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

Monthly Archives: August 2013

FHA Loan Short Sale Eligibility Rules

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We get many questions about borrowers who want to apply for an FHA loan in the wake of a short sale. What do FHA loan rules, as described in HUD 4155.1, say about applying for an FHA mortgage after a short sale?

Much depends on whether your previous loan was current or delinquent when the short sale occurred. Borrowers who were current on all mortgage payments at the time of the short sale may find a lender willing to work with them based on HUD 4155.1 Chapter Four Section C, which states:

“A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all

• mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and

• installment debt payments for the same time period were also made within the month due.”

Note that the FHA loan requirement as stated in Chapter Four, Section C also addresses the borrower’s OTHER debt, not just the mortgage payment. That is a very important factor to consider.

Another important factor is the recent Back To Work program implemented by the FHA which may also provide some added leniency if borrowers can document financial difficulties related to the recession. So while Chapter Four Section C does seem to have the “final word” on FHA loan eligibility in these cases, don’t assume you cannot get an FHA mortgage–the new Back To Work standards may be of some help for qualified borrowers.

Borrowers who were in loan default at the time of their short sale may also benefit from the Back To Work program if their personal circumstances qualify. However, in general FHA rules in Chapter Four, Section C state:

A borrower in default on his/her mortgage at the time of the short sale (or pre- foreclosure sale) is not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale/Note: A borrower who sold his/her property under FHA’s pre-foreclosure sale program is not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.

Exception: A lender may make an exception to this rule for a borrower in default on his/her mortgage at the time of the short sale if the

• default was due to circumstances beyond the borrower’s control, such as death of primary wage earner or long-term uninsured illness, and

• a review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.”

For more information on these rules or the FHA Back To Work program, contact a loan officer or the FHA directly at 1-800 CALL FHA.

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

HUD Brings Housing Discrimination Charges Against Fifth Third Bank, Fifth Third Mortgage Company and Cranbrook Mortgage Corporation

FHA DISCRIMINATION SETTLEMENT

The FHA/HUD official site has issued a press release announcing charges against Fifth Third Bank, Fifth Third Mortgage Company and Cranbrook Mortgage Corporation.

According to HUDNo.13-128, “The U.S. Department of Housing and Urban Development (HUD) announced today that it is charging Fifth Third Bank, Fifth Third Mortgage Company and Cranbrook Mortgage Corporation with discriminating against a couple with disabilities who were attempting to refinance their home mortgage.  HUD’s charge alleges that the Cincinnati, Ohio-based mortgage lender and the Clinton Township, Michigan-based mortgage broker required unnecessary medical documentation in order to qualify the couple for a Federal Housing Administration (FHA) loan.”

Fair Housing Act laws forbid discrimination in the home loan process or loan modification process, “based on disability, race, color, religion, national origin, sex, or family status, including imposing different application or qualification criteria” according to the FHA/HUD press release which adds, “Persons with disabilities should not have to meet higher mortgage qualification standards because they rely on disability insurance payments as a source of income,” said Bryan Greene, HUD’s Acting Assistant Secretary for Fair Housing and Equal Opportunity.

Green also says, “Banks and mortgage companies may verify income and have eligibility standards, but they may not single out homebuyers with disabilities or deny financing when they are otherwise qualified.”

According to the press release, the discrimination charges come after a married couple that receives Social Security Disability Insurance (SSDI) benefits complained, “claiming that their application for an FHA-insured home refinance loan was unfairly denied. According to HUD’s charge, the lender and mortgage broker made statements and employed written policies requiring the couple to provide physician statements to establish continuance of SSDI income. The charge alleges that at the time of the couple’s loan, Fifth Third’s underwriting policy explicitly specified a physician’s statement as appropriate evidence for establishing continuance of disability income.”

Fair housing rules create a situation where the lender is permitted to “verify an applicant’s income amount and source” according to HUD, but the lender is forbidden to “place higher qualification standards on applicants who receive disability income.” In this case, the couple refused to furnish physician statements and were turned down for their home loan. The next steps in the case are described in the press release:

“HUD’s charge will be heard by a United States Administrative Law Judge unless any party to the charge elects to have the case heard in federal district court. If an administrative law judge finds after a hearing that discrimination has occurred, he may award damages to the complainants. The judge may also order injunctive relief and other equitable relief to deter further discrimination, as well as payment of attorney fees. In addition, the judge may impose fines in order to vindicate the public interest.  If the matter is decided in federal court, the judge may also award punitive damages.”

