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

Monthly Archives: December 2013

Happy New Year!

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We’re taking a short break from our usual discussion of FHA home loans, and fielding reader questions about FHA loans and refinancing loans, to celebrate New Year’s Eve and New Year’s Day. Our regular posting schedule returns on Thursday, January 2, 2014. Thank you for reading in 2013 and we look forward to another year of serving you. Have a safe and wonderful New Year.

FHA Extends Deadline For 2014 Loan Limit Appeals

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The FHA has announced an extended deadline for appeals to the 2014 FHA loan limits for high cost areas. According to an announcement dated December 20, 2013, the FHA will allow “interested parties” in high-cost areas to submit an appeal until the end of January 2014.

“On December 6, 2013, the Federal Housing Administration (FHA) issued Mortgagee Letter 2013-43 which announced FHA’s loan limits for case numbers assigned on or after January 1, 2014 through December 31, 2014. FHA is extending the date for interested parties to request a change to high cost area loan limits announced in ML 2013-43 from January 6, 2014 to January 31, 2014.”

However, the appeal process is not open to all high cost areas. According to the FHA/HUD announcement, “Requests for a change to loan limits for a specific local area will only be considered for counties for which HUD does not already have home sale transaction data for the calculation of loan limits.”

Furthermore, those who are allowed to appeal must submit documentation to justify a higher loan limit in that market. “A request to change loan limits must contain sufficient housing sale price data, with the request listing one-family properties sold in a specified high-cost area, and where the sale took place within the look- back period of January through August 2013. Housing sale price data included in requests should also:

–Differentiate between single-family residential properties and condominiums or cooperative housing units.
–Distinguish between distressed and non-distressed sales, to the extent possible.”

The FHA announcement likely does not affect a typical FHA loan transaction that closes after the start of the new year, except in certain cases. However, borrowers in high-cost areas that may qualify for a reconsideration of the FHA loan guaranty limit in that area should discuss the situation with their loan officers to see whether any such appeal might affect the FHA loan process in that instance.

Those who wish to appeal for higher local FHA loan limit changes should submit their appeals before January 31, 2014. All such requests must be submitted to:

FHA Santa Ana Homeownership Center:
Attn: Program Support/Loan Limits
U.S. Department of Housing and Urban Development Santa Ana Homeownership Center
Santa Ana Federal Building
34 Civic Center Plaza, Room 7015
Santa Ana, CA 92701-4003

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 FHA.com, a private company and not a government website.

FHA Loan Answers: Debt To Income Ratios

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When a borrower applies for an FHA home loan, he or she is asked to list all source of verifiable income. This is used to calculate the debt-to-income ratio, which is a comparison of the borrower’s income against the amount of financial obligations the applicant must pay every month.

The ratio is very important in the FHA loan approval process. According to HUD 4155.1, Chapter Four, Section F, this ratio must be calculated in two ways–the borrower’s income is compared to the projected amount of the FHA mortgage payment, and a separate calculation is made for the total amount of monthly debts plus the mortgage payment. Why are these calculations made?

Because FHA loan rules don’t allow the mortgage payment itself or the amount of total debt plus the mortgage payment to exceed a certain percentage of the borrower’s verifiable income. According to Chapter Four,  “The relationship of the mortgage payment to income is considered acceptable if the total mortgage payment does not exceed 31% of the gross effective income.”

When it comes to the calculation of the mortgage alone versus the borrower’s total effective income, “A ratio exceeding 31% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. For those borrowers who qualify under FHA’s Energy Efficient Homes (EEH), the ratio is set at 33%.”

FHA loan rules say this calculation is made to include both principal and interest, plus escrow deposits for real estate taxes and any required hazard insurance. A list of other expenses may also be factored in, including:

• mortgage insurance premium
• homeowners’ association dues
• ground rent
• special assessments, and
• payments for any acceptable secondary financing.

When it comes to the total amount of the borrower’s debt plus the mortgage payment, FHA loan rules in Chapter Four state:

“The relationship of total obligations to income is considered acceptable if the total mortgage payment and all recurring monthly obligations do not exceed 43% of the gross effective income. A ratio exceeding 43% may be acceptable only if significant compensating factors, as discussed in HUD 4155.1 4.F.3, are documented and recorded on Form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. For those borrowers who qualify under FHA’s EEH, the ratio is set at 45%.”

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 FHA.com, a private company and not a government website.

FHA Loan Answers: New Job Income

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Many FHA loan applicants want to know if taking a new job will affect their chances at FHA loan approval. FHA loan rules are designed to help guide loan officers through the qualification process for a variety of scenarios including those where the borrower may have “projected income” that could be factored into the borrower’s debt-to-income ratio.

What do FHA loan rules say about projected income? How is it defined? The answers to these questions and more can be found in HUD 4155.1 Chapter Four, Section E.

“Projected income is acceptable for qualifying purposes for a borrower scheduled to start a new job within 60 days of loan closing if there is a guaranteed, non-revocable contract for employment.”

