUD 4155.1 Chapter One:

  • Insurance premiums not payroll deducted (for example, medical, auto, life, renter’s insurance)
  • Payment to child care providers made to businesses that provide such services
  • School tuition
  • Retail stores credit cards (for example, from department, furniture, appliance stores, or specialty stores)
  • Rent-to-own (for example, furniture, appliances)
  • Payment of that part of medical bills not covered by insurance
  • Internet/cell phone services

You can discuss providing these items with the lender–each FHA loan situation is different and your loan officer may have certain requirements or documentation needs you’ll need to meet for your application to be considered complete.

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

VA Loan Answers: The Difference Between “Maximum Loan Amount” and “Maximum FHA Loan Guaranty”

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There is a commonly asked question about FHA loans that pertains to the amount of loan a borrower is eligible to apply for; what is the FHA maximum loan amount?

There is no set, across-the-board limit for an FHA mortgage. Instead, the loan amount is determined in part by the appraisal and in part by the FHA mortgage guaranty limits for that county. Those limits are not on the actual amount the loan is for, but rather for the amount the FHA will insure.

According to FHA loan rules in HUD 4155.1, “The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s

• sales price, subject to certain required adjustments, or

• appraised value.”

The same section of the rulebook adds, “In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.”

So what is the difference between the maximum loan amount and the maximum VA loan guaranty amount?

The maximum loan amount is based on the price of the home as determined above, but also includes any allowable add-ons to the loans where permitted. If you are permitted to include points or costs into the loan, the amount would increase to accommodate those add-ons. But the maximum FHA loan guaranty–the amount the FHA will insure–is fixed as described above.

You and the lender may agree on an amount higher than that of the FHA maximum loan guaranty, but in such cases you may be expected to pay more up front or make a larger down payment. Discuss these options with your loan officer to learn more.

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

 

FHA Loan Reader Questions: Commission Income

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A reader asks, “How would you calculate a borrower who started a new job in May 2011, made a base salary with incentive? In 2012 went from incentive to commission + base & will continue for 2013 w/a verification stating commission likely will continue. Please advise.”

While many FHA loan applicants work in “traditional” vocations with weekly, bi-weekly, or monthly paychecks, others are self employed, work on commission, etc. FHA loan rules anticipate these types of employment situations and have rules based on them.

FHA loan rules address commission income in HUD 4155.1 Chapter Four Section D, which states, “Commission income must be averaged over the previous two years. To qualify with commission income, the borrower must provide

–copies of signed tax returns for the last two years, and

–the most recent pay stub.”

Borrowers who have been working in commission for more than a year but less than two years might find an exception is possible according to another section in the FHA loan rulebook in Chapter Four. “A borrower whose commission income was received for more than one year, but less than two years may be considered favorably if the underwriter can

–document the likelihood that the income will continue, and

— soundly rationalize accepting the commission income.”

What about borrowers who have been working on commission but had a bad year compared to the previous year?

Is there any exception in such cases? FHA loan rules say, “Commission income showing a decrease from one year to the next requires significant compensating factors before a borrower can be approved for the loan.” Compensating factors may include substantial cash reserves, investments or other forms of capital that could justify the lender’s making an exception.

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

FHA Credit Report Rules

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When you apply for an FHA loan, your loan application will include forms you sign to give your loan officer permission to pull your credit reports, check your employment history and other items that are required in order to approve your VA home loan.

But what are the rules for the lender when pulling your credit reports? What is the loan officer obligated to review and how is the process regulated? FHA loan rules, as printed in HUD 4155.1, give the lender a long set of instructions when it comes to accessing credit data.

For starters, the lender can only accept credit report information directly from the credit agencies.

It cannot come from any third party including the borrower. Additionally, HUD 4155.1 Chapter One Section Five states, “A credit report submitted with a loan application must contain all credit information available in the accessed repositories. Additionally, for each borrower responsible for the debt, the report must contain all of the information available in the credit repositories pertaining to

• credit
• residence history, and
• public records information.”

The lender is permitted to pull joint credit reports, “for individuals with joint accounts.”

Borrowers who do not have traditional credit histories can submit alternative credit qualifying data or show the lender where to access such data, but HUD 4155.1 requires follow-up with the credit agencies.

“FHA prefers that all non-traditional credit references be verified by a credit bureau and reported back to the lender as a non-traditional mortgage credit report (NTMCR) in the same manner as traditional credit references.”

