Monthly Archives: November 2013
Can a borrower be turned down for an FHA loan because of a lack of credit history? Recently we fielded a reader question about FHA loans that included the following line:
“I do have older doctor bills that are outstanding but everything else I have saved and payed cash for, therefore making it unnecessary to have a credit card.” Would this lack of a credit card work against the FHA loan applicant?
Before answering, it’s important to point out that a borrower’s credit activity, regardless of the type of credit (utility bills, rent payments, student loans, etc) must reflect a general pattern of reliability. A borrower that cannot show at least one year of on-time payments to all creditors in the time leading up to the new loan application may have difficulties getting FHA loan approval.
Having said that, here is what the FHA loan rulebook, HUD 4155.1, says about a lack of credit history:
“The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application.” That’s simple enough, but the FHA elaborates in order to make this issue as clear as possible.
“Some prospective borrowers may not have an established credit history. For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from
• utility payment records
• rental payments
• automobile insurance payments, and
• other means of direct access from the credit provider, as described in HUD 4155.1 4.C.1.e.”
Again, all borrowers including those who have non-traditional credit histories or a lack of credit history in general should take care to come to the FHA loan application process with at least a year of on-time payments on their credit histories.
It’s the only way to apply for an FHA loan with confidence. The lender will definitely look at the payment history of all borrowers to be obligated on the loan, so it’s an important detail.
Do you have questions about FHA home loans? Ask us in the comments section.
A reader asks, “I have checked my credit report before and it came back insufficient. I do have older doctor bills that are outstanding but everything else I have saved and payed cash for, therefore making it unnecessary to have a credit card.”
“If I had a portion of money for a down payment on a house would I be able to receive an FHA loan? And I would also like to know what the first step of buying a house is, because I would be a first time home buyer and have no idea what the process is.”
Having the required minimum 3.5% cash investment is only one requirement for FHA loan approval, so the simple availability of the down payment wouldn’t be enough. A borrower is required to have a minimum credit score that meets FHA standards, but the lender often has higher standards than the FHA minimums. This is acceptable to the FHA–all participating FHA lenders may require higher FICO scores than the FHA minimums.
The borrower’s first step based on the circumstances as described in the reader question should be to call the FHA at 1-800 CALL FHA and request a referral to an FHA/HUD approved housing counselor who can help.
Housing counselors can help the borrower get started with becoming a first time home buyer, give advice on credit issues as they relate to FHA home loan approval, and answer many of the questions this reader might have in the process. The lack of a credit card on your credit report may not be an issue, but a borrower’s repayment history in other areas will definitely be scrutinized for purposes of loan approval.
Credit score issues can be worked on, but potential borrowers should beware spending money on so-called credit repair agencies. In many cases, you may learn from a good FHA-approved housing counselor that the things you pay for with “credit repair” are things you can do yourself without having to spend money on a third party service.
New FHA loan applicants should know that many finance experts recommend preparing for an FHA home loan at least 12 months in advance to work out any credit issues or other areas that may need attention before submitting a credit application. The FHA-approved housing counselor can explain the hows and whys of this “12 month rule” in detail.
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 company and not a government website.
When some borrowers apply for an FHA loan for the first time, they may worry that past minor credit mistakes could hurt their chances at loan approval. Do these minor credit problems affect a borrower’s chances at an FHA mortgage? Or can the lender ignore certain minor credit issues if the borrower’s overall pattern of repayment and credit management is good?
There is no simple answer to this question since the answer depends on the specifics of the borrower’s situation, but FHA loan rules in HUD 4155.1 do offer a few clues as to what you can expect in these cases.
Any delinquent account must be investigated by the lender, even if in the end it doesn’t affect the application. According to FHA loan rules, “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.”
That covers the lender’s requirements. But what is the lender to do with this information? What is expected once the situation leading to the minor credit problem is fully understood?
“Minor derogatory information occurring two or more years in the past does not require an explanation. 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.”
In short, lenders don’t have to “sweat the small stuff” under the right circumstances. In situations where there are bigger credit issues, the lender may need to require the borrower to “provide an explanation for major indications of derogatory credit, such as judgments and collections, and any minor indications within the past two years” according to HUD 4155.1.
Do you have questions about FHA loans? Ask us in the comments section.
One common misconception about FHA home loans is that the FHA requires a minimum time on the job in order for you to qualify for a FHA guaranteed mortgage loan. Specifically, some think that the FHA requires you to work for the same employer for at least two years, or some variation of this idea.
