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

Monthly Archives: March 2014

FHA Updates Official Site On Electronic Signatures Policy

104Recently, the FHA updated its electronic signature policy to accept “e-signatures” on a wider range of documents related to FHA home loans. According to the official site at www.FHA.gov, “FHA will accept electronic signatures on the following ‘Authorized Documents’ (see below), provided they are not otherwise prohibited by law, and comply with the standards set forth in Mortgagee Letter 2014-03 and with the Electronic Signatures in Global and National Commerce (ESIGN) Act.”

The mortgagee letter issued at the end of January 2014 stated that FHA recognizes electronic signatures within certain limits as defined by the ESIGN act. “The ESIGN Act defines electronic signatures as “any electronic sound, symbol, or process attached to or logically associated with a contract or record and executed or adopted by a person with the intent to sign the record.”

There are certain exceptions…according to the FHA official site FAQ section and the mortgagee letter, borrowers should know “FHA will not accept an electronic signature that is solely voice or audio. This policy applies to FHA Single Family Title I and II forward mortgages and HECMs.”

What type of documents does the FHA accept e-signatures on? Here’s a list as found on the updated FHA/HUD official site:

• Mortgage Insurance Endorsement: All documents requiring signatures in the case binder (including the URLA & addendums, Lender Underwriting Transmittal Summary, & Conditional Commitment), except the Note. As of 12/31/14, FHA will accept electronic signatures on the Note for forward mortgages only. FHA will not accept electronic signatures on HECM notes.
• Servicing and Loss Mitigation: Any documents associated with servicing or loss mitigation services for FHA-insured mortgages.
• FHA Insurance Claims: Any documents associated with the filing of a claim for FHA insurance benefits, including the Form HUD-27011, “Single Family Application for Insurance Benefits.”
• HUD Real Estate Owned: The HUD REO Sales Contract and related addenda.

According to the FAQ page about e-signatures, “The document must be presented to the signatory before an electronic signature is obtained. The electronic signature must be attached to, or logically associated with, the document that has been electronically signed.”

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: Government Benefits and Assistance Income

105One of the most common questions we get about FHA home loans involves the borrower’s basic eligibility for the FHA loan program based on receiving government assistance or other types of government payments including:

• military income
• VA benefits
• government assistance programs
• mortgage credit certificates
• Section 8 home ownership vouchers

What do FHA loan rules say about these types of income? Can they be used to qualify for an FHA mortgage? Not all these types of payments are covered under one blanket rule. The different types of pay have different rules. For example, when it comes to military allowances above and beyond base pay, HUD 4155.1 Chapter Four 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…as long as the probability of such pay to continue is verified in writing.”

VA benefits have their own special rules. Chapter Four:

“Direct compensation for service-related disabilities from the Department of Veterans Affairs (VA) is acceptable income for qualifying, provided the lender receives documentation from the VA. Education benefits used to offset education expenses are not acceptable.”

Potential FHA borrowers on government assistance programs also have a special set of guidelines which cover that type of income:

“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. If the income will not be received for at least three years, it may be considered as a compensating factor. 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.”

As you can see, each different situation and type of income requires a different type of regulation to address those specific programs. We’ll address the FHA rules for Section 8 vouchers and mortgage credit in a future blog post.

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: Does Alimony/Child Support Count As Income?

097

We’ve been discussing topics this week related to FHA loan rules for income and employment. The participating FHA lender is responsible for verifying an FHA loan applicant’s employment and income to make sure it is stable and reliable.

Not all forms of income can be used on the FHA loan application. Sporadic income from sales of goods online, for example, may not qualify, and certain types of commissions may not qualify depending on their frequency. GI Bill housing stipends cannot be used because they are not “likely to continue” past a certain number of months.

Then there is the common question about child support and/or alimony payments. Can this form of income, if declared on the FHA loan application, be used to qualify for the mortgage?

Chapter Four of HUD 4155.1 provides the answers.

“Alimony, child support, or maintenance income may be considered effective, if

• payments are likely to be received consistently for the first three years of the mortgage
• the borrower provides the required documentation, which includes a copy of the

− final divorce decree
− legal separation agreement,
− court order, or
− voluntary payment agreement, and

• the borrower can provide acceptable evidence that payments have been received during the last 12 months, such as
− cancelled checks
− deposit slips
− tax returns, or
− court records.”

Are FHA loan applicants with less than 12 months of child support or alimony income left out in the cold? Not if certain conditions are met, according to Chapter Four:

“Periods less than 12 months may be acceptable, provided the lender can adequately document the payer’s ability and willingness to make timely payments.”

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: Qualifying For A Home Loan As Self-Employed/Family Business Employee

091

FHA home loan rules include a requirement that the lender verify employment and sources of income. The reasons for this verification include making sure the job and wages are stable and likely to continue to help the borrower pay the monthly mortgage bills. But what are the rules for borrowers who are self employed or who work at a family business?

