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

Monthly Archives: July 2013

FHA Loan Answers: Alimony and Child Support as Verifiable Income

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FHA loan rules say that a borrower’s income must be verified in order for it to count when the lender makes debt-to-income ratio calculations necessary for approving (or denying) the mortgage loan. Verifiable income is defined basically as earnings that are stable, reliable, and likely to continue.

A borrower’s full or even part-time employment would count in most cases. But the money a borrower makes, for example, by selling items on eBay, would likely not pass the “stable” or “likely to continue”  requirements.

When it comes to non-job “income” such as child support or alimony payments, FHA loan rules make provisions that allow this income to be counted under the right conditions. A borrower does not have to declare child support income under the Fair Housing Act, but it it is not declared, it cannot be considered.

What does the FHA rulebook say about child support and alimony payments?

“Alimony, child support, or maintenance income may be considered effective, if

• payments are likely to be received consistently for the first three years of the mortgage

• the borrower provides the required documentation, which includes a copy of the

− final divorce decree

− legal separation agreement,

− court order, or

− voluntary payment agreement, and

• the borrower can provide acceptable evidence that payments have been received during the last 12 months, such as

− cancelled checks

− deposit slips

− tax returns, or

− court records.”

The FHA adds that periods of alimony or child support less than 12 months may be counted “provided the lender can adequately document the payer’s ability and willingness to make timely payments. Child support may be ‘grossed-up’ under the same provisions as non-taxable income sources.”

For more information on alimony or child support as verifiable income, discuss your situation with your loan officer.

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

 

FHA Loan Answers: Buying Homes From Family Members With An FHA Mortgage

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Here’s a question about FHA loans that isn’t as common as some, but still comes up often enough to discuss here: can a family member purchase a residence from another family member using an FHA mortgage?

FHA home loans have rules designed to protect the integrity of the loan process–FHA loan rules in HUD 4155.1 say that some FHA loan transactions may have different or lower loan amounts depending on the circumstances of those loans. “Certain types of loan transactions affect the amount of financing available to a borrower and how the maximum mortgage amount is calculated. These transactions include

  • identity-of-interest
  • properties with non-occupying coborrowers
  • three- and four-unit properties
  • properties where a house will be constructed by a borrower on his/her land, and/or as a licensed general contractor
  • payoffs of land contracts, and
  • transactions involving properties under construction, or less than a year old.”

One such case of “identity of interest” transactions affecting the FHA loan amount? Family members selling homes to other family members. From Chapter Two, Section B of HUD 4155.1:

“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.”

So we can see that FHA loan rules DO permit one family member to sell a home to another relative using an FHA insured mortgage loan–and if the borrower meets the criteria above, the 85% limit can be waived. This is an important detail for those who meet the conditions–for more information on how these waivers work, speak to a loan officer.

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

 

FHA Loan Reader Questions: Bankruptcy and FHA Loans

FHA DISCRIMINATION SETTLEMENT

A reader asks, “I filled for a Chapter 13 bankruptcy in March 2009, then converted it to a Chapter 7 which was discharged in March 2012. I would like to buy a house, but was told I had to wait 2 years from the March 2012 date by a mortgage broker I called. I have worked to repair my credit since then and have incurred no more dept other than a small credit limit credit card that I was using to build new, good credit.”

“I have a good job with good pay in education, with solid 2 years of increased income and have signed a contract for another year. What process should I take to try and qualify for an FHA loan under the 2 year wait period after bankruptcy?”

FHA loan rules on Chapter 7 bankruptcy are clear. These rules are found in HUD 4155.1 Chapter Four, Section C, which can be accessed at the FHA official site at FHA.gov. Chapter Four says:

“A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have

• re-established good credit, or
• chosen not to incur new credit obligations.”

