Monthly Archives: October 2013
Borrowers who get into financial trouble may have difficulty paying their monthly FHA mortgages. In all cases, the FHA encourages borrowers to get in touch with the lender as soon as possible to make arrangements to avoid going into delinquency and default on an FHA loan. Borrowers who do this have the most options, and find many more doors open to them. Borrowers who wait until it’s too late to prevent going into default may have few choices.
What is the lender’s responsibility when a borrower starts missing payments and is in danger of foreclosure? The FHA and HUD have issued updated guidance telling lenders what must be done and what the acceptable course of action is for the financial institution in such cases.
These updates were published in FHA mortgagee letter 2013-39. It says in part:
“Prompt and effective contact with all delinquent borrowers is essential in ensuring that delinquencies are properly addressed. This includes ensuring that notices and communications are provided in a manner that is effective for persons with hearing, visual, and other communications-related disabilities. Servicers must also ensure that their contact attempts are adequately documented in their servicing files.”
An FHA lender is expected to be polite and professional in such cases, but there’s also a set of rules governing what to do when the borrower cannot or will not communicate with the bank. According to ML 2013-39, on the 20th day of delinquency, the FHA lender must begin or continue, “telephone contact with borrowers who are delinquent on their mortgages. Servicers should call a minimum of two times per week at varying times and days of the week, until contact is established or until the servicer determines that the property is vacant or abandoned.”
By the 32nd day of delinquency, the lender is advised, “Beginning on the 32nd day, but no later than the 45th day from the date payment was due, send a:
–Notification to borrower(s) of the availability of housing counseling; and
–Service members’ Civil Relief Act (SCRA) Notice (see Mortgagee Letter 2006-28).”
Additionally, this very important step on the 45th day of FHA loan delinquency, where the lender is required to take further action:
“Beginning on the 45th day after the date payment was due, if the servicer has received the borrower’s financial information, the servicer should commence its analysis of those financials to identify appropriate loss mitigation options. If unable to reach the borrower, the servicer must perform a visual inspection of the mortgaged property to determine if it is vacant or abandoned. This action should be completed no later than 60 days after the date payment was due.”
For more information on your FHA loan options to prevent losing your home if you become delinquent on the loan, call the lender and the FHA as soon as possible.
Do you have questions about FHA home loans? Ask us in the comments section.
A reader asks, “Veterans are not required to purchase mortgage insurance with a VA loan. Is there a way that a veteran can be exempt from the mortgage insurance premium? The mortgage insurance is very high.”
The short answer to this reader question is “no”. FHA loans are not designed the same way that VA home loans are–FHA loans require a Mortgage Insurance Premium (MIP), where VA home loans do not. Veterans should consider their options between VA home loans and FHA mortgages carefully. In some cases a veteran or currently serving military member could choose an FHA loan over a VA mortgage, for a variety of reasons.
But a borrower faced with these choices should make the most informed decision possible. FHA home loans do have certain similar features to VA mortgages including the ability to apply for a Streamline Refinance loan with no FHA-required credit check or appraisal. A lender is free in both cases (VA and FHA) to require one or both depending, but the FHA Streamline Refinance is similar in many other respects to the VA version.
FHA loans also feature a similar cash-out refinance option to VA loans and in both cases there is an appraisal required and a new credit application which must be submitted. In both cases these loans have an occupancy requirement, though VA loan rules may have additional considerations for veterans depending on the circumstances.
VA loans require no down payment in many cases, and while FHA insured mortgages do have a down payment requirement the amount is much lower than many conventional mortgages. VA and FHA loans both have their advantages and unique features–veterans should not be afraid to explore these options when it’s time to start planning for a new home.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA mortgage loan at www.fha.com, which is a private company and not a government website.
Some veterans and currently serving military members may choose to pursue an FHA home loan instead of a VA mortgage for any number of reasons. If a borrower is eligible for VA benefits, can he or she count those benefits as income for the purposes of qualifying for an FHA insured mortgage loan?
According to the FHA loan rulebook, military pay and some benefits may be counted as verifiable income as long as it meets the right criteria. Chapter Four of HUD 4155.1 says, “Military personnel receive base pay, and are often entitled to additional forms of pay, such as
• variable housing allowances
• clothing allowances
• flight or hazard pay
• rations, and
• proficiency pay.
These types of additional pay are acceptable when analyzing a borrower’s income as long as the probability of such pay to continue is verified in writing.”
The FHA loan rules also instruct the lender to take into account whether the pay or benefits being reviewed are tax-exempt or not.