Have you experienced housing discrimination? You can file a complaint by contacting HUD’s Office of Fair Housing and Equal Opportunity at (800) 669-9777 (voice) or (800) 927-9275 (TTY).

FHA Loan Reader Questions: Lender Requirements

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A reader asks, “My husband and I both have credit scores of 628 and 635, and no late payments on any current accounts for over 1 year. Our mortgage broker told us in order to qualify for the 3.5% down we have to have a credit score of over 660 to qualify for FHA. Is this true? and if it is, do we qualify for any other FHA loan? It has been over 4 years since there has been anything derrogative on our credit reports, and the items that are on there from 4 yrs ago or more are due to an economic hardship of losing our business.”

One thing home loan applicants should know about the FHA loan program is that FHA loan minimum standards for FICO scores and other credit requirements are just that–minimums. A participating FHA lender may have more stringent requirements depending on the nature of the loan, the borrower’s financial qualifications, and other factors. A lender is free to require higher FICO scores or other factors as long as those requirements are applied fairly to all applicants in accordance with Fair Housing Act laws.

In cases such as these, a borrower may find it best to look for a lender who may be willing to offer more competitive rates or terms. In cases where a borrower’s credit is marginal according to a particular lender’s standards, FHA loan rules permit the loan to be approved using something known as compensating factors, which can include a larger down payment.

According to FHA loan rules in HUD 4155.1, the lender’s compensating factors benchmarks have a heading for “Down Payment” which includes the following guidance to the lender: “The borrower makes a large down payment of 10% or higher toward the purchase of the property” allowing the lender to approve an FHA home loan “with ratios that exceed FHA benchmark guidelines.” Those “ratios” might include debt-to-income or other credit-related issues.

It’s important to point out that there may be reasons that the lender, in the case of this particular reader question, requires the higher down payment–reasons not mentioned in the reader question. Those reasons could include a variety of things including lender policy, or the individual circumstances of the loan.

FICO scores are not the only issue examined on a credit application. To infer that simply by raising FICO scores for the loan application in question, the loan might be approved with the minimum down payment in this case would be misleading–there are many factors that affect your credit worthiness in the eyes of a lender, FICO scores are just one of those factors.

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

FHA Loan Reader Questions: The Nature of FHA Loans

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A reader asks, “I am currently buying a home on a land contract and was hoping maybe I could get it run through FHA the pay off is I think around 19,000.00 it is a trailer with a garage on it. My credit isn’t good enough to run it through the bank. I’m hoping you can help me. I have been paying on it for about 4 & 1/2 years. Please if you can help me I would appreciate it. I live off SSI because I became disabled in 1995, and have been drawing my SSI since 1996. Thank you for your time and consideration.”

This reader question is a good reminder that there are still plenty of myths floating around out there about FHA mortgages and the nature of the FHA loan program in general. Let’s address each one of the issues raised by this reader question, starting with the notion that a borrower can get a loan directly from the FHA.

I am currently buying a home on a land contract and was hoping maybe I could get it run through FHA..” The FHA does not lend money to FHA loan applicants. Instead, the FHA loan program requires a participating lender, who receives a loan guaranty from the government for approved FHA loan applications. Borrowers do not apply directly to the FHA, instead they apply with a participating lender.

My credit isn’t good enough to run it through the bank. I’m hoping you can help me.” We don’t know what this reader’s credit score is, so the following comments may or may not apply to this specific reader. That said, in general, FHA loan applicants with FICO scores below 500 are not eligible for FHA loans, and many lenders won’t work with applicants who have FICO scores below 620. Some lenders require FICO score minimums of 640, your experience may vary.

FHA loan applicants with poor credit should contact the FHA for a referral to an FHA/HUD approved housing counselor who can advise borrowers who to improve credit performance. Low FICO scores can hurt a borrower’s chances at FHA loan approval, and much depends on the lender standards at the financial institution where you apply. Contact the FHA for more information on housing counseling or credit score issues by calling 1-800 CALL FHA.

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

FHA Loan Reader Questions: Spouse Credit Issues

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A reader asks, “My husband and I are looking to apply for an FHA loan. We just recently got married. He is more than qualified to apply on his own, with a good credit score and great income. I, unfortunately, have terrible credit and unresolved debts (prior to marriage). Is it possible for him to apply on his own without factoring in my debt? Our loan agent told us that I had have my credit checked and my debt would also be factored into the debt to income ratio, but not my income. Is this true?”

