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

Monthly Archives: September 2013

FHA Loan Modification Trial Payment Plans-What If The Borrower Fails?

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Recently the FHA changed some of its policies related to loss mitigation and foreclosure avoidance on FHA guaranteed home loans. In our last look at these changes, we examine what the latest guidance from the FHA and HUD has to say about borrowers in financial difficulty who cannot or do not successfully navigate a Trial Payment Plan.

Borrowers and lenders are advised in Mortgagee Letter 13-32, “If a mortgagor fails to successfully complete a Trial Payment Plan under a Loan Modification or FHA-HAMP, pursuant to 24 C.F.R. § 203.355, mortgagees must still re-evaluate the mortgagor’s eligibility for other appropriate Loss Mitigation Options. If the mortgagor’s circumstances have not changed, the mortgagee must evaluate the mortgagor for FHA Loss Mitigation Home Disposition Options prior to initiating foreclosure.”

While the Trial Payment Plan is not the final option according to that paragraph, borrowers should take the Trial Payment Plan very seriously as it in and of itself may help the borrower avoid further financial complications. But in some cases, there may be complications that seem to have no resolution in sight for the borrower.

In these circumstances, the latest FHA guidance states, “If the cause of default is incurable (i.e., the mortgagor has no realistic opportunity of replacing his/her lost income or reducing his/her expenses enough to meet the mortgage obligation), Home Disposition Options are readily available for use upon default.”

Furthermore, FHA Mortgagee Letter 13-32 adds, “A mortgagor who did not succeed in completing a Trial Payment Plan is eligible to reapply for assistance and begin a second Trial Payment Plan only if his/her financial circumstances have changed since the last application for assistance.”

The new guidance requires borrowers to supply their loan officers with, “verifiable documentation supporting the change in their financial circumstances. Changes in employment must be verified by paystubs or by a Verification of Employment as described in HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance on One- to-Four Unit Mortgage Loans.”

And finally, for borrowers in bankruptcy proceedings, it’s important to point out that ML 13-32 states, “Mortgagors with an active Chapter 7 or Chapter 13 bankruptcy case are eligible for FHA Loss Mitigation Options to the extent that such Loss Mitigation does not violate federal bankruptcy law or orders of the Bankruptcy Court or Bankruptcy Trustee. In addition, mortgagors who have received a Chapter 7 bankruptcy discharge and failed to reaffirm the FHA-insured mortgage debt under applicable law are eligible to be considered for Loss Mitigation Options.”

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

FHA Loans, Credit Scores, and Your Repayment History

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One common type of question we’ve been asked as of late has to do with a borrower’s chances at getting an FHA loan approved in spite of bad credit, past financial difficulty, or a combination of both. There are many important things to understand about credit, but one of the most important for any borrower interested in an FHA should know about? The FHA’s attitude towards on-time bill payment, past financial difficulty, and related issues.

The FHA loan rulebook, HUD 4155.1 says in Chapter Four, Section C, “Past credit performance is the most useful guide to

• determining a borrower’s attitude toward credit obligations, and

• predicting a borrower’s future actions.”

That’s a basic general guideline, as is the next line from Chapter Four. “Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”

The FHA rules for lenders elaborates on this point, stating that the lender needs to examiner the applicant’s overall pattern established by his or her credit record and not isolated incidents. “When analyzing a borrower’s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred.”

That last line is the key–if a borrower comes to the FHA loan application with 12 months of reliable payments, there is a far better chance of getting an FHA loan approved. What does the FHA consider to be a reliable payment record? There are clues in Chapter Four:

“The lender must document the analysis of delinquent accounts, including whether late payments were based on

• a disregard for financial obligations
• an inability to manage debt, or
• factors beyond the borrower’s control, such as delayed mail delivery, or disputes with creditors.”

Furthermore, the FHA does not sound overly concerned with “Minor derogatory information occurring two or more years in the past”, saying these issues do not need explanations. However, “Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file.”

Borrowers should take all of this information into account when in the planning stages for an FHA home loan application. If you haven’t got at least one year of on-time payments on your record, you may wish to consider waiting to apply until you do–your chances will be greatly improved.

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

FHA Loan Interest Rates

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Mortgage rates have, at the time of this writing, been moving lower for a variety of reasons. Given the up-and-down environment mortgage loan interest rates have experienced in the last six months, it’s easy to understand why some borrowers might be confused about how interest rates–and more importantly, interest rate locks on FHA mortgages–work.

According to the FHA loan rulebook, HUD 4155.1, there is no provision for the government to set mortgage rates on an FHA mortgage. “Under all currently active FHA single family mortgage insurance programs, the borrower and the lender negotiate the interest rate and any discount points.”

