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

Monthly Archives: February 2014

FHA Loans And Credit Scores: More Lenient Now?

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Are FHA home loans getting easier to come by? According to one report in the L.A. Times, the answer is yes. Several sources are reporting that average credit scores on FHA mortgages has “declined steadily”. Combine that with a trend towards higher debt-to-income ratios among borrowers and you have indications that lenders in general may be easing their standards.

For many years, the minimum credit score many lenders would need to approve an FHA loan was between 620 and 640. But with reports of some financial institutions approving FHA mortgages with scores at 600–still well within the FHA guidelines for loan approval–it seems the lending environment has gotten friendlier to borrowers with credit scores in this range.

According to the L.A. Times report, “The FHA theoretically allows credit scores as low as 580. But lenders, buffeted by defaulted loans and demands that they buy back troubled mortgages that they sold, generally have set standards higher since the mortgage meltdown.”

FHA borrowers with lower credit scores may not have access to the most ideal interest rates, but for those looking to get into a home, the low down payment requirements can make up for some of that compared to the down payments needed on many conventional mortgages. FHA loans feature a minimum 3.5% down, as opposed to as much as 20% on conventional loans.

FHA home loans may be easier to come by these days if the reports are any indication, but FHA loan applicants should always compare rates and terms with competing lenders to try to get the most favorable deal. For those looking for an FHA cash-out refinance loan, remember that you aren’t tied to your current lender when looking to refinance. Any participating FHA lender can help you refinance your conventional, VA or FHA mortgage loan.

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 Loans For Single Parents

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There are many FHA home loan options available for qualified borrowers, but one question about the program common enough to warrant attention from the FHA official site itself is whether there is home buying assistance available for single parents looking to purchase a home with an FHA mortgage loan.

According to the FHA official site, help for single parents IS available, but one important thing to remember about such homebuyer assistance programs is that they are not administered by the FHA. According to FHA.gov, “There is help available. Start by becoming familiar with the homebuying process and pick a good real estate broker.”

The site points out that while single parents won’t have the advantage of two incomes when it’s time to financially qualify for an FHA mortgage, getting pre-qualified for an FHA loan can help you know what your borrowing power is.

So if the FHA says help is available, but the help for single parents who want to buy a home with an FHA loan does not come from the FHA/HUD directly, how can the FHA as an agency help a borrower who needs home buying assistance?

According to the FHA official site, “Contact one of the HUD-funded housing counseling agencies in your area to talk through other options for help that might be available to you. Research buying a HUD home, as they can be very good deals. Also, contact your local government to see if there are any local homebuying programs that could help you. Look in the blue pages of your phone directory for your local office of housing and community development or, if you can’t find it, contact your mayor’s office or your county executive’s office.”

Local home buying assistance programs may be able to help some borrowers get into a home loan or at least offer advice on resources, budgeting, and preparing for the loan. Contact the FHA directly for a referral to a HUD-approved housing counselor in your area for assistance.

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 Rules: A Reader Question About Earnest Money

108A reader asks, “A buyer made an application for a FHA loan to purchase a property. The buyer was not able to obtain FHA loan approval by close of escrow and rather than to cancel the contract and receive the earnest money back the buyer and seller agreed in writing to extend the contract’s close of escrow provided the earnest money become unrefundable if the buyer could not close escrow for any reason.”

“The buyer was not approved for FHA financing and cancelled the contract yet is claiming FHA overrides the written contract and FHA states the earnest money must be returned to the buyer when the buyer is denied aFHA loan. Does FHA have some sort of rule or authority over a legal contract between buyers and sellers for the earnest money? I can’t see how.”

The answer to this question is tricky–we can’t offer legal advice and the basic issue in this reader question could be legal in nature. There are instances where a government insured mortgage loan such as an FHA loan or VA mortgage loan has regulations that do override language in the contract that may violate the rules of the program or don’t meet its standards. We aren’t able to comment whether this is the case here.