Note that the rules state that two years must elapse from the time the bankruptcy is discharged, not when it is FILED. The two-year minimum could have exceptions in certain cases according to Chapter Four. FHA loan rules for exceptions to the two year waiting period include the following:

“An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower

  • can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
  • has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.Note: The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”

Notice that the FHA loan rules do not REQUIRE the lender to offer a shorter wait time; this shortened “seasoning period” is at the lender’s discretion and the borrower should be prepared to show, in writing, the required proof mentioned in the rules above. A borrower who has at least one year of on-time payments and has documented the same may have a much better chance at finding a lender willing to consider an FHA mortgage as long as the lender’s other standards are met.

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

FHA Loan Downpayment Sources: A Reader Question

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A reader asks, “Can I use money from a residential loan or my thrift savings towards a FHA downpayment and closing costs?”

The rules that cover down payment funds for FHA insured mortgages are found in HUD 4155.1, Chapter Five.

That chapter begins by stating, “Under most FHA programs, the borrower is required to make a minimum downpayment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price. Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement. Funds used to cover the required minimum downpayment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented.”

Specifically, the reader wants to know if a loan and/or thrift savings account funds would be considered “acceptable sources” for the down payment and/or closing costs. Chapter Five states that collateralized loans and thrift savings account funds are indeed acceptable sources of down payment money. When it comes to using funds from a thrift savings plan, FHA loan rules state:

“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, and

• withdrawal penalties.

Notes:

  • Redemption evidence is required.
  • Evidence of liquidation is not required, unless more than 60% of the amount in the account is used.
  • The portion of the assets not used to meet closing requirements, after adjusting for taxes and penalties, may be counted as reserves.”

When it comes to using  loan funds as a down payment or closing costs, the FHA loan rules state:

“The borrower may obtain a loan for the total required investment, as long as satisfactory evidence is provided that the loan is fully secured by assets such as investment accounts or real property. These assets may include stocks, bonds, and real estate other than the property being purchased.” The loans cannot be cash advances on credit cards, “payday loans”, etc.

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

FHA Loans and Your Credit

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For some borrowers, the credit approval process is a mystery, especially when it comes to FHA home loans. Do you understand what the lender needs in order to approve a home loan application? Borrowers should understand that FHA loan approval is based on several factors including FICO scores, debt to income ratio, but also the repayment history shown on your credit report.

FHA rules and instructions to the lender on this area are found in HUD 4155.1 Chapter Four. In Section C, we get some insight into this process and how the lender is supposed to evaluate your repayment history as found in a credit report:

“Evaluating credit involves reviewing payment histories in the following order:

• first: previous housing expenses, including utilities,

• second: installment debts,

• third: revolving accounts.

Generally, a borrower is considered to have an acceptable credit history if he/she does not have late housing or installment debt payments, unless there is major derogatory credit on his/her revolving accounts.”

Having an acceptable credit history is just as important as having an acceptable employment history. That’s why many financial planners recommend borrowers start preparing for an FHA home loan at least a year in advance, making sure that there is a minimum of 12 months with acceptable payment behavior–no late payments of any kind. That includes rent or mortgage payments. Consider what Chapter Four says on this subject:

“The borrower’s housing obligation payment history holds significant importance when evaluating credit. The lender must determine the borrower’s housing obligation payment history through the

  • credit report
  • verification of rent received directly from the landlord (for landlords with no identity-of-interest with the borrower)
  • verification of mortgage received directly from the mortgage servicer, or
  • review of canceled checks that cover the most recent 12-month period.

    Note: The lender must verify and document the previous 12 months’ housing history even if the borrower states he/she was living rent-free.”

As you can see, FHA loan rules put a great deal of emphasis on the timely payments aspect of your credit report. It’s an area not to be underestimated when it’s time to submit a credit application of any kind, but especially on a major investment like an FHA mortgage.

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

 

 

FHA Loans After Chapter 7 Bankruptcy: A Reader Question

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A reader asks, “I filed chapter 7 in March 2010 and discharged in June 2010. I had a home included in the bankruptcy but after the two year waiting period the lender told me I had to wait an additional three years from the time of the final sale of the property which was not until March 2013. So are they correct in stating that it is a five year waiting period before I can qualify for an FHA loan?”

