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

Monthly Archives: June 2013

FHA/HUD Announce Relief For Alaska Flood Victims

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The FHA and HUD have issued a press release announcing relief for victims of recent flooding in Alaska. According to HUDNo.13-100, released Thursday June 27, 2013, “U.S. Housing and Urban Development Secretary Shaun Donovan today announced HUD will speed federal disaster assistance to the State of Alaska and provide support to homeowners and low-income renters forced from their homes due to recent flooding.”

This assistance came after the President made an announcement declaring parts of Alaska affected by the flooding to be federal disaster areas. According to the press release, “President Obama issued a disaster declaration for Alaska Gateway Regional Educational Attendance Area, Copper River Regional Educational Attendance Area, Lower Yukon Regional Educational Attendance Area, Yukon Flats Regional Educational Attendance Area and Yukon Koyukuk Regional Educational Attendance Area.”

The federal disaster zone declaration allows HUD to offer foreclosure relief and other assistance to those living in the affected areas. “Families who may have been forced from their homes need to know that help is available to begin the rebuilding process,” HUD Secretary Shaun Donovan was quoted saying. “Whether it’s foreclosure relief for FHA-insured families or helping these counties to recover, HUD stands ready to help in any way we can.”

What kind of assistance is available for FHA borrowers in these areas? According to the FHA official site, there are a variety of options, including a 90-day moratorium on foreclosures and forbearance on foreclosures of FHA-insured home mortgages. There is are also options availabe under the FHA 203(h) program, which “provides FHA insurance to disaster victims who have lost their homes and are facing the daunting task of rebuilding or buying another home. Borrowers from participating FHA-approved lenders are eligible for 100 percent financing, including closing costs” according to the FHA/HUD official site.

There is also help available through the HUD Section 203(k) loan program, which “enables those who have lost their homes to finance the purchase or refinance of a house along with its repair through a single mortgage. It also allows homeowners who have damaged houses to finance the rehabilitation of their existing single-family home”.

If you need assistance with these programs, contact your lender immediately or call 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 Questions: Seasoning Periods On FHA Streamline Refinance Loans

052A reader asks, “Is there a cutoff date for when the original mortgage (FHA) was started? I have been getting letters that I am prequalified and I finally called one lender today. After giving them all of my information so they could check my credit, they said I was not in the house long enough. From the info on this website and the FHA website I don’t see anything about the length of time.”

The FHA issued guidance on this issue in 2011 with Mortgagee Letter 2011-11, which was a policy update on a variety of requirements for FHA refinance loan transactions in general, but specifically addressing issues such as the “seasoning period” for FHA loans before a borrower can apply for FHA refinancing.

According to FHA Mortgagee Letter 2011-11, when applying for FHA Streamline Refinance Loans:

  • The mortgagor must have made at least six payments on the FHA- insured mortgage that is being refinanced, and
  • At least six full months must have passed since the first payment due date of the refinanced mortgage, and
  • At least 210 days have passed from the closing date of the mortgage being refinanced.

To help clarify the closing date issue, the FHA official site provides an example.”…if the FHA case number on the mortgage being refinanced was closed on or before December 1, and if mortgagor’s first payment on that mortgage was due on January 1, the mortgagee may request assignment of an FHA case number for the refinancing mortgage no earlier than July 1.”

It should be pointed out that this is an FHA minimum policy and a lender may be free to require a longer seasoning period as long as the requirement is applied in accordance with Fair Housing Act laws. The FHA loan rules do not prevent a lender from requiring more time, but the lender cannot allow a shorter seasoning period that specified in the FHA loan rules.

When it comes to cash out refinances, there are similar requirements. According to the mortgagee letter, the borrower must meet the following:

  • Has made all payments on the mortgage being refinanced within the month due for the previous 12 months.
  • For mortgages with more than 6 months and less than 12 months of payment history, the mortgagor must have made all payments when due. Mortgages with less than 6 months of payment history are not eligible for a cash-out refinance.

For more information on FHA loan rules in this area, contact the FHA directly at 1-800 CALL FHA.

FHA Loan Reader Questions: FICO Score Minimum Requirements

019A reader asks, “Hello, my husband score is 623 and my score is 738, is there a FHA loan out there that would allow us to get a loan? I have read that some companies have stated that both parties must have at least a 650 or above.”