The answer to this question is fairly simple–it depends on the laws of your state. The first thing a borrower in this situation should do is check to see if they are living in a community property state where the law requires both borrower and spouse to be equally obligated on major financial transactions such as a home loan.

In any state where the law dictates this or similar considerations for a married couple, what this borrower was told may be true. Here is what the FHA loan rules say as defined in HUD 4155.1 Chapter Four, Section A:

“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.”

Furthermore, FHA loan rules 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. A credit report that complies with the requirements of HUD 4155.1 4.C.2 must be provided for the non-purchasing spouse in order to determine the debts that must be counted in the DTI ratio.

Note: This requirement is applicable if the subject property or the borrower’s principal residence is located in a community property state.”

As with many other issues, FHA loan rules DO NOT override state or federal law.

For more information on this issue, you should check with a legal expert or real estate expert who can advise on state law as applicable in your area. Some borrowers may not be affected by community property laws for the simple reason that not all states have such laws. But those who do live in community property states will need to carefully examine both the spouse and non-purchasing spouse’s credit to avoid surprises in the FHA loan application process.

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

Back To Work: The FHA’s New Program Requires Housing Counseling

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The FHA has a new program called Back To Work, designed to help borrowers who have experienced what the FHA terms an Economic Event that resulted in negative credit information but may not necessarily be an accurate indicator of a borrower’s creditworthiness or ability to repay the FHA mortgage.

Back To Work, according to FHA Mortgagee Letter 2013-26, lets lenders evaluate these Economic Events to see if the borrower may still be a good credit risk for an FHA loan. “FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage. To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • the borrower has demonstrated full recovery from the event; and,
  • the borrower has completed housing counseling.”

The last line in that quote is very important. The FHA Back To Work requirements include housing counseling–the borrower must complete such counseling in order to qualify for Back To Work. “Housing counseling is an important resource for both first-time home buyers and repeat home owners. Housing counseling enables borrowers to better understand their loan options and obligations, and assists borrowers in the creation and assessment of their household budget, accessing reliable information and resources, avoiding scams, and being better prepared for future financial shocks, among other benefits to the borrower” according to the mortgagee letter.

How does a borrower fulfill this counseling requirement? Mortgagee Letter 2013-26 says, “Housing Counseling, for purposes of this ML, means counseling from a HUD-approved housing counseling agency related to homeownership and residential mortgage loans that is provided in accordance with 24 C.F.R. part 214 “Housing Counseling Program” and satisfies the requirements identified in Satisfactory Housing Counseling.”

Additionally, “To qualify for purposes of establishing Satisfactory Credit following an Economic Event, participants in this FHA initiative must:

  • receive homeownership counseling or a combination of homeownership education and counseling provided that each participant receives, at a minimum, one hour of one-on-one counseling from HUD-approved housing counseling agencies, as defined at 24 C.F.R. §214.100. The counseling must address the cause of the economic event and the actions taken to overcome the economic event and reduce the likelihood of reoccurrence. The housing education may be provided by HUD-approved housing counseling agencies, state housing finance agencies, approved intermediaries or their sub-grantees, or through an on-line course, and
  • be completed a minimum of thirty (30) days but no more than six (6) months prior to submitting a loan application to a lender”

For more information on this requirement, contact a loan officer or the FHA directly at 1-800 CALL FHA.

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

Back to Work: How the new FHA Loan Guidelines Apply to Foreclosures and Short Sales

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In recent blog posts we’ve explored a new FHA program called Back To Work, which allows lenders to be more lenient with credit requirements for borrowers who have experienced what the FHA terms an Economic Event. Borrowers who have a qualifying Economic Event under Back To Work may be able to get an FHA mortgage in spite of negative credit data that lender determines does not realistically affect the borrower’s ability to afford mortgage payments on the FHA loan.

The FHA’s Back to Work program rules are described in FHA Mortgagee Letter 2013-26, which states, “FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • the borrower has demonstrated full recovery from the event; and,
  • the borrower has completed housing counseling.”

The Economic Events in question may include qualifying bankruptcy filings, collections, judgments and other situations up to and including foreclosure and short sales. Let’s examine what the FHA rules for Back To Work say about borrowers who have a foreclosure or short sale on their recent credit history.