One important military benefit that does NOT count as verifiable income is associated with military education pay. The GI Bill features a housing allowance or stipend for many eligible service members, but this stipend cannot be counted as income by the lender. Why?
The housing allowance is only paid when the student attends classes. It is not paid over breaks or in the summer in between classes. It also has a very limited time of availability–once the student has attended a certain number of classroom time, those benefits end.
That means the pay is not “likely to continue” and is only temporary. The lender can’t use it to calculate the borrower’s debt to income ratio, therefore it’s not allowed to be included in the “income” column. Speak to a participating FHA lender if you aren’t sure whether your current VA benefits or military pay/allowances can be included in your list of verifiable income sources.
FHA home loan applications require the borrower to list income and job details so that the lender can accurately determine a borrower’s debt-to-income ratio. For this purpose, FHA loan rules say that only income that is likely to continue can be used–the borrower’s wages, tips, bonuses and other earnings may be counted if they meet FHA criteria for “stable and reliable” and “likely to continue”.
One source of income for some borrowers involves a trust fund–can trust income be used as verifiable income for an FHA mortgage loan?
The answer is yes, but only if the trust income meets FHA loan minimum standards as described in HUD 4155.1, which includes the following guidance to lenders when reviewing trust fund income listed on a borrower’s application, found in a section called Investment and Trust Income:”
“Interest and dividend income may be used for qualifying as long as tax returns or account statements support a two-year receipt history. This income must be averaged over two years. The underwriter should subtract any funds derived from these sources that are required for the cash investment, before calculating the projected interest or dividend income. Income from trusts may be used for qualifying if guaranteed, constant payments will continue for at least the first three years of the mortgage term.”
The lender will, under FHA loan rules, require the FHA loan applicant to provide documentation of the trust arrangement. According to HUD 4155.1:
“Required trust income documentation includes a copy of the Trust Agreement or other trustee statement, confirming the
• amount of the trust
• frequency of distribution, and
• duration of payments.
The borrower may withdraw funds from the trust account to use for the required cash investment if he/she provides adequate documentation that this withdrawal will not negatively affect the amount of trust income the underwriter used to determine repayment ability.”
For more information on these standards, speak to your loan officer or contact the FHA directly.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at www.FHA.com (a private website, not a government agency).
Ever since we posted about the FHA’s Back to Work program for borrowers who have experienced “Economic Events” or financial hardship and lowered credit ratings as a result of the recession, we’ve gotten a number of important questions about the program.
According to one of our original posts on the new FHA program, “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.”
But many borrowers aren’t sure where to look for the required counseling. According to the FHA official site it can’t be just ANY counseling session, it must meet certain requirements.
“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, as application is defined in Regulation X, implementing the Real Estate Settlement Procedures Act, 24 C.F.R. 3500.2(b).”
FHA rules say this counseling “may be conducted in person, via telephone, via internet, or other methods approved by HUD, and mutually agreed upon by the borrower and housing counseling agency, as provided for in the regulations at 24 CFR 214.300 and in the Housing Counseling Handbook.”
Where can you find this counseling? Via the FHA. You can find a list of FHA/HUID-approved housing counseling agencies at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm or by calling 1-800-569-4287.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply for get pre-qualified for an FHA loan or refinance loan at www.FHA.com, which is a private company and not a government agency.
When you’re getting ready to fill out an FHA loan application, knowing in advance what documentation you’ll need to get the process moving forward can be a big help. There are individual lender requirements that you’ll need to get directly from your loan officer, but the FHA loan rulebook (HUD 4155.1) lists some things the FHA requires as part of the process the lender uses to verify your employment, income, and credit data.
The list of documentation includes (but may not be limited to) the following list found HUD 4155.1 Chapter One Section B:
- general mortgage credit analysis documents
- evidence of Social Security Number
- verification of deposit
- verification of employment (VOE)
- alternative employment documentation
- appraisal documentation.
FHA loan rules in Chapter One say, “Lenders must obtain the most recent documents required to perform the mortgage credit analysis. ‘Most recent’ refers to the most recent document available at the time the loan application is made.”
In addition to the above documentation, the lender may in some cases require the borrower to provide verification of previous rent and rental agreements or documentation on past mortgage payments. FHA loan rules say this documentation must be one of the following:
- direct written verification from the landlord or mortgage servicer
- information shown on the credit report, or
- the most recent 12 months of cancelled checks or receipts for payment of the rent/mortgage.