FHA loan rules for FHA mortgages applied for in the wake of a Chapter 7 Bankruptcy are found in HUD 4155.1 Chapter Four, Section C, which states the following:

“A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have

• re-established good credit, or
• chosen not to incur new credit obligations.”

Additionally, Chapter Four Section C says, “An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower

  • can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
  • has since exhibited a documented ability to manage his/her financial affairs in a responsible manner.

Note: The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”However, borrowers should know that the lender’s standards may exceed FHA standards for waiting periods–this is acceptable to the FHA and permitted under FHA loan program rules. A lender may require a longer “seasoning period” following a Chapter 7 bankruptcy, so in the case of this reader question, it’s entirely possible that a five year wait might be needed for that particular lender in that particular circumstance.

Borrowers are always free to explore other options with other financial institutions–if you find a lender willing to work with you in your circumstances, you may find the FHA minimums are the only ones to worry about. Again, that’s given that you have a lender willing to observe those minimums only.

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

“No Credit Check” FHA Loans: A Reader Question

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A reader asks, “In regards to not all FHA streamline loans require a new credit check. What is the criteria required for FHA loans that do not require a credit check and/or appraisal?”

FHA new purchase home loans do require a credit check and an appraisal, as do all FHA cash-out refinance and Home Equity Conversion Mortgages or HECM loans.

There is no such thing as a no-credit check FHA loan for a new purchase transaction or for any transaction that includes cash back to the borrower that is not in the form of a bona fide refund. Certain exceptions may be possible for FHA energy efficient add-ons for a Streamline Refinance loan, depending on the circumstances.

The FHA Interest Rate Reduction Refinance Loan or Streamline Refinancing loan is the ONLY FHA loan product that has no FHA-required credit check in most cases, and no FHA-required appraisal. These refinance loans are only for existing FHA mortgages and cannot be used to refinance a conventional or other non-FHA mortgage.

Borrowers should also know that the no-credit check/no appraisal feature is an FHA option for these types of loans and the lender is free to require–and may well require–a new credit check and/or appraisal for these loans.

The fact that the FHA does not require a credit report or appraisal for FHA Streamline Refinancing does not obligate the lender to do the same.

Loan approval criteria for Streamline Refinancing is based on the borrower’s original mortgage loan application, but the new loan is reviewed carefully to insure that lower interest or mortgage payments are the result of the new loan (unless the old loan being refinanced is an Adjustable Rate Mortgage). A borrower who applies for this type of refinancing but finds his or her payments going up 20% or more as a result of the new loan will be required to get a new credit check.

For more information on no-credit check FHA refinance loans, speak to a loan officer about options and policies.

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

 

FHA Loan Minimum Property Requirements: Where Are They Found?

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A reader asks, “We are looking into an FHA loan but our I know our house is not totally in code with the FHA/HUD guidelines. Such as railings needed if steps are 2 feet or higher. Is there somewhere that I can find these guidelines so that we can start?”

FHA minimum property requirements are found in HUD 4910.01, Minimum Standards For Housing. But there is a very important factor to be considered–FHA loan rules are not the only standards a home must live up to.

Anyone who wants to spend time and money fixing up a home to make sure it is in compliance with FHA loan minimum standards must also make sure the home is within state, local or otherwise applicable building codes. FHA appraisals on homes that do not meet code may require repairs or other changes to bring that property up to code as a condition of loan approval.

In other words, a property could meet ALL FHA minimum property standards, but if it does not meet state or local building code it cannot be approved for an FHA mortgage until it is brought into compliance or there is an applicable waiver that may be applied for (such waivers may or may not exist depending on the code violation and the nature of the laws involved).

It’s not safe to assume that a home which meets FHA minimum standards is “safe” from state or local code violations–before investing money to alter a home to live up to FHA rules, it’s important to know what other state or local building codes may be applicable in a given situation to avoid wasting time and money.