“Economic Event-Related Mortgage Foreclosure

The lender must verify and document that:

  •   a minimum of twelve (12) months have elapsed since the date of foreclosure or deed-in-lieu; and
  •   the foreclosure or deed-in-lieu was the result of the Economic Event.”

When it comes to Short Sales, the rules are similar:

“Economic Event-Related Short Sale

The lender must verify and document that:

  • a minimum of (12) months have elapsed since the date of sale; and
  • the short sale was the result of the Economic Event.”

What does it mean for the lender to evaluate these circumstances to see if they are considered part of the Economic Event? According to FHA Mortgagee Letter 2013-26, “The lender must first analyze and document (1) all delinquent accounts and (2) all indications of derogatory credit, including collections and judgments, bankruptcies, foreclosures, deeds-in-lieu, short sales, and other credit problems, to determine whether associated late payment, credit deficiencies or other credit problems were the result of an Economic Event, or an inability to manage debt or a general disregard for managing financial obligations.”

Additionally, FHA loan rules state, “To establish that borrower’s derogatory credit was the result of an Economic Event, the lender must review the credit report and determine that:

  • the borrower exhibited Satisfactory Credit prior to the Economic Event Onset;
  • the borrower’s derogatory credit occurred after the Economic Event Onset, and
  • the borrower has re-established Satisfactory Credit for a minimum of twelve (12) months.”

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

Back to Work: How the new FHA Loan Guidelines Apply to Bankruptcy

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In our last several blog posts we’ve been examining an important new development from the FHA, a program known as Back To Work that allows lenders to work with borrowers who may have negative credit information due to the recession that doesn’t necessarily reflect the ability to pay for an FHA mortgage.

The FHA describes an applicable financial setback as an “economic event” and allows borrowers to be more lenient with credit requirements for qualified borrowers. Back To Work rules were issued in FHA Mortgagee Letter 2013-26, which says “FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • the borrower has demonstrated full recovery from the event; and,
  • the borrower has completed housing counseling.”

Many potential FHA borrowers want to know how the Back To Work rules might affect those with Chapter 7 or Chapter 13 bankruptcies. The FHA has made specific mention of such circumstances and has this to say on the subject:

“The lender must first analyze and document (1) all delinquent accounts and (2) all indications of derogatory credit, including collections and judgments, bankruptcies, foreclosures, deeds-in-lieu, short sales, and other credit problems, to determine whether associated late payment, credit deficiencies or other credit problems were the result of an Economic Event, or an inability to manage debt or a general disregard for managing financial obligations.”

Additionally, “To establish that borrower’s derogatory credit was the result of an Economic Event, the lender must review the credit report and determine that:

  • the borrower exhibited Satisfactory Credit prior to the Economic Event Onset;
  • the borrower’s derogatory credit occurred after the Economic Event Onset, and
  • the borrower has re-established Satisfactory Credit for a minimum of twelve (12) months.”

What other rules apply for those who have filed bankruptcy? According to FHA Mortgagee Letter 2013-26:

D. Economic Event-Related Chapter 7 Bankruptcy

The lender must verify and document that:

  • a minimum of twelve (12) months have elapsed since the date of discharge of the bankruptcy; and
  • the bankruptcy was the result of the Economic Event.

E. Economic Event-Related Chapter 13 Bankruptcy

The lender must verify and document that:

  • the Chapter 13 Bankruptcy was discharged prior to loan application and all required bankruptcy payments were made on-time, or a minimum of twelve (12) months of the pay-out period under the bankruptcy has elapsed and all required bankruptcy payments were made on time; and
  • the bankruptcy was the result of the Economic Event. If the Chapter 13 Bankruptcy was not discharged prior to loan application, the lender must also verify and document that the borrower has received written permission from the Bankruptcy Court to enter into the subject mortgage transaction.”

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

New FHA Loan Rules For Borrowers With Financial Difficulties: Evaluating an “Economic Event”

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We’ve been taking a look at the new FHA loan guidelines for lenders who are working with borrowers who have had what the FHA terms an “economic event” that affects credit but may not necessarily be a good indication of a borrower’s ability to repay an FHA mortgage loan. FHA Mortgagee Letter 2013-26 describes an FHA program known as Back To Work.