That is simple enough–FHA loan rules allow for projected income when there is documented evidence and legally binding agreements between the borrower and employer. But the rules also require the lender to verify not only the income, but also the ability to afford the loan in the meantime.

From Chapter Four; “The lender must verify that the borrower will have sufficient income or cash reserves to support the mortgage payment and any other obligations between loan closing and the start of employment.”

There are additional stipulations in Chapter Four–the projected income doesn’t help if the loan closes more than sixty days before the borrower begins his or her new employment. Chapter Four says as much:

“The loan is not eligible for endorsement if the loan closes more than 60 days before the borrower starts the new job. To be eligible for endorsement, the lender must obtain from the borrower a pay stub or other acceptable evidence indicating that he/she has started the new job. Examples: A teacher whose contract begins with the new school year, or a physician beginning his/her residency fall into this category.”

There are situations where projected income can be used, and those where it is not, but it should also be noted that the lender may have additional requirements in this area above and beyond FHA loan rules. Check with your loan officer about your specific needs to get a better understanding of what might be possible.

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 FHA.com, a private company and not a government website.

Happy Holidays!

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We pause from our usual writing and answering reader questions about FHA home loans to enjoy the holiday season. Our regularly scheduled posts return on Thursday December 26. Thank you for reading and may your holiday be a safe and festive one! Season’s greetings from all of us at FHANewsBlog.com!

FHA Loan Program FICO Score Minimums: A Reader Question

052A reader asks, “I noticed that to be eligible for an FHA loan your score must be at least at a 580. Is this true? I was told this is just something you show here on your site but once you really go through the process its a whole different story. I’m looking to buy my 1st home and I want to be told what’s right as to what’s wrong.”

FHA loan FICO score requirements, as listen in HUD 4155.1, are as follows:

FHA CREDIT SCORES FICO

That is an exact duplicate of the table found in HUD 4155.1. The basic answer to the reader question is that according to FHA loan rules, any borrower with a credit score above 500 is technically eligible for some kind of FHA guaranteed home loan. However, these scrores are only the FHA minimums. A participating lender is free to require a higher credit score in order to be approved for financing.

What does this mean?

The participating lender you choose may require a higher FICO score than the FHA loan minimum. If the bare minimum to qualify for some kind of FHA guaranteed financing is 500 or above, but the lender’s requirements state that no loan can be approved for a borrower with credit scores below 640, the lender has set a higher FICO score standard than the FHA minimum. This is permitted

Because the FHA loan program is voluntary and participating lenders choose to do business with FHA mortgages, the FHA and HUD cannot force the lender to approve loans for borrowers who do not meet the financial institution’s credit standards.

Your experience may vary from lender to lender–some banks may be perfectly willing to work with you, while others may have standards that are quite high. It’s best to shop around for the most advantageous FHA loan terms and conditions you can find. It’s never safe to assume that just because one bank will or will not work with you, a better deal might not be available elsewhere.

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.

 

 

FHA Loan Rules For Section 8 Income & Government Assistance: Reader Questions

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We’ve gotten several questions lately from readers about FHA loans, government assistance and Section 8 income. What does the FHA loan rulebook say about government assistance and Section 8 income used to qualify for an FHA guaranteed home loan?

When it comes to government assistance, FHA loan rules found in HUD 4155.1, Chapter Four say, “Income received from government assistance programs is acceptable for qualifying, as long as the paying agency provides documentation indicating that the income is expected to continue for at least three years.” The continuation of the income is key, so borrowers using government assistance income to qualify should be prepared to submit documentation of the income according to the lender’s requirements.

Borrowers should know that FHA loan rules also address government assistance that isn’t expected to last three years or more. According to Chapter Four, “If the income will not be received for at least three years, it may be considered as a compensating factor.”

There’s also a section that addresses unemployment benefits. “Unemployment income must be documented for two years, and there must be reasonable assurance that this income will continue. This requirement may apply to seasonal employment.”

When reviewing the rules for Section 8 income, we learn the following from HUD 4155.1 Chapter Four:

“A monthly subsidy may be treated as income if a borrower is receiving subsidies under the housing choice voucher home ownership option from a Public Housing Agency. Continuation of the home ownership voucher subsidy beyond the first year is subject to Congressional appropriation, however, FHA has agreed that it will assume, for the purposes of underwriting, that the subsidy will continue for at least three years.”

FHA loan rules also mention considerations for how the subsidy is paid out. “If the borrower is receiving the subsidy directly, the amount received is treated as income. The amount received may also be treated as non-taxable income and ‘grossed up’ by 25%, which means that the amount of the subsidy, plus 25% of that subsidy may be added to the borrower’s income from employment and/or other sources.”

Furthermore, “Lenders may treat this subsidy as an offset to the monthly mortgage payment (i.e. reduce the monthly mortgage payment by the amount of the home ownership assistance payment before dividing by the monthly income to determine the payment-to-income and debt-to-income ratios).”