Borrowers might want to commit to a specific interest rate on a day when the rates seem particularly advantageous. But the loan won’t close until a later date in many cases, so how do the borrower and lender settle on the interest rate? By using something called a lock-in, which has the lender and borrower committing to a specific interest rate in writing.

FHA loan rules state, “The minimum time for lock-ins or rate locks is 15 days. The loan may close in less than 15 days at the convenience of the borrower, and the lender may still earn the lock-in fees. Lenders must honor all such commitments.”

When negotiating an interest rate lock-in, “Lenders are permitted to charge a commitment fee to guarantee, in writing, the interest rate and any discount points for a specific period of time, or to limit the extent to which the interest rate or discount points may change.”

Borrowers should be careful to make sure they can complete the paperwork and other requirements before the lock-in period expires–there is no guarantee mortgage loan rates will be higher or lower after that period expires. Any changes to the written agreement for the lock-in rate may require additional paperwork as well as certification from both the lender and the borrower that the changes are agreed-upon.

For more information on interest rate lock-ins, speak to your loan officer about that financial institution’s specific policies.

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

FHA Loan Rules on Special Forbearance

093The FHA recently updated its rules associated with foreclosure avoidance and loss mitigation on FHA mortgages; borrowers who get into financial difficulty and may have trouble paying their FHA insured home loans should contact their loan officer immediately to discuss options for avoiding foreclosure. The newly updated FHA loan rules in this area include something known as Special Forbearance.

Special Forbearance is described by the FHA as, “a written agreement between a mortgagee and mortgagor to reduce and/or suspend mortgage payments.” According to the most recent guidance from the FHA, “A Special Forbearance is available only to mortgagors who are unemployed. Special Forbearance agreements must provide for a minimum of 12 months for re-employment and require subsequent evaluation for a more permanent Loss Mitigation option to cure the default.”

This information comes by way of FHA Mortgagee Letter 13-32, which also adds, “The delinquency amount can never exceed 12 months PITI during the Special Forbearance. (Note: The terms of a Special Forbearance agreement will not provide for reinstatement because mortgagees must re-evaluate mortgagors for more permanent Loss Mitigation options to cure a default).” This information is written to assist lenders in dealing with such cases, but borrowers should know about the rules also, to better understand their options.

ML 13-32 continues, “Special Forbearance agreements, used as a result of the mortgagor(s) being unemployed, are also referred to as Type I Special Forbearances and are the only forbearance agreements for which mortgagees may collect incentive payments. Please note that Type II Special Forbearances have been eliminated.”

The FHA loan rules also say in situations where the mortgagor is still employed or, in the words of the FHA, “where 85 percent of the mortgagor’s surplus income is sufficient to cure the arrearage within six months” the lender must offer the borrower a “Formal or Informal Forbearance Agreement.”

Those considering this as a possible option in times of financial difficulty should know, “Special Forbearances are not available until three monthly mortgage payments are due and unpaid. Thus, even if Step 2 in Attachment A results in a mortgagor qualifying for a Special Forbearance, the mortgagee must wait to effectuate the Special Forbearance until three monthly mortgage payments are due and unpaid.”

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

FHA Loan Modification Rule Changes

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Borrowers who get into financial difficulty and have trouble making payments on their FHA home loans have some options with the FHA that can help the borrower avoid foreclosure. The FHA has updated its rules to home loan modifications and other foreclosure avoidance procedures–those updates are found in FHA Mortgagee Letter 13-32. We recently discussed some of the initial changes, which the FHA has given lenders until December 2013 to make.

That recent update includes some instructions to the lender regarding loan forbearance.

“Before a mortgagee considers a delinquent mortgagor for one of FHA’s Loss Mitigation Home Retention Options, the mortgagee must first evaluate the mortgagor for both Informal and Formal Forbearance Plans…Informal and Formal Forbearance Plans are the only options available for delinquent mortgagors without verifiable losses of income or increases in living expenses.”

FHA ML 13-32 continues, stating:

  • Forbearance Plans are arrangements between a mortgagee and mortgagor that may allow for a period of reduced or suspended payments and may provide specific terms for repayment, depending on the circumstances.
  • Informal Forbearance Plans are oral agreements relating to a period of three months or less. (See Mortgagee Letter 2000-05).
  • Informal and Formal Forbearances are ineligible for loss mitigation incentive payments.
  • Formal Forbearance plans are written agreements with a period of greater than three months but, not more than six months. If the mortgagee determines that 85 percent of the mortgagor’s surplus income is sufficient to bring the mortgage current within six months, the only available loss mitigation option is a Formal Forbearance plan that provides for repayment within the six months…

After evaluating a delinquent FHA borrower “for Informal and Formal Forbearance Plans” the mortgagee letter says, the lender must review FHA’s Loss Mitigation Home Retention Options in a specific order of precedence. The borrower may be given options in the following descending order starting with Special Forbearances, the moving to Loan Modifications, or FHA-HAMP.