This confusion might come from a misreading of the rules of FHA loans, which state that the lender is required to verify an FHA loan applicant’s work history for the past two years. That does not mean, “insure the applicant has worked for the same company for at least two years.”
What does it mean? It simply means the lender must document the borrower’s work history over the last 24 months. In some cases, it may not be necessary to contact the employer directly provided certain conditions are met.
FHA loan rules say, “direct verification is not required if all of the following conditions are met:
- the current employer confirms a two-year employment history (this may include a pay stub indicating a hiring date)
- the lender only uses base pay (no overtime or bonus pay) to qualify the borrower and
- the borrower signs Form IRS 4506 or Form IRS 8821 for the previous two tax years.”
In cases where an FHA loan applicant has not been employed at the same company for the last two years, FHA loan rules say the lender is required to “verify the most recent two years of employment history by obtaining
• copies of W-2s
• written VOEs, or
• electronic verification acceptable to FHA.”
Furthermore, the FHA does NOT require written explanations for “gaps in employment of six months or less during the most recent two years”, but gaps longer than six months may require said explanation.
These are FHA requirements, your lender may have stricter requirements for employment verification including written explanations for employment gaps–talk to your loan officer if you have concerns about these issues and how to best address them.
A reader asks, “Does FHA use your tax returns in determining your eligibility for qualifying for a loan?”
There are many reasons why a participating FHA lender may request your income tax returns as part of the FHA loan application process. FHA loan rules in HUD 4155.1 start, “All borrowers, including United States (U.S.) citizens, must have a valid Social Security Number (SSN) and must provide evidence of that SSN to the lender.”
The rules say the lender is responsible for documenting and validating the Social Security Number for each applicant and may do so through a variety of means including income tax paperwork. Specifically, HUD 4155.1 Chapter One Section B states,
“The lender is responsible for
- documenting an SSN for each borrower, coborrower, or cosigner on the mortgage
- validating each SSN either through
− entering the borrower’s name, date of birth and SSN in the borrower/address validation screen through the FHA Connection (FHAC) or its functional equivalent
− examination of the borrower’s pay stubs, W-2 forms, valid tax returns obtained directly from the Internal Revenue Service (IRS), or other documentation acceptable to FHA, or
− use of a service provider, including those with direct access to the Social Security Administration (SSA), and resolving, if necessary, any inconsistencies or multiple SSNs for individual borrowers that are revealed during loan processing and underwriting.”
That’s only one instance where the borrower may require tax documents as part of the FHA loan application. Self-employed borrowers and small business owners must also submit tax information and related documentation in order to verify income and other required data.
It’s important to submit copies of this information rather than originals–you never know when you might need the originals again. Discuss your tax documents with a loan officer to see if you are required to submit in your specific situation. Some borrowers may not need to provide this paperwork, while it may be a requirement in others.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply for an FHA mortgage loan at www.FHA.com, which is a private company and not a government agency.
Borrowers interested in a non-streamline, credit-qualifying FHA refinance loan that features no cash back to the borrower will be interested in knowing some of the basics of this option including the maximum mortgage loan possible and details of the Up Front Mortgage Insurance Premium requirements.
The rules that govern these types of refinancing loans are found in HUD 4155.1 in Chapter Three. Borrowers should note that there is no fixed single dollar amount limit for an FHA loan–your loan amount is determined by the fair market value of the home (which is determined by an appraisal) and your loan amount can be affected by the FHA loan guaranty limits in your county, plus any approved add-ons to the mortgage.
When it comes to percentages, however, there are specific numbers. According to Chapter Three:
“The maximum mortgage for a no cash out refinance with an appraisal (credit qualifying) is the lesser of the
• 97.75% Loan-To-Value (LTV) factor applied to the appraised value of the property, or
• existing debt.”
FHA loan rules say the total “first mortgage” of your FHA loan “is limited to 100% of the appraised value, including any financed upfront mortgage insurance premium (UFMIP).”
At this stage many borrowers want to know if UFMIP is required on the FHA refinance loan. Chapter Three reminds borrowers and lenders, “Most FHA mortgages require payment of an UFMIP.” The maximum loan amounts described in the FHA loan rulebook do not include the amount of the UFMIP, and Chapter Three addresses the obvious question raised by this:
“Generally, the maximum mortgage may never exceed the statutory limit, except by the amount of any new UFMIP. However, the maximum mortgage may exceed the statutory limit on certain specialty products.”