The rules that cover these requirements are found in HUD 4155.1 Chapter Four, Section D. Under the heading, “General Information on Self Employed Borrowers and Income Analysis” we find the following instructions to the lender:

“Income from self employment is considered stable and effective, if the borrower has been self employed for two or more years.” However, the FHA loan rules do make a distinction between someone who owns a family business–a self employed person–and someone who works at that business as an employee. According to Chapter Four:

“In addition to normal employment verification, a borrower employed by a family-owned business is required to provide evidence that he/she is not an owner of the business, which may include

• copies of signed personal tax returns, or
• a signed copy of the corporate tax return showing ownership percentage.”

The income received by an employee of the family owned business may be treated as typical wage income depending on the circumstances rather than self-employment income. Who is considered a self-employed person as opposed to someone who is simply an employee of the family business? Chapter Four says that depends on the ownership interest of that employee.

“A borrower with a 25% or greater ownership interest in a business is considered self employed for FHA loan underwriting purposes.”

As you can see this is an important issue as self-employed borrowers have more documentation to provide and additional standards and guidelines which must be met.

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: Does Commission Income Count As Verifiable Income?

052For an FHA home loan, the participating FHA lender is required to verify the borrower’s employment and income. Only verifiable income can be used to calculate the borrower’s debt-to-income ratio and there are instructions for the lender on how to determine if certain types of income can be used and under what circumstances. Commission income is a very good example.

Not all commission income may be eligible to be used for the debt to income ratio. How does the lender determiner what’s permissible and what’s not? There are instructions to the lender in HUD 4155.1, Chapter Four, Section D under the heading, “Salary, Wage, And Other Forms Of Income”. It begins by saying:

“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.”

When commissions aren’t consistent from year to year, FHA loan rules tell the lender:

“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.

All of this is helpful to the borrower, but one important thing to know is what exactly the FHA determines to be “commission income”. According to Chapter Four, “A commissioned borrower is one who receives more than 25% of his/her annual income from commissions.”

That income ratio is very important to know when trying to determine your eligibility for an FHA home loan based on your employment and type of income. If you have significant commissions, your chances of loan approval are better than those who meet the qualifications for “commissioned borrowers” but don’t have much in the way of commission income AND don’t have other income to offset this factor.

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: Income Requirements

055A reader asks, “What is the income limit for a loan? My daughter and friend wants to buy a home with a few acres. She started a new job in Nov of 2013. He has a good income and working on his credit rating. They do not have enough for a large down payment.”

FHA loans do not feature a minimum or maximum income limit. Instead, the lender must get employment and income information from the borrower(s) and determine the applicant’s debt-to-income ratio. A borrower with too much debt and not enough income will not qualify for the FHA loan.

The borrower who has little debt but not enough income to qualify for the loan based on how much debt to income that would apply with the mortgage figured in would also not qualify.

The debt to income ratio is an important calculation, so borrowers should discuss the lender’s standards when considering an FHA mortgage loan.

The reader question also includes mention of a down payment. Borrowers should know that FHA loans do feature a minimum required cash investment–a down payment–of 3.5% of the loan in general terms. The downpayment is mandatory and it’s good to start saving for it as early as possible in the loan planning stages.

It’s also good to know that the FHA does not consider payment of fees, expenses, or loan costs in the down payment amount. The down payment is a separate expense and must be budgeted for accordingly.

Borrowers who seek down payment assistance will need to discuss those needs with local agencies as the FHA does not administer such programs.

Planning for the expenses of an FHA loan early in the house hunting stages–or better yet, even before house hunting begins–is the best way to manage those costs. Saving and budgeting are important for the success of your FHA home loan application when the time is right.

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 For Income Verification: Part-Time Employment Income

099FHA loan rules include a requirement that the lender verify sources of income and employment. Some types of income may or may not be permitted on the FHA loan application, and FHA loan rules printed in HUD 4155.1 explain what’s permitted or not allowed.

One area some borrowers may be concerned with in this area is part time income. Does the FHA allow a lender to verify and count as income the earnings from a part-time job? The rules for this are found in Chapter Four Section D of HUD 4155.1 under the heading “Salary, Wage, And Other Forms Of Income”. It says in part:

“Part-time and seasonal income can be used to qualify the borrower if the lender documents that the borrower has worked the part-time job uninterrupted for the past two years, and plans to continue. Many low and moderate income families rely on part-time and seasonal income for day to day needs, and lenders should not restrict consideration of such income when qualifying these borrowers.”

Note the emphasis on both part-time and seasonal income. That’s an important thing to know for affected borrowers who derive significant income from a seasonal position. Chapter Four also tells the lender, “Part-time income received for less than two years may be included as effective income, provided that the lender justifies and documents that the income is likely to continue.”

What does the FHA consider “part-time”? Chapter Four states, “For qualifying purposes, ‘part-time’ income refers to employment taken to supplement the borrower’s income from regular employment; part- time employment is not a primary job and it is worked less than 40 hours.”