For more information on credit report issues related to FHA home loans, 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: Credit Score Minimums and FHA Requirements

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A reader asks, “We have been working for the last year to clean up our credit with the help of a credit repair company. We have made strides. We have been living in our home the last three years which we are purchasing on a land contract.”

“It is now the end of the contract and we need to do the financing. I’m reading that the minimum credit FHA requires is 580, but I cannot find any place that will finance a person with less then a 640 credit score. Secondly, it is my understanding that we should be doing a refinance anyhow, but the places I have called are clueless. HELP! Our high score is right at 580 and we need to finish this financing NOW.”

This is an issue that many borrowers learn about the hard way–FHA loan rules do have a minimum credit score that is below 600, but the FHA cannot force a lender to approve home loans for borrowers with credit scores lower than the lender’s minimum FICO score requirements.

What this means is that while some borrowers may technically qualify for an FHA home loan based on FHA loan requirements, the lender’s FICO score requirements also apply and play an important part in loan approval. For this reason, borrowers with credit scores that are right at the FHA minimums or close to them should call the FHA to ask for a referral to an FHA-approved housing counselor.

A housing counselor can offer advice and information about credit, improving credit scores, and strategies to get ready for an FHA home loan. These FHA-approved housing counselors do not offer to “repair your credit”–they offer advice to borrowers so the applicant can take steps to become more creditworthy. It’s very important to use caution with any third party company that offers to “repair credit” for a fee.

Many times these companies won’t be able to offer you anything you cannot do for yourself. Improving credit scores takes time and patience. The help of a government-approved housing counselor may be invaluable for any FHA loan applicant who needs to improve their chances for an FHA mortgage loan. To get a referral to an FHA approved housing counselor in your area, contact the FHA at 1-800-CALL FHA.

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

FHA Loan Reader Questions: FHA Loans For Retired People

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A reader asks, “Have been trying to get my Freddie Mac loan reduced for 16 months with no good results.  Can a retired person get an fha/obama loan if they have excellent credit, no debt and low income?”

The answer to this question really depends on more information. The FHA itself does not have a minimum income requirement for FHA refinance loan approval. Instead, the FHA guidelines state that the borrower’s debt-to-income ratio would be a factor in some kinds of refinancing.

The term “low income” itself is very relative–what might seem to be low income for some is perfectly acceptable in other cases. A borrower with good credit and a low debt-to-income ratio may be perfectly able to qualify for an FHA mortgage assuming other qualifying factors are also met.

The key to answering a question like this? Speaking to a lender about an FHA refinance loan and seeing what the results of that conversation are based on all the qualifying details.

It would be impossible to say, in this case, whether the borrower is or is not qualified. In a general sense, with enough income and without the additional burden of a high debt-to-income ratio, an FHA refinance loan could be well within a borrower’s reach…but it all depends.

Never assume you can’t qualify for an FHA loan or FHA refinance loan unless you have been told so by an FHA rep or a loan officer.

Even when the bank turns you down, it’s important to know the difference between not meeting one particular lender’s standards and not being eligible for the FHA loan program at all. If you aren’t sure which applies in your particular case, contact the FHA directly at 1-800 CALL FHA to discuss your situation in detail.

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

FHA Loan Forbearance and Refinance Relief: Hurricane Sandy and Beyond

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Recently the FHA modified its guidelines to lenders for borrowers struggling to recover in federally declared disaster zones such as the large areas affected by Hurricane Sandy.

There are two very important aspects of this policy modification that borrowers should know–before, during, and after natural disaster.

According to FHA Mortgagee Letter 2013-11, “FHA is expanding forbearance relief for affected borrowers.  Under this policy:

  • Borrowers may suspend up to 12 months’ worth of mortgage payments while they repair their homes; and
  • After the forbearance period, borrowers may be eligible for an FHA streamlined loan modification to avoid large lump sum payments.

Up to 285,922 borrowers in the Sandy-affected areas who were eligible for forbearance relief as of February 28, 2013, may be eligible for an FHA streamlined modification.”

The Streamlined loan modification is a very important part of the disaster relief effort for borrowers that can have positive effects long after the storm damage has been repaired.

The Mortgagee Letter adds, “This new loss mitigation option aligns with Fannie Mae and Freddie Mac (the Enterprises) to provide borrowers coming out of forbearance a streamlined loan modification that will not require a financial assessment.  FHA recognizes that borrowers who were current at the time of the disaster should be provided an expedient means of transitioning out of forbearance into a permanent mortgage solution.”

For more information on any aspect of these changes, contact the FHA at 1-800 CALL FHA or speak to your loan officer.

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