However, let’s examine what FHA loan rules found in HUD 4155.1 have to say in general terms about sales contracts. According to Chapter Six Section A, under a heading called “Policy On Sales Contracts” we find the following:

“Except for houses sold by FHA under the REO program, FHA is not a party to the sales agreement.

When a sales contract contains conditions that, if performed, would violate FHA’s requirements, the lender must obtain an addendum or modification to the purchase agreement that allows conformance to those requirements. Nevertheless, failure to perform a condition of the sales contract is not grounds for denying loan endorsement, provided the loan closes in compliance with all regulations and policies. Example: The sales contract may require the seller to pay an amount in excess of present seller contribution limitations.”

Whether this applies to the reader question remains to be seen. The best course of action in this case is to contact the FHA directly at 1-800 CALL FHA and discuss the matter with a legal expert who knows real estate and/or contract law.

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 Reader Questions: Roof Requirements

076A reader asks, “For an FHA loan, are there roof requirements on a detached garage or do the requirements solely apply to the roof over the home?”

FHA loan rules for property analysis can be found in HUD 4150.2. Under the “Roof” section we find the following:

“The covering must prevent moisture from entering and must provide reasonable future utility, durability and economy of maintenance. When re-roofing is needed for a defective roof that has three layers of shingles, all old shingles must be removed before re-roofing…The appraiser must observe the roof to determine whether the deficiencies present a health and safety hazard or do not allow for reasonable future utility.”

The rules do not make a distinction between attached garages or detached garages, but the line about future utility and durability would seem to imply that roofing in general would be required to live up to that standard.

Then there’s another line in 4150.2 which would also seem to imply this to be true: “Required repairs are limited to those repairs necessary to preserve the continued marketability of the property and to protect the health and safety of the occupants.”

However, FHA loan appraisal standards aren’t the only rules that would affect a transaction like this–state or local building code must also be observed. Depending on where the home is located, roof issues for a detached garage may be addressed by state or local code, and those rules would need to be followed as well.

Borrowers with questions like these should consult the local authority to see what may be permitted and what may not be considered “up to code”.

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 Home Loans: What The FHA Will And Won’t Approve

093If you’re looking for an FHA guaranteed home loan, it can be a very big help to know in advance what kinds of properties the FHA will and won’t approve loans for in its single-family home loan program.

There are sometimes misconceptions about the FHA single-family home loan program; some borrowers are interested in loans for commercial buildings or properties, but single-family home loans are intended for purchasing a dwelling for the borrower’s personal use.

The FHA’s list of approved and unapproved uses for an FHA mortgage make it fairly obvious how these loans can be used, but if you’re new to the program those details aren’t always as clear. You can save a lot of time knowing up front what’s allowed under the FHA mortgage program.

The rules for approved uses are found in a rulebook called HUD 4155.2, Lender’s Guide To The Single Family Mortgage Loan Process. A great deal of the time we quote here from HUD 4155.1, Mortgage Credit Analysis For Mortgage Insurance, but the instructions in 4155.2 add more perspective to this part of the FHA loan process. According to the Lender’s Guide:

“FHA’s single family programs are limited to one- to four-family properties that are owner-occupied principal residences. FHA insures mortgages secured by

• detached or semi-detached dwellings
• manufactured housing
• townhouses or row houses, or
• individual units within FHA-approved condominium projects.

FHA will not insure mortgages secured by

• commercial enterprises
• boarding houses
• hotels and motels
• tourist houses
• private clubs
• bed and breakfast establishments, or
• fraternity and sorority houses”

As you can see, it’s the residential nature of a property for an individual borrower (and family, where applicable) that makes the difference in whether an FHA single-family home loan is approved or disapproved where the basic purpose of the loan is concerned. Not all the properties listed in the “approved” column may be available for purchase with an FHA loan–for example, many lenders at the time of this writing are not offering FHA loans for manufactured housing. Your experience may vary depending on the housing market.