Chapter Four has instructions for the lender about part time or seasonal income that does not live up to the rules, stating:

“Part-time income not meeting the qualifying requirements may be considered as a compensating factor only.” That can help some borrowers, but not others. Discuss your specific situation with a loan officer to learn what your part-time income might be able to do for your chances at FHA loan approval.

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 Minimum Property Standards: A Reader Question

108

A reader asks, “Will FHA allow a house with no heat to use (the FHA Energy Efficient Mortgage) energy package? The EEM program states “improve”; what if it is a question of not having heat at all. Does this program still apply?”

There are several different standards that might affect such a transaction. The reader wants to know whether a home without a heating system might be eligible for an FHA mortgage using an Energy Efficient Mortgage that could, if the question is interpreted correctly, add a heating system.

What do FHA loan rules say about this?

For starters, “ ”FHA will endorse a mortgage for an existing property before the energy- efficient improvements are installed, provided that the lender establishes an escrow account and deposits funds into the account to pay for the energy- efficient improvements.”

Furthermore, “The EEM is initially underwritten as if the energy package did not exist, using standard FHA underwriting guidelines, qualifying income ratios, and maximum mortgage/minimum downpayment requirements, without regard to the energy package.”

That means that the home would most likely be appraised without the EEM consideration. If the property doesn’t meet FHA standards, it would have to have corrections (if possible) as a condition of loan approval. What’s more, state or local building code may require the home to have a heating system. The borrower would have to check with the local authority to see if this applies.

It’s entirely possible that depending on the geographic location, a home without a heating system could be approved for a loan provided it meets the standards set by FHA loan rules and the state/local building code. But it’s just as possible that a heating system IS required in this particular case, and the borrower would have to learn what “next steps” are from the appraiser before proceeding unless the lender or a reputable agent in the area knows what precedents have been set by previous transactions in that area.

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 For Borrowers With Non-Traditional Or Insufficient Credit

013

FHA loans have flexible standards when it comes to the kinds of credit history a borrower brings to the loan application process. By that we mean that applicants who have non-traditional or even insufficient credit history may be able to get a loan approved depending on circumstances.

Borrowers with non-traditional credit or insufficient credit history may be asked to provide additional documentation and paperwork as part of this process. You could be required to furnish tax documents, utility bills, and/or any other recurring payment that could help establish credit history.

FHA loan rules in HUD 4155.1 explain the rules, instructing the lender:

“When evaluating a borrower with non-traditional credit history, a satisfactory credit history, at least 12 months in duration, must include

  • no history of delinquency on rental housing payments
  • no more than one 30-day delinquency on payments due to other creditors,and
  • no collection accounts/court records reporting (other than medical) filed within the past 12 months.”

Furthermore, “To enhance the sustainability of homeownership for borrowers with insufficient credit histories, the qualifying ratios

• are computed only on those borrowers occupying the property and obligated on the loan. Non-occupant coborrowers may not be included.

• may not exceed 31% for the payment-to-income ratio and 43% for the total debt-to-income (DTI) ratio.”

Those are important guidelines to remember, especially if you’re considering an FHA loan application with a non-occupying co-borrower.

One issue some borrowers might be concerned with is whether applying for an FHA loan under these circumstances affects the maximum loan available–do people with non-traditional credit or a lack of a credit history have a disadvantage in the FHA application process? HUD 4155.1 says, “Borrowers with non-traditional or insufficient credit are eligible for maximum financing, but must meet the all underwriting guidance provided in HUD 4155.1 4.C.3.”

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.

Am I Eligible For A New FHA Loan After A Short Sale?

081One of the most commonly asked questions we get in our comments section has to do with whether a borrower can apply for a new FHA loan following a short sale. The loan rules for post-short sale transactions are found in HUD 4155.1, Chapter Four, Section C under the heading, “Short Sales”.

It starts off by stating that while it IS possible to get a new FHA loan following a short sale under the right conditions, ”A borrower is not eligible for a new FHA-insured mortgage if he/she pursued a short sale agreement on his/her principal residence simply to

• take advantage of declining market conditions, and
• purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value.”

The rules mention an FHA loan is possible, post-short sale, if the right conditions are present. What are those conditions? From Chapter Four:

“A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all

• mortgage payments on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and

• installment debt payments for the same time period were also made within the month due.”

What about situations where the borrower was in default on the mortgage when the short sale occurred? “A borrower in default on his/her mortgage at the time of the short sale (or pre- foreclosure sale) is not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.” FHA loan rules also add the following note:

“A borrower who sold his/her property under FHA’s pre-foreclosure sale program is not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.”

Since FHA loans are handled on an individual basis, some borrowers MIGHT be eligible for an exception according to Chapter Four. “A lender may make an exception to this rule for a borrower in default on his/her mortgage at the time of the short sale if the

• default was due to circumstances beyond the borrower’s control, such as death of primary wage earner or long-term uninsured illness, and

• a review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.” This exception is at the lender’s discretion and may not be available to all borrowers.

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.