FHA loan rules even address the procedure for payment of the subsidy. “As the subsidy payment must not pass through the borrower’s hands, the assistance payment must be

• paid directly to the servicing lender, or
• placed in an account that only the servicing lender may access.

Note: Assistance payments made directly to the borrower must be treated as income.”

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.

FHA Loans and Commission Income: A Reader Question

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A reader asks, “Is it true that if you work in a job where your pay is based on commission you have to be with your current employer for at least one year to obtain a FHA loan, even if your prior job was in the same line of work and was also a commission paying job?”

FHA loan rules require the lender to verify employment and income. Only verifiable income can be used to calculate a borrower’s ability to afford an FHA home loan and there are FHA regulations that determine what constitutes verifiable income. Commission income can be used if it meets certain criteria.

The rules governing commission income are found in HUD 4155.1, Chapter Four Section D  under a heading titled, “Salary, Wage, and Other Forms of Income”. For commission income, the rules state:

“Commission income must be averaged over the previous two years. To qualify with commission income, the borrower must provide

• copies of signed tax returns for the last two years, and
• the most recent pay stub.

Commission income showing a decrease from one year to the next requires significant compensating factors before a borrower can be approved for the loan. A borrower whose commission income was received for more than one year, but less than two years may be considered favorably if the underwriter can

• document the likelihood that the income will continue, and
• soundly rationalize accepting the commission income.”

FHA loan rules don’t stop there–they also address situations where, similar to the reader question (but not exactly), a potential FHA loan applicant has only been in a commission-paying job for a year or less:

“Commission income earned for less than one year is not considered effective income. Exceptions may be made for situations in which the borrower’s compensation was changed from salary to commission within a similar position with the same employer. A borrower may also qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the mortgage.”

These are FHA loan minimums and additional lender standards may apply. It’s best to discuss these situations with the lender to see what may be permissible in the borrowers specific circumstances.

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.

FHA Loan Closing Costs: A Reader Question

087A reader asks, “My husband and I are trying to buy a home. We have the 3-3.5% down required, I have $1500.00 for the realtor earnest money, the appraisal and the inspection. Is that all the money I will need up front. We are asking seller to pay closing. Since we can ask them that 6% goes to pay to closing. SO, if seller pays closing. I have money for the down payment, earnest money, appraisal and inspection- that will be all I need, correct?”

It’s difficult to answer a question like this because every loan is unique. Some home loan purchases may require a flood zone determination, there may be certain legal fees if the borrower has paid for certain title services, state laws and tax code may apply, etc. There are a lot of factors that go into the final expenses of any home loan.

One example of this? Compliance inspections. An FHA appraiser is required to review the home to be purchased with an FHA mortgage loan. If the home “passes” the appraisal, no corrections or improvements may be required. But some appraisals turn up issues that need correcting, and these corrections are often required as a condition of loan approval.

What does that mean when it comes to the expenses associated with the FHA mortgage?

When these corrections are made, the borrower is often required to pay for an additional “compliance inspection” to follow up. The compliance inspection tells the FHA and lender that the repairs or alterations required by the appraiser actually did occur and to the satisfaction of the appraiser. Compliance inspections are paid for by the borrower the same as the original appraisal. It’s payment due for a service rendered.

These inspections are not part of every single FHA home loan transaction, but whether or not they may occur in the case of our reader question is unknown. It’s best to anticipate such expenses and hope they aren’t needed. FHA loan questions like these often don’t have a one-size-fits-all solution, but knowing what could be required can help a borrower budget for these costs accordingly.

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.

FHA Loan Questions: Credit History–What Counts?

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We get a number of reader questions about FHA home loans, and many of those include questions about credit history. Does the presence of a few late payments on a borrower’s credit history jeopardize an FHA loan application?

In general, it’s best to come to the FHA loan process with at least 12 months of on-time payments on your record, but we should examine the FHA loan rulebook (HUD 4155.1) to see what instructions are given to participating FHA lenders about credit history.

These instructions can be found in Chapter Four, Section C of HUD 4155.1. They include the following, found under the heading “Documenting an Analysis of Delinquent Accounts”:

“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.”

Lenders are also instructed, “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.”

This information should be considered carefully–the borrower is not penalized for minor lapses in loan repayment or other financial obligations in general, but it should be pointed out that the FHA gives the lender plenty of discretion as to how such credit information can and should be interpreted. The lender makes the final call–the FHA cannot force the lender to lower a financial institution’s minimum credit standards.

And the lender may have standards which are higher or more stringent than FHA minimums–that’s why it’s very important not only to know what may be expected from your credit report when you apply for the loan, but also to shop around for a lender who seems to be willing to work with you in your specific situation. One lender may have more strict FICO score requirements than another–the standards of one bank do not necessarily mean all lenders have an identical standard.

That also goes for borrowers with non-traditional credit. Consider what Chapter Four says about this area:

“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. 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”

Speak to a loan officer or contact the FHA directly to learn more.

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.