For Verification of Deposit, the FHA loan rulebook says, “The lender must obtain a written Verification of Deposit (VOD) and the borrower’s most recent statements for all asset accounts to be used in qualifying” but there is an alternative to providing the VOD.
According to Chapter One, “As an alternative to obtaining a written VOD, the lender may obtain from the borrower original asset statements covering the most recent three-month period. Provided that the asset statement shows the previous month’s balance, this requirement is met by obtaining the two most recent, consecutive statements.”
Verification of Employment requires the most recent pay information in writing, “showing year-to-date earnings of at least one month, and one of the following to verify current employment:
–a written VOE verbal verification of employment,
–electronic verification acceptable to FHA.”
For more information on these requirements, speak to a loan officer or contact the FHA directly.
Do you have questions about FHA home loans or refinance loans? Ask us in the comments section. You can apply or get pre-qualified for an FHA loan at www.FHA.com, which is a private company, not a government agency.
Earlier this year, the FHA indefinitely extended its special forbearance programs for unemployed borrowers. In a mortgagee letter titled, “Extension of Unemployment Special Forbearance” the agency has created an open-ended policy as described below:
“The policies in Mortgagee Letter 2011-23, (Unemployment Special Forbearance: Temporary Program Changes and Clarifications) relating to special forbearances for unemployed borrowers are hereby extended until amended, superseded, or rescinded.”
The policies mentioned above also include a reference to an earlier Mortgagee Letter. “In ML-2000-05, FHA provided mortgagees with additional guidance concerning the Loss Mitigation Program that all mortgagees must follow, when applicable, to reduce FHA insurance losses in those circumstances, as determined by the mortgagee, where delinquent mortgagors might be able to find an alternative to foreclosure.”
“ML 2002-17 amended ML 2000-05 to allow mortgagees to offer forbearance to unemployed mortgagors with good payment records and stable employment histories, even when mortgagees are not able to determine whether the special forbearance will lead to reinstatement of the loan.”
Basically, in 2011, the FHA changed unemployment forbearance policy to remove “the requirement that the mortgagee verify that the mortgagor has a good payment record and stable employment history” and also to extend the minimum FHA loan forbearance period in cases of unemployment to a full 12 months.
Originally, that policy was considered temporary and had an expiration date of August 2013. But now the FHA has extended that expiration date indefinitely. Unemployed FHA borrowers now have the option of special loan forbearance when discussing foreclosure avoidance options with the lender. According to the FHA, at the end of the special forbearance period, the lender must:
“conduct a review…to evaluate the mortgagor for all applicable loss mitigation programs, and notify the mortgagor in writing whether or not he/she qualifies for a loss mitigation option. If the mortgagor does not qualify for any loss mitigation option, the mortgagee must provide the mortgagor with the reason for denial and allow the mortgagor at least seven calendar days to submit additional information that may impact upon the mortgagee’s evaluation.”
Contact your lender directly for information about how to get special forbearance if you are an FHA borrower and have become unemployed.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-qualified for an FHA home loan at www.FHA.com (a private company, not a government agency).
Just as the government shutdown crisis was unfolding, the FHA was preparing an update to policies that affect borrowers who need to apply for FHA 203(k) mortgages as part of their recovery from Super Storm Sandy.
Unfortunately, that press release likely got overlooked by many because of the government shutdown issue. That update, as described in FHA Mortgagee Letter 2013-36, titled, “Eligible Properties in Presidentially Declared Major Disaster Area Super Storm Sandy for 203(k) insured mortgages” describes some very important updates.
These updates specifically pertain to those seeking FHA 203(k) loans in areas affected by Sandy–they do not apply to other borrowers outside this area.
According to the mortgagee letter, “Handbook 4240.4 Section 1-4 currently states that, homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided the existing foundation system is not affected and will still be used. The complete foundation system must remain in place.”
However, the update states that not all homes affected by Super Storm Sandy will be eligible for foundation repair under the 203(k) loan program.