Credit score questions are some of the most frequently asked when it comes to a new purchase FHA home loan. While it’s true that the FHA does have a set of minimum FICO scores listed (see below) there is one very important thing ALL borrowers should know about the FHA loan rules for minimum credit scores–they are the FHA’s minimums ONLY.

A lender is free to require higher credit scores as long as such higher standards are consistently applied and in accordance with the Fair Housing Act.

What are the FHA minimum credit score or FICO score standards? This table gives us the details that are effective at the time of this writing:

FHA loan FICO SCORE tableThe reader asks about scores ranging from between 623 and 738. According to the table above, these scores would meet FHA loan standards for maximum financing. However, an individual lender may require both parties to have at least a 640 FICO score as the lowest one–but not all lenders have the same standards.

That is an important aspect of FHA home loans any borrower should pay attention to–you may need to comparison shop between lenders for the best rates and terms. One lender may be willing to work with a borrower or borrowers in the circumstances described in the reader question, others may not be. FHA minimums cannot overrule the lender’s standards in this area.

Borrowers who want advice on how to improve their creditworthiness for an FHA mortgage loan should contact the FHA directly at 1-800 CALL FHA and ask for a referral to an FHA/HUD approved housing counselor.

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

FHA Loan Rules For Down Payments: Gift Funds and Approved Sources of Those Funds

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In a recent post we examined the FHA loan policy about down payments for new purchase home loans. FHA loan rules require all new purchase loans for single family residences to include a minimum cash investment from the borrower of 3.5%.

That 3.5% must come from an approved source including the borrower’s own cash reserves, cashed-in investments, savings bonds or other holdings. The required down payment cannot come from what the FHA labels “non-collateralized loans” such as a payday loan, credit card cash advance, etc.

The down payment money is permitted to come from a third party as a bona fide gift, as long as the source of that gift is acceptable under FHA loan rules. What are considered acceptable sources of gift funds for down payments?

Before we can answer that question, the FHA definition of “gift” must be discussed. A “gift” must meet specific parameters. According to HUD 4155.1 Chapter Five Section B, “In order for funds to be considered a gift, there must be no expected or implied repayment of the funds to the donor by the borrower.”

That is a very important aspect of using gift funds as a down payment source–borrowers should know that rule going into the loan, as well as the second half of the rule which states that any portion of the gift funds not used to make a down payment can be counted by the lender as “cash reserves”.

According to Chapter Five, “An outright gift of the cash investment is acceptable if the donor is

  • the borrower’s relative
  • the borrower’s employer or labor union
  • a close friend with a clearly defined and documented interest in the borrower
  • a charitable organization
  • a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time homebuyers.”

The FHA also has specific rules that deal with prohibited sources of gift funds. Chapter Five says:

“The gift donor may not be a person or entity with an interest in the sale of the property, such as

  • the seller
  • the real estate agent or broker
  • the builder
  • an associated entity.”

Chapter Five adds, “Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.”

It’s the lender’s job, regardless of where the down payment funds come from, to verify that the money has not come from a prohibited source–expect the lender to ask and to check when it’s time to make the down payment.

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

FHA Loan Answers: All About Seller Concessions

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Seller concessions are a commonly asked-about topic related to FHA home loans. FHA loan rules permit a seller (or a “third party”) to contribute up to six percent of the sales price or appraised value of the property toward closing costs, discount points or “other financing concessions” according to the FHA official site.

The six percent limit would be the lesser of the two amounts–the sale price or appraised value. What specifically can the seller or third party contribute? According to FHA loan rules spelled out in Chapter Two of HUD 4155.1, that six percent limit may include:

  • third party payment for permanent and temporary interest rate buydowns, and other payment supplements
  • payments of mortgage interest for fixed rate mortgages
  • mortgage payment protection insurance, and
  • payment of the upfront mortgage insurance premium (UFMIP).

The rules also include a note which states, “Contributions exceeding six percent are considered inducements to purchase.” Additionally, FHA loan rules do not consider broker fees to be part of this six percent limit. According to Chapter Two, “Payment of real estate commissions or fees, typically paid by the seller under local or state law, or local custom, is not considered an interested third party contribution.”