FHA minimum property standards are just that–minimums. They enhance, but do not override, state and local building code. Borrowers and sellers should be aware of this fact when coming to the bargaining table, pre-appraisal.

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

FHA Loan Reader Questions: A Few Basics:

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A reader asks, “Why is there no website that shows you what income qualification rules might apply for an FHA loan ? Is there a maximum income allowed for a first-time, unmarried, home buyer?”

There’s a simple reason where there is no website that details income qualification rules for FHA home loans when it comes to maximum loan amounts, first-time home buyer preferences and whether marital status itself affects an FHA home loan application: these are generally not factors.

That’s NOT to say that your marital status or income might not affect your FHA loan. Far from it. Married borrowers applying for a loan together may have a better chance based on income factors and other aspects than a single borrower. (Two applicants applying together may also have its share of liabilities if one applicant has weaker credit than the other, but that’s a topic for another blog post.)

This reader question brings us back to a couple of common misconceptions about the FHA home loan program. There is no minimum or maximum income dollar amount. Instead, the FHA requires the income you bring to the bargaining table to be verified as stable and reliable, and it requires the borrower to have a certain debt-t0-income ratio in order to qualify for the loan.

If the lender determines your debt-to-income ratio is too high, it would be determined that the borrower cannot afford the FHA home loan. High debt ratios may be offset by what are called “compensating factors” such as substantial cash reserves or larger down payments, but this would have to be discussed with the lender.

When it comes to “first time home buyer” preferences, there are none in the FHA loan rules. A lender might have a program unique to that financial institution, or you might find a state or local first time homebuyer assistance program, but the FHA loan rules themselves are not designed to offer preferences to first-time house hunters.

And finally, there is no such thing as a “maximum income” for FHA home loans. That would imply that FHA mortgages are somehow targeted at lower-income borrowers, but the fact is that FHA loans are available to all financially qualified applicants. There’s no cap on how much a borrower can earn before he or she is “disqualified from applying” for an FHA mortgage loan.

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

 

FHA Loan Reader Questions: Social Security Income

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A reader asks, “My husband and I have never owned a home. He is a Veteran. He is receiving Social Security. I will also be receiving Social Security.
Would we be able to receive a FHA Loan?”

FHA loan rules do address Social Security income as a potential source of verifiable income that can be used to qualify for an FHA mortgage loan. For example, in HUD 4155.1 in a section titled “Income Analysis: Individual Tax Returns (IRS Form 1040)” we find the following in the section for IRA Distributions, Pensions, Annuities, and Social Security Benefits:

“The non-taxable portion of these items may be added back to the adjusted gross income, if the income is expected to continue for the first three years of the mortgage.”

Also, in a section discussing non-taxable and projected income, FHA loan rules as written in HUD 4155.1 say:

“Certain types of regular income may not be subject to Federal tax, such as

• some portion of Social Security,
• some Federal government employee retirement income
• Railroad Retirement benefits
• some state government retirement income
• certain types of disability and public assistance payments
• child support
• military allowances, and
• other income that is documented as being exempt from Federal income taxes.

The amount of continuing tax savings attributed to regular income not subject to Federal taxes may be added to the borrower’s gross income. The percentage of non-taxable income that may be added cannot exceed the appropriate tax rate for the income amount. Additional allowances for dependents are not acceptable.

The lender

  • must document and support the amount of income grossed- up for any non- taxable income source, and
  • should use the same tax rate the borrower used to calculate his/her income tax from the previous year.”

So it’s clear that FHA loans do consider Social Security income as verifiable. However, the reader should know that debt-to-income ratios, FICO scores, repayment history and other financial factors also play an important role in FHA loan approval.

The last word on Social Security income comes from HUD 4155.1 Chapter Four Section D which says:

“Social Security income must be verified by the Social Security Administration (SSA) or from Federal tax returns. If any benefits expire within the first full three years of the loan, the income may only be considered as a compensating factor.”

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