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 Reader Questions: Refinancing Loans and Occupancy

091A reader asks, “We have a home for 25 years paid the first mortgage off and the we got a home equality line now ten years are up and the loans and it need to be refinance and the bank said because we done live in the house but my daughter and her husband do that won’t give us the loan again. Can we just get another mortgage on the house I don’t want to lose our house.”

FHA loans for single-family residences do have an occupancy requirement–the borrower must live in the home as his or her “principle residence”. This is an important thing for FHA loan applicants to be aware of–FHA loan regulations include the borrower moving into the home and using it for the borrower’s personal use.

HUD 4155.1 Chapter Four Section B includes the following instructions to the lender about occupancy:

“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.”

The rules also define what the FHA expects in terms of using the home as the principal residence. “A principal residence is a property that will be occupied by the borrower for the majority of the calendar year.”

Furthermore, Chapter Four Section B states, “To prevent circumvention of the restrictions on making FHA-insured mortgages to investors, FHA generally will not insure more than one principal residence mortgage for any borrower. FHA will not insure a mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be insured will be the only one owned using FHA mortgage insurance.”

However, the reader question doesn’t involve investment property–this may offer the reader an exception to the policy if a participating lender willing to work with the borrower can be found. From Chapter Four:

“Any person individually or jointly owning a home covered by an FHA- insured mortgage in which ownership is maintained may not purchase another principal residence with FHA insurance, except in certain situations…” The “except in certain situations” part of that quote from the FHA loan rules is the key–speak to a loan officer about your needs in cases like these to see what may or may not qualify for an exception.

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: Can The Lender Pay Closing Costs On An FHA Mortgage?

047There are a lot of rules about the closing costs associated with an FHA mortgage loan. For example, the rules in HUD 4155.1 state that closing costs cannot be considered part of the borrower’s required down payment. The minimum cash investment requirement is separate from the FHA loan closing costs and must be paid in addition to those costs.

There are rules governing how much a seller can contribute to closing costs, and there are rules about what costs can and cannot be charged to the borrower. Some FHA loan applicants may wonder if there are any provisions for the lender to pay closing costs; after all, the seller may contribute so why not the lender?

This practice is allowed under VA home loan rules–it’s known as “premium pricing” and may be offered as a perk or incentive to qualified borrowers. Not all FHA loan applicants may be eligible for premium pricing depending on credit scores and other financial qualifying data. But for those who are offered premium pricing, the FHA has specific guidelines for how it may be done.

In HUD 4155.1 Chapter Five, Section A, we find the following instructions about premium pricing:

“Lenders may pay a borrower’s closing costs, and/or prepaid items by ‘premium pricing.’ Closing costs paid in this manner do not need to be included as part of the seller contribution limitation. The funds derived from a premium priced mortgage

• may never be used to pay any portion of the borrower’s downpayment
• must be disclosed on the GFE and the HUD-1 Settlement Statement
• must be used to reduce the principal balance if the premium pricing

agreement establishes a specific dollar amount for closing costs and prepaid expenses, with any remaining funds in excess of actual costs reverting to the borrower, and

• may not be used for payment of
− debts
− collection accounts
− escrow shortages or missed mortgage payments, or
− judgments”

Speak to a loan officer to find out if you are eligible for premium pricing on your FHA loan.

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 Reader Questions: Closing Costs Paid By The Seller

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A reader asks, “What portion FHA’S closing costs that the buyer cannot pay that must be paid by the seller?” 

A look at HUD 4155.1 revealed no language that included a requirement for the seller to pay closing costs on behalf of the borrower for an FHA home loan. There IS language in FHA loan rules saying that the borrower cannot be charged certain fees or expenses such as the lender’s legal fees for retaining a lawyer.

FHA loan rules in Chapter Five, Section A of HUD 4155.1 also mention the following:

“If the seller pays the broker fee as part of the sales commission, it is not considered an inducement to purchase, or part of the seller contributions limitation, as long as the seller is paying only the normal sales commission for that market. Any additional seller-paid commission to the broker is considered an inducement to purchase.”