When reading the above, many will wonder what “inducement to purchase” means; an inducement to purchase is a contribution above and beyond the six percent limit. Such contributions require the lender to reduce the FHA loan amount accordingly. An inducement to purchase will reduce the loan amount by the dollar value of the inducement. What could be considered an inducement to purchase?

According to Chapter Two;

• contributions exceeding 6% of the sales price
• contributions exceeding the actual cost of prepaid expenses, discount points, and other financing concessions
• decorating allowances
• repair allowances
• moving costs
• other costs as determined by the appropriate Homeownership Center

For more information contact the FHA directly by calling 1-800 CALL FHA.

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

FHA Loan Reader Questions: Down Payment Assistance

045A reader asks, “I want to move and was qualified for an FHA but needed to know if there is any programs to help assist with the down payment. I know there is an option for sellers to offer 6% sellers assist but is there any else to cover the rest?”

The FHA itself does not offer any type of down payment assistance program. In the past there have been down payment assistance programs offered on a state or local level, but some federal laws have banned certain types of down payment assistance. Others not banned by federal law would be obliged to meet FHA loan rules as to the source of down payment money (see below).

What does this mean?

FHA loan rules require all borrowers to make a “minimum cash investment” or down payment on single family new purchase home loans. There are specific rules and guidelines for FHA loan down payments include the source of that down payment money. According to the FHA loan rules written in HUD 4155.1 Chapter Two, “The seller and/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.”

FHA loan rules describe what this “six percent rule” includes:

  • third party payment for permanent and temporary interest rate buydowns, and other payment supplements
  • payments of mortgage interest for fixed rate mortgages
  • mortgage payment protection insurance, and
  • payment of the upfront mortgage insurance premium (UFMIP).

There are rules that permit third parties to make an “outright gift” of down payment money to a borrower. HUD 4155.1 Chapter Five, Section B says the following about such programs:

“An outright gift of the cash investment is acceptable if the donor is

  • the borrower’s relative
  • the borrower’s employer or labor union
  • a close friend with a clearly defined and documented interest in the borrower
  • a charitable organization
  • a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time homebuyers.”

For more information on the rules for such programs, contact the FHA directly at 1-800 CALL FHA.

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

FHA Loan Rules: Maximum Loan Amounts and Down Payments

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FHA loan rules include guidance for lenders and borrowers about maximum loan amounts and down payment requirements. There’s a myth about today’s FHA home loans that some still repeat–variations on the idea that there may be no down payment required for first-time home buyers. What’s the reality?

FHA loans do require a down payment. It’s much lower than the required down payment for many conventional loans, which is why some might believe that the FHA down payment requirement is reduced or eliminated for first-time borrowers.

The minimum down payment amount for an FHA new purchase loan is 3.5%. No closing costs can be used to meet this requirement–the down payment is a separate amount from what are called “non-recurring” costs, prepaid expenses, discount points, etc.

The down payment amount is 3.5%–but many borrowers want to know what this amount is a percentage of; is it the sale price of the home? The total loan amount?

According to the FHA loan rules as specified in HUD 4155.1, the minimum down payment is 3.5% of “the lesser of the appraised value or the sales price of the property.” That’s found in Chapter Two, Section A under the heading, “Maximum Mortgage Amount For A Purchase”.

How does the FHA calculate that maximum mortgage amount it will insure?

According to Chapter Two, “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.

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.”

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

FHA Loan Reader Questions: FHA Decision Credit Scores

052A reader asks, “Do all three credit scores on my credit report have to be in the 640 range in order to qualify for an FHA home loan?”

FHA loan rules include a minimum credit score. Borrowers who have credit scores below this minimum are not eligible for FHA loan financing. But the minimums found in the FHA loan rules are not necessarily the minimums a financial institution will impose–and the bank is free to require a general higher standard applied equally to all borrowers according to Fair Housing laws.

FHA loan FICO score minimums are as follows, as found on the FHA official site:

FHA CREDIT SCORES FICO

However, many lenders will require a minimum credit score of 640. The reader wants to know if all his or her credit scores need to be in the 640 range in order to apply. According to FHA loan rules as found in HUD 4155.1, Chapter Four Section A:

“If a credit score is available, it must be used to determine the decision credit score for the application and for eligibility for FHA-insured mortgage financing. A “decision credit score” is determined for each applicant according to the following rule: when three scores are available (one from each repository), the median (middle) value is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.”