The mortgagee letter adds, “Before four full monthly installments due on the mortgage are unpaid, the mortgagee must evaluate a mortgagor’s financial situation on a monthly basis to determine the appropriate Loss Mitigation option when the mortgage is in default or imminent default.”

For more information on these options, discuss your needs with a lender or contact the FHA directly at 1-800 CALL FHA.

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

FHA Updates Foreclosure Prevention Program

021On Friday September 20, 2013, the FHA issued a Mortgagee Letter that updates its Loss Mitigation program options. The new Mortgagee letter, ML 2013-32, overrides a previous mortgagee letter issued in 2012.

The changes are designed to, “help reduce the number of full claims against FHA’s Mutual Mortgage Insurance Fund by assisting a greater number of distressed mortgagors in retaining their homes; thus, Mortgagee Letter 2012-22 will remain effect until servicers are able to fully implement this Mortgagee Letter.”

The Loss Mitigation Program was established by the FHA in 1996, “to ensure that distressed FHA mortgagors were afforded opportunities to retain their homes and to assist in minimizing losses to FHA’s Mutual Mortgage Insurance Fund”.

The most recent changes include a variety of program modifications. Keep in mind that the following list is intended for the lender’s use–we’ll discuss the finer points of many of these program changes in future blog posts. The changes include:

  • Eliminating the FHA-HAMP maximum Back End Debt-to-Income Ratio requirement of 55 percent;
  • Eliminating the 12-month restriction on the amount of principal, interest, taxes and insurance (PITI) that may be included in an FHA-HAMP Partial Claim;
  • Eliminating the FHA-HAMP eligibility requirement that the FHA-insured mortgage be no more than 12 full payments past due;
  • Streamlining FHA’s Loss Mitigation Home Retention Option priority order by replacing its current 4-tier incentive structure with a 3-tier incentive structure, consisting of Special Forbearances, Loan Modifications, and FHA- HAMP;
  • Requiring the use of a “Special Forbearance” only in cases where the mortgagor(s) are unemployed;
  • Permitting mortgagors to receive a Loan Modification or FHA-HAMP only once in a 24-month period;
  • Expanding FHA-HAMP so that it now consists of a stand-alone Loan Modification, stand-alone Partial Claim, or a combination of a Loan Modification and Partial Claim;
  • Permitting those mortgagors who were initially unsuccessful in completing Trial Payment Plans to re-apply for standard Loan Modifications or FHA- HAMP if their financial circumstances have changed since their initial application for assistance; and
  • Defining “surplus income percentage” as surplus income divided by net income (i.e., net take-home income).

These changes, as mentioned above, do overrule a previous set of alterations made by the FHA last year, but lenders have until December 1, 2013 to implement the above list. We’ll discuss these changes to the FHA Loss Mitigation Program in detail in future posts. Contact the FHA or your lender directly for assistance with Loss Mitigation options

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

FHA Loan Reader Questions: Credit Scores, Loan Limits and Mortgage Insurance

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A reader asks, “The insurance for fha does it include in your morgtage or you have to pay that together with the downpayment? Do you know before you pick the house the amount you qualify for? How hard is it after one year of bankruptcy? I was laid off and did not work for close to two years due to the economy. how hard is it to get a lender with a score of 580???? Can closing cost be included in mortgage?

This is a lot of questions, but the first and most important question is the matter of FICO scores. The reader asks how difficult it is to get a lender when the borrower has a 580 credit score. We can’t speak for all lenders, but in general a borrower should have a minimum FICO score of 620 (as the lowest score) before applying for an FHA mortgage.

It’s technically true that borrowers with FICO scores below 620 but higher than 500 are eligible to apply. But many lenders won’t approve an FHA loan for an applicant with a FICO score lower than 620, and the lender is perfectly free to do this.

The borrower’s question, “Do you know before you pick the house the amount you qualify for? ” could be answered by getting pre-approved for an FHA loan amount, but in general the FHA loan amount is determined by the sale price of the home or the appraised value (whichever is lower) plus considerations made based on the borrower’s creditworthiness.

The answer to the bankruptcy question is essentially, “It depends.” It depends on a variety of factors including the type of bankruptcy, whether the borrower established a solid credit history in the wake of the bankruptcy or at the very least a record of on-time and reliable payments.

The borrower’s question about closing costs is answered in a general way on the FHA/HUD official site, which states, “Your down payment can be as low as 3.5% of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.”

FHA loans require both an Up Front Mortgage Insurance and a mortgage insurance premium. FHA recently changed the rules for its mortgage insurance premium requirements which includes the following guidance to lenders as found in Mortgagee Letter 13-04:

“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. 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.”