The seller is PERMITTED, but not REQUIRED to contribute the following:

  • third party payment for permanent and temporary interest rate buydowns, and other payment supplements
  • payments of mortgage interest for fixed rate mortgages
  • mortgage payment protection insurance, and
  • payment of the upfront mortgage insurance premium (UFMIP).

These items are known as seller concessions and are subject to FHA loan rules, lender requirements, and an agreement between the borrower and the seller. These concessions would need to be negotiated between the borrower and the seller–there’s no mandatory inclusion of seller concessions in an FHA mortgage loan.

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.

 

When Filling Out Your FHA Loan Application

055When a borrower fills out an FHA home loan or refinancing loan application, some may be tempted to leave out unfavorable information or provide documents to the lender that are not as up to date as they could be, but reflect more favorably than the most current information.

When applying for a home loan, honesty is definitely the best policy–FHA loan rules published in HUD 4155.1 require the lender to exercise due diligence where this information is concerned. Chapter One Section B of HUD 4155.1 instructs the lender:

“The mortgage loan application package must contain all documentation that supports the lender’s decision to approve the mortgage loan. When standard documentation does not provide enough information to support the approval decision, the lender must provide additional, explanatory statements that are consistent with information in the application. The explanatory statements must clarify or supplement the documentation submitted by the borrower.”

As you can see from that statement, it’s the lender’s responsibility to make sure all data supports a decision to approve the FHA loan. But the rules don’t stop there–they go a step further, telling the lender:

“At loan closing, all documents in the mortgage loan application may be up to 120 days old, or 180 days old for new construction, unless

• a different time frame is specified in this handbook or in other applicable HUD instructions, or

• the nature of the documents is such that their validity for underwriting purposes is not affected by the prescribed time frame, such as

− divorce decrees,or

− tax returns.

If the age of documents exceeds the above limits, the lender must obtain updated written verification of the documentation.”

Borrowers who have concerns about missed payments, income verification or other areas that require the lender’s verification should discuss their needs with the loan officer. It’s far better to discuss a situation directly with the loan officer rather than to omit verifiable data and hope it won’t be noticed. The lender’s contact with credit agencies, employers, and creditors usually reveals the “big picture” of a borrower’s creditworthiness–knowing that up front can be a big help when filling out the FHA loan application.

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 Reader Questions: Divorce, First Mortgages, and Second Mortgages

096A reader asks, “Currently, my husband and I have a FHA loan on our primary residence. We are no longer living together, but still married. I have lived in the home for the last 5 years and paid the first mortgage which is current, never late. My husband inquired a second mortgage on the property in 2006 but is not current on the payments of the second mortgage.”

“The second mortgage is in his name only. He filed bankruptcy in 2009 which has been discharged. He did not reaffirm debt of the first mortgage, but he reaffirmed the second mortgage. Can his name be removed from the FHA loan, especially since he is no longer obligated to pay the first mortgage by not reaffirming the debt during his Chapter 7 bankruptcy filing?”

FHA loan rules aren’t necessarily the guidelines that would apply in this situation–state laws, especially those that govern the disposition of common debts and property in a marriage–would apply.

We aren’t qualified to give legal advice in cases like these, so the reader would need to consult with a lawyer or a legal expert who has experience dealing with state marriage laws that may apply.

Since state laws vary quite a bit, it’s impossible for the FHA to have a blanket policy on such things, and even if there was an FHA loan rule that might pertain, it would not and could not override state marriage laws or other regulations where applicable. One reason for this is that some states have “community property laws” which basically make the financial obligations formed during the marriage a matter of shared responsibility between both spouses.

But not all states have such laws, so the reader will need to determine what might required under the law in the state where the home purchased with the FHA loan is located.

Borrowers with questions about the disposition of an FHA loan during or after a divorce, legal separation or other action will need to discuss the issue with the lender and a lawyer where necessary.

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.