It’s best to try to bring your credit scores as close to 640 as possible if you fall below that number as it seems to be the prevailing credit minimum for home loans of this type.

Again, the minimums you find in the FHA table above are just that–FHA minimums. There is no law or regulation forcing lenders to accept loan applications with these FICO scores. For more information on the issue of FHA minimums versus lender FICO score minimums, contact the FHA directly at 1-800 CALL FHA or speak to a loan officer.

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

FHA Loan Rules for Non-Purchasing Spouses

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One of the most commonly asked questions about FHA home loans is whether or not a spouse is required to sign, co-sign, or otherwise be committed to an FHA home loan. Can one spouse by a home with an FHA insured mortgage without participation of the other?

That depends greatly on state law. FHA loan rules cannot and do not override state laws, but there are clauses found in the FHA loan rules written in HUD 4155.1 that address this issue. These items are found in Chapter Four, Section A under a section titled Non-Purchasing Spouses. It says in part;

“If required by state law in order to perfect a valid and enforceable first lien, a non-purchasing spouse may be required to sign either the security instrument or documentation indicating that he/she is relinquishing all rights to the property.”

However, according to Chapter Four, “When the security instrument is executed for this reason, the non-purchasing spouse is

• not considered a borrower, and
• not required to sign the loan application.

Note: Non-applicant individuals can have an ownership interest in the property at the time of settlement without executing the mortgage note and security instrument, regardless of whether the transaction is a purchase or a refinance.”

Community property states, where the law requires both spouses to share equally in the debts created as part of the marriage relationship, may require both spouses to commit to the FHA loan. In such cases, FHA loan rules in Chapter Four state:

“Except for obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios, if the

• borrower resides in a community property state, or
• property being insured is located in a community property state.

The non-purchasing spouse’s credit history is not considered a reason to deny a loan application. However, the non-purchasing spouse’s obligations must be considered in the debt-to-income (DTI) ratio unless excluded by state law.”

For assistance with community property laws or issues surrounding non-purchasing spouse requirements, contact the FHA at 1-800 CALL FHA or speak to a loan officer about your specific needs.

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

FHA Loan Approval or Rejection: The Rules

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FHA loan rules cover a lot of ground, including specific procedures that are supposed to happen when an FHA single-family mortgage loan is approved or denied. Did you know the FHA loan rules, listed in HUD 4155.1, give instructions on how approvals and rejections are handled?

Those rules are found in Chapter One, Section A of HUD 4155.1. When an FHA loan application is approved, the rules instruct the lender:

“When a borrower is approved, the Direct Endorsement (DE) underwriter

• records the results of the credit analysis on the HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary

• enters any modification of the mortgage amount or approval conditions under “Underwriter Comments” on the form, and

• approves the borrower and authorizes closing, if the case is a DE case.”

The phrase “direct endorsement” refers to FHA loans the lender can close automatically without referring to the FHA for assistance or approval. Some loans cannot be handled with direct endorsement–a topic we’ll cover in future blog posts. FHA loan rules add,

“The lender is responsible for notifying the borrower of the approval, either in writing or verbally, immediately after receipt of the underwriter’s decision. The term of the firm commitment or underwriter’s approval of the borrower, on page three of form HUD-92900A, HUD/VA Addendum to Uniform Residential Loan Application, is 90 days or the remaining life or whichever is greater of the

• Conditional Commitment
• U.S. Department of Veterans Affairs (VA) Certificate of Reasonable Value (CRV), or
• underwriter’s approval of the property, as appropriate.”

What happens when a loan application is rejected? In such cases FHA loan rules require the following, according to Chapter One:

“When a loan is rejected, the lender must immediately complete

• a rejection notice consistent with the requirements of Regulation B and,
• when required, an Equal Credit Opportunity Act (ECOA) notice, forwarded to the borrower.”

At least one credit aspect must be rejected before the lender can issue an overall rejection. The rejection notice must provide specific reasons for the rejection. Delinquent credit accounts need not be listed. The rejection notice must contain all the reasons for denial/ineligibility and any counter proposals to effectuate loan approval, such as reduced mortgage amount.”

For more information on these procedures or how they work, contact the FHA directly.

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