Finally, on an FHA refinance loan where an appraisal is required, the borrower must make any corrections or other alterations recommended by the FHA appraiser as a condition of loan approval.
Do you have questions about FHA refinancing loans? Ask us in the comments section.
When it’s time to refinance a home loan with an FHA loan, borrowers may wonder whether their situation qualifies for an FHA refinance, whether that’s a Streamline Refinance or a Cash-Out refinance loan.
Obviously an homeowner with an existing FHA mortgage wouldn’t have a problem getting a streamline refinance loan, but what about those who have conventional or even VA loans? What do FHA loan rules say it takes to qualify for an FHA refinance?
FHA loan rules on this subject are found in HUD 4155.1 Chapter Three Section A, under the heading, “General Information on Refinance Transactions”. It says in part:
“A refinance transaction is used to pay off an existing real estate debt with the proceeds of a new mortgage
- for borrower(s) with legal title, and
- on the same property.”
Additionally, “The borrower is eligible to refinance the loan, as long as he/she has legal title, even if he/she was not originally on the loan.”
Under “Types of Refinances” FHA loan rules describe what can be done with an FHA refinance transaction:
“FHA insures several different types of refinance transactions, including
- streamline refinances of existing FHA-insured mortgages made with or without appraisals
- no cash out refinances (rate and term) of conventional and FHA-insured mortgages, where all proceeds are used to pay existing liens and costs associated with the transactions, and
- cash out refinances.”
FHA refinance loans may, depending on the type of loan and other factors, require an appraisal. Some, such as FHA Streamline/IRRLs, do not have an FHA-required appraisal. The lender is free to require one anyway, but for Streamline loans there is no FHA requirement to do so. Terms of the loan–the maximum duration of the FHA refinance–are dependent on whether the loan is with/without an appraisal.
According to Chapter Three:
“The maximum term of any refinance with an appraisal is 30 years. The maximum term of a streamline refinance without an appraisal is limited to the lesser of the remaining term of the existing mortgage, plus 12 years, or 30 years.”
Can a borrower applying for an appraisal-required FHA refinance loan use the existing appraisal on a property? This wouldn’t apply for those who have owned the home for several years before applying to refinance, but those who got into a loan in the past six months and want to refinance may have a valid appraisal still good on the property. What do FHA loan rules say about this situation? Chapter Three states:
“FHA appraisals on existing properties are valid for six months. However, appraisals cannot be reused
• during the six month validity period once the mortgage for which the appraisal was ordered has closed, or
• for a subsequent refinance, even if six months have not passed.”
The bottom line in these cases? “A new appraisal is required for each refinance transaction requiring an appraisal” according to HUD 4155.1. For more information on getting started with an FHA loan, speak to a loan officer or contact the FHA directly for further assistance on the options and types of loans available.
Do you have questions about FHA loans? Ask us in the comments section.
A reader asks, “My mother works in Florida and wants to finance a home in Kentucky. Can she get a FHA loan? I’ll be the co-owner of the home, but not the co-borrower on the loan. I’ll be at he home all the time.”
FHA loan rules for single family home loans require the borrower to certify that he or she will purchase the home for “personal occupancy”. The borrower is required to certify in writing that he or she will occupy the home within a specific amount of time after the loan closes.
These rules are found in HUD 4155.1, Chapter Four Section B. It states, “At least one borrower must occupy the property and sign the security instrument and the mortgage note in order for the property to be considered owner-occupied. FHA security instruments require a borrower to establish bona fide occupancy in a home as the borrower’s principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year.”
Those rules are fairly clear and don’t provide an exception, though the actual “move-in date” after closing may be flexible depending on circumstances if the borrower and lender make prior arrangements. This is not guaranteed and may be subject to further interpretation or discussion by the FHA.
Occupancy rules for FHA loans are designed to prevent abuses of the single-family loan system and while this reader’s question doesn’t suggest “abuses” the situation described here is outside the score of FHA loan rules. The best course of action may be to speak to a lender about possible options or alternatives that may be available that could address the needs of this situation. Would it make more sense for there to be two co-borrowers on this loan to satisfy FHA occupancy requirements?
That might depend greatly on the needs of the FHA loan applicants, but it’s certainly one course of action to consider. A discussion with the loan officer could be very helpful.
Do you have questions about FHA home loans? Ask us in the comments section. To qualify or get pre-approved for am FHA loan, visit www.FHA.com, which is a private company, not a government website.