The mortgagee letter was issued in order to, in the words of the FHA, “provide minimum underwriting standards and criteria for evaluating borrowers who have experienced an Economic Event, as defined in this ML, that resulted in a severe reduction in income due to a job loss or other circumstances resulting in reduced Household Income; describe the use of housing counseling to qualify under the provisions of this ML; amend HUD Handbook 4155.1, Chapter 4, Section C to add an Economic Event to the list of examples of extenuating circumstances and instruct lenders to use the guidance for Back to Work – Extenuating Circumstances established in this ML as Chapter 6 Section G, to underwrite an applicant with an Economic Event”.

In order for a lender to consider an FHA loan applicant for the Back To Work program, the borrower’s economic event must be reviewed. Then the borrower’s recovery from that event must be reviewed. Here’s what the FHA says about the process:

“An Economic Event is any occurrence beyond the borrower’s control that results in Loss of Employment, Loss of Income, or a combination of both, which causes a reduction in the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months. The Onset of an Economic Event is the month of Loss of Employment/Income. Recovery from an Economic Event is the re-establishment of Satisfactory Credit (as defined on page 5 of this ML) for a minimum of twelve (12) months.”

During this review the lender is required to evaluate any negative credit information to determine whether that information was a result of the economic event or a simple inability to manage finances properly.

“The lender must first analyze and document (1) all delinquent accounts and (2) all indications of derogatory credit, including collections and judgments, bankruptcies, foreclosures, deeds-in-lieu, short sales, and other credit problems, to determine whether associated late payment, credit deficiencies or other credit problems were the result of an Economic Event, or an inability to manage debt or a general disregard for managing financial obligations.

To establish that borrower’s derogatory credit was the result of an Economic Event, the lender must review the credit report and determine that:

  • the borrower exhibited Satisfactory Credit prior to the Economic Event Onset;
  • the borrower’s derogatory credit occurred after the Economic Event Onset, and
  • the borrower has re-established Satisfactory Credit for a minimum of twelve (12) months.”

So you can see the new rules do allow a borrower to apply for a new FHA mortgage if it’s determined that the borrower does meet the economic event criteria and meets the other requirements of the FHA loan program. There are special provisions under the FHA Back To Work program that apply to foreclosure and bankruptcy-we’ll examine those in our next blog post.

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

New FHA Rules For Borrowers Who Have Faced an “Economic Event”

101In recent blog posts, we’ve examined some of the new guidelines for FHA borrowers who may have negative credit information on their records as a result of financial difficulties the FHA describes as an “economic event”. The FHA/HUD issued Mortgagee Letter 2013-26 outlining new guidelines for lenders who are working with borrowers affected by such circumstances.

According to the mortgagee letter, “Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • the borrower has demonstrated full recovery from the event; and,
  • the borrower has completed housing counseling.”

Additionally, the FHA advises the lender that the new rules are “applicable to purchase money mortgages in all FHA programs with the exception of Home Equity Conversion Mortgages.”

The FHA is now instructing lenders to “use the provisions of this ML when considering a borrower who experienced an Economic Event, as defined in this ML, which resulted in a foreclosure, short sale, bankruptcy or other negative impact on their credit” adding that while added consideration is offered to borrowers in these circumstances, “loans originated using these criteria must meet all other applicable FHA eligibility and policy criteria. Lenders remain responsible for determining whether the borrower meets all other HUD requirements before approving the loan.”

What criteria does the lender use to evaluate the borrower in the wake of an economic event? This is one of the most important aspects of the new rules, as the borrower’s actions following the financial setback directly affect their ability to get an FHA loan.

According to Mortgagee Letter 2013-26, “The lender may deem a borrower to have Satisfactory Credit if:

  • the borrower’s credit history is clear of late housing or installment debt payments, and major derogatory credit issues on revolving accounts;
  • any open mortgage is current and shows twelve (12) months satisfactory payment history. Mortgages may have been brought current through loan modification, which may be “temporary” or “permanent” so long as all payments have been documented as being received in accordance with the modification agreement(s)”

Furthermore, “The lender must verify and document a reduction in the borrower’s Household Income of twenty (20) percent or more for a period of at least six (6) months that resulted from the Loss of Employment, Loss of Income, or a combination of both.”

Finally, the lender is also required to analyze the circumstances of the “economic event”. The new FHA loan rules state, “The lender must first analyze and document (1) all delinquent accounts and (2) all indications of derogatory credit, including collections and judgments, bankruptcies, foreclosures, deeds-in-lieu, short sales, and other credit problems, to determine whether associated late payment, credit deficiencies or other credit problems were the result of an Economic Event, or an inability to manage debt or a general disregard for managing financial obligations.”

We’ll examine that process in another blog post.

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