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

FHA Loan Answers: Back To Work Guidelines

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Ever since the FHA published details of its new program “Back To Work” for borrowers who experienced economic hardship related to the recession, we’ve gotten a variety of questions and comments about the program.

While this website cannot and does not speak for the FHA, we do publish its guidelines, its press releases and its revisions to the rules when appropriate. It seems there is some confusion about Back To Work–now is a good time to review some of the basics of this program.

According to the FHA Mortgagee Letter 13-26, “Borrowers that may be otherwise ineligible for an FHA-insured mortgage due to FHA’s waiting period for bankruptcies, foreclosures, deeds-in-lieu, and short sales, as well as delinquencies and/or indications of derogatory credit, including collections and judgments, may be eligible for an FHA-insured mortgage if the borrower

  •   can document that the delinquencies and/or indications of derogatory credit are the result of an Economic Event as defined in this ML,
  •   has completed satisfactory Housing Counseling, as described in this ML, and
  •   meets all other HUD requirements.”

The FHA lists a set of definitions to explain its terms–what does “economic event” mean? What is the “onset of an economic event”? How does this affect the borrower or homeowner? According to the FHA:

“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.”

Many borrowers are approaching lenders asking about Back To Work; a number–we don’t know how many–are being told at some financial institutions that the bank in question has no provision for the Back To Work program at this time.

Borrowers should know that FHA lenders are considered “participating lenders” and cannot be forced to offer any program or extend credit to borrowers who don’t meet that financial institution’s minimum credit or other qualification standards.

It’s best to contact the FHA directly with concerns over Back To Work by calling 1-800 CALL FHA, but borrowers who believe they may qualify for an FHA loan under this or any other FHA program can apply or get pre-approved for an FHA mortgage loan at www.FHA.com (a private company, not a government website).

FHA Home Loan Debt To Income Ratio Rules: A Reader Question

017A reader asks, “I have significant student loans, but my parents make all payments on the loans because they had promised to provide my education as a gift (this was a commitment they made before I made the decision to pursue my education).”

“They have made timely payments for three years, and they intend to continue to make payments until the loans are paid off. Can they guarantee future payments so that I can remove the loans from my debt-to-income ratio?”

There are two basic factors at work when the lender is reviewing a borrower’s debt-to-income ratio. One is the borrower’s current debt load compared to the amount of income coming in. The other is how the new FHA loan payment would affect that debt load.

Since the debts in this reader question are in the borrower’s name, those debts would have to be considered, regardless of the extenuating circumstances. However, the fact that there is a payment being made on the borrower’s behalf may or may not be considered as a compensating factor.

The basic answer to this question is that it may depend on the lender. A strict interpretation of FHA loan rules might lead one to believe that the borrower’s debts in this case are simply included in the ratio but not the payments from the parents.

But if those payments are “likely to continue” in the eyes of the lender, there might be some flexibility possible. But saying that should not be construed as a guarantee or a promise that such arrangements will be approved by the lender or the FHA.

Matters such as these would be handled on a case-by-case basis. Borrowers should be prepared to fully document the situation, get written guarantees or other certifications that might convince a lender to favorably view the arrangement. But at the end of the day, it may be the lender’s call or the decision might be made based on the requirements of the financial institution or even the applicability of state law.

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

 

FHA and HUD Announce Assistance for Colorado Storm Victims

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The FHA and HUD have issued a press release announcing help for victims of recent storms and flooding in Colorado. According to HUDNo.13-142, foreclosure relief, FHA home loans for disaster victims, and other forms of assistance are now available to those in Adams, Boulder, Larimer and Weld Counties.

The press release says, “U.S. Housing and Urban Development Secretary Shaun Donovan today announced HUD will speed federal disaster assistance to the State of Colorado and provide support to homeowners and low-income renters forced from their homes due to severe storms, flooding, landslides and mudslides.” This type of assistance generally comes after the affected area has been declared a disaster zone by the president.

“Families who may have been forced from their homes need to know that help is available to begin the rebuilding process,” said Secretary Donovan. “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.”

That assistance comes in a variety of forms, including the following as described in the press release:

Foreclosure Relief – HUD granted a 90-day moratorium on foreclosures and forbearance on foreclosures of Federal Housing Administration (FHA)-insured home mortgages.

Mortgage Insurance – HUD’s Section 203(h) program 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.

Making insurance available for both mortgages and home rehabilitation – HUD’s Section 203(k) loan program 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.

For more information on this assistance or to learn how you can apply, contact the FHA directly by calling 1-800 CALL FHA. Borrowers with FHA loans who are affected by the storms and flooding should contact the FHA, as well as their loan officer and FEMA to learn what relief measures may apply and how to avoid complications with an FHA loan during disaster recovery efforts.

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