“Where a property is located in Presidentially Declared Major Disaster Area Super Storm Sandy, work on the existing foundation system may be eligible, (ed. note–emphasis ours) provided that:
- The existing foundation does not currently meet the flood elevation +1 foot requirement;
- Any additional repairs or modifications to the foundation must be required by applicable codes, community development plan, an insurance plan, or other local, state, or federal laws and regulations ;
- The foundation, after elevation, must comply with local building codes, and FEMA requirements;
- The lowest floor must be elevated at or above the Base Flood Elevation based on the most recent FEMA data, plus one foot of freeboard. The most recent FEMA data includes Advisory Base Flood Elevations or Preliminary Flood Insurance Rate Maps, when available However, in no event shall the lowest floor be below the Base Flood Elevation on the current adopted Flood Insurance Rate Map;
- A report from a licensed structural engineer must be obtained stating that the proposed foundation is capable of supporting the proposed construction of the dwelling;
- The FHA case number must be assigned within 18 months (540 days) from the effective date of this Mortgagee Letter to be assigned an FHA case number;
- The loan must be processed as a Standard 203(k);
- The 203(k) Consultant must conduct a preliminary feasibility analysis to determine that the subject property is damaged but can be rebuilt to comply with building codes and FHA Minimum Property Requirements; and
- The loan amount (prior to the addition of any financed UFMIP) does not exceed 100% of the after repaired value.”
These are important considerations to remember–borrowers who are in doubt about how these policy updates apply to them should contact their loan officers immediately and contact the FHA at 1-800 CALL FHA for advice and assistance. The mortgagee letter closes by reminding borrowers:
“For any property not located within Presidentially declared Major Disaster Area Super Storm Sandy or any property that does not meet the above requirements, the restriction on foundation work described in Handbook 4240.4 Section 1-4 remains in force.”
When you think about your choices for buying a home using an FHA mortgage, it’s easy to forget that all types of properties can be considered for purchase–not just a typical house in the suburbs. The FHA does allow loans for condo units, and there’s a section of the FHA loan rulebook (HUD 4155.1) that discusses the requirements for this type of purchase.
According to HUD 4155.1 Chapter Four Section B, “FHA must approve condominium projects before a mortgage on an individual condominium unit can be insured”. But what does the FHA define as a “condo”? How are they different than other types of housing? According to FHA loan rules:
“A condominium is a multi-unit project that
• has individually-owned units, which may be either
− attached in one or more structures, or
− detached from each other, and
• is essentially residential in use (for FHA purposes).”
The condo “regime” as it’s described in these rules, is governed by local or state ordinances, “characterized by fee simple ownership of a unit which is defined in the condominium documents, together with common areas. The property interest in these areas is both common and undivided on the part of all unit owners, each of whom belongs to the Homeowners’ Association (HOA) that typically maintains the property and collects assessments or dues from each unit owner.”
There are also descriptions of “manufactured housing condominiums” and “site condominium” projects, both of which may be eligible for FHA loans under the right circumstances.
For example, when it comes to site condos, FHA loan rules say, “Site Condominiums are single family totally detached dwellings encumbered by a declaration of condominium covenants or condominium form of ownership. They have no shared garages or any other attached buildings. Project approval is not required for site condominiums unless they do not meet this definition.”
For more information on FHA condo loans, speak to a loan officer about your specific needs–you may be surprised to learn what your options are for this type of home loan application.
Do you have questions about FHA loans? Ask us in the comments section.
A reader asks, “What is the length of time after filing bankruptcy that you have to wait to qualify for a FHA loan…during that waiting process what are some of the things that I should be doing to make the approval process easier and making my credit better?”
FHA loan rules and lender standards are both considerations in situations like these, as is the specific circumstances of the individual’s bankruptcy and other credit issues. Borrowers should know that FHA minimums are just that–minimums. Lenders can and often do require higher standards.
That’s why it’s important to consider shopping around for a lender who may be more willing to work with you–one lender may not be able to help, while another can depending on your situation. For the record, FHA loan rules for bankruptcy vary depending on whether the filing was Chapter 7 or Chapter 13. For Chapter 7, FHA loan rules in HUD 4155.1 say 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.”
The two year minimum waiting period may, as described in FHA loan rules, be waived depending on circumstances. Keep in mind that, as mention above, his is an FHA rule and your lender may have stricter standards. According to Chapter Four of HUD 4155.1:
“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.”
FHA loan rules add the following note to this section, stating: “The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.”
For Chapter 13 bankruptcy, the FHA loan rules say that Chapter 13 bankruptcy does not “disqualify a borrower from obtaining an FHA-insured mortgage provided that the lender documents that:
• one year of the pay-out period under the bankruptcy has elapsed
• the borrower’s payment performance has been satisfactory and all required payments have been made on time, and
• the borrower has received written permission from bankruptcy court to enter into the mortgage transaction.”
FHA loan rules add a very imporant note to the above, which borrowers should pay close attention to–“Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy.”
The FHA has issued guidelines for some leniency that may be applicable for qualified borrowers under the Back To Work program–speak with a loan officer to see if your circumstances qualify and to learn more.
Do you have questions about FHA home loans? Ask us in the comments section.