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

Monthly Archives: April 2014

FHA HECM Loan Changes: A Reader Question

079A reader asks, “I have reviewed the new changes regarding protecting the surviving spouse on a reverse mortgage. My husband and I took out a reverse mortgage in 2012 and was told that when I turn 62 in 2015, that I could be added to the loan and be safe.”

“Since then I have found out that is not true. We would have to refinance, however, there may be a large amount of money needed to do this. Now we are worried that I may not get on this loan and I could be in danger if my husband dies before me. Will this new ruling protect me?”

This reader question refers to our previous blog post about changes to the FHA HECM program which now offer non-borrowing spouses protection from losing the home upon the death of the borrower.

According to FHA.gov, “Non- Borrowing Spouses were able to refinance HECMs upon the death of their mortgagor spouses in order to retain the homes. However, FHA recognizes that, for some Non-Borrowing Spouses this option has become more difficult. This has, in some cases, left few viable options for a Non-Borrowing Spouse if they wanted to remain in the home they had previously shared with their spouse.”

The new HECM loan rules have been changed as follows, from a recent FHA Mortgagee Letter, ML 2014-07. That mortgagee letter says in part:

“For any HECM with a case number issued after the effective date of this Mortgagee Letter, in order to be eligible for FHA insurance, the HECM must contain a provision deferring the due and payable status that occurs because of the death of the last surviving mortgagor, if a mortgagor was married at the time of closing and the Non-Borrowing Spouse was identified at the time of closing.”

“Specifically, the HECM documents must contain a provision deferring due and payable status until the death of the last surviving Non- Borrowing Spouse or until another listed event occurs.”

The mortgagee letter is lengthy and is quite new–it requires further study. At first glance there is no indication whether the protections offered by this change in FHA HECM loan rules would apply retroactively or not. The best course of action at present is to contact the FHA directly to ask for further clarification.

It may be that the FHA is considering this issue as this blog post is being written. Whether or not further guidance is pending is unknown at the time of this writing–check with the FHA/HUD to learn what the latest information or updates might be on this issue.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loan Reader Questions: Qualifying For an FHA Loan With Substantial Cash Reserves

052A reader asks, “I have low income but sufficient to qualify, credit score qualification and a low amount of debt. I also have significant savings (over $150,000) in a money market acct from a property settlement agreement. Does my large savings disqualify me? Is there a limit to the amount of assets one can own and still qualify?”

This is a common misconception about FHA home loans–the notion that FHA loans are only for first-time home buyers, or only for those who might be considered at an economic disadvantage of some kind. The truth about FHA loans is quite different.

FHA mortgages have no minimum income requirement. Instead they are approved based on a borrower’s FICO scores, debt-to-income ratio and other financial factors. There is also no maximum income limit. Borrowers can apply for an FHA loan as long as they financially qualify and aren’t otherwise barred from the FHA loan program or sitting out a required waiting period due to a bankruptcy or foreclosure.

There are cases where a borrower who is considered “marginal” when it comes to FICO scores or other financial qualifications may have to bring “compensating factors” to the bargaining table.

Those compensating factors could include a larger than normal down payment, substantial cash reserves or other assets that could be used to justify the loan. But in typical FHA loan circumstances this would not be required.

In the case of this reader question if the borrower’s debt to income ratio is low and the income is sufficient to help pay the mortgage loan, the compensating factor of substantial cash reserves may not be required but this is a call the lender has to make–it may take some shopping around for a financial institution that can work with the borrower’s circumstances, but some lenders may view the situation favorably assuming all other qualifying issues are addressed.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Updates HECM Loan Rules

001The FHA has issued a new Mortgagee Letter updating the rules of the FHA Home Equity Conversion Mortgage (HECM) loan program. Mortgagee Letter 2014-07 announces rule changes for HECM loans that feature a non-borrowing spouse.

“This Mortgagee Letter uses the authority granted HUD in the Reverse Mortgage Stabilization Act of 2013 to amend the Federal Housing Administration’s (FHA) HECM program regulations and requirements concerning due and payable status where there is a Non-Borrowing Spouse at the time of loan closing.”

What are the rule changes? We’ll cover them in depth in another blog post, but essentially the HECM loan program has been modified to further protect the interests of a non-borrowing spouse in cases where the HECM loan borrower dies.

“For many years, Non- Borrowing Spouses were able to refinance HECMs upon the death of their mortgagor spouses in order to retain the homes. However, FHA recognizes that, for some Non-Borrowing Spouses this option has become more difficult. This has, in some cases, left few viable options for a Non-Borrowing Spouse if they wanted to remain in the home they had previously shared with their spouse.”

The new HECM loan rules have been changed as follows, from ML 2014-07:

“For any HECM with a case number issued after the effective date of this Mortgagee Letter, in order to be eligible for FHA insurance, the HECM must contain a provision deferring the due and payable status that occurs because of the death of the last surviving mortgagor, if a mortgagor was married at the time of closing and the Non-Borrowing Spouse was identified at the time of closing.”

“Specifically, the HECM documents must contain a provision deferring due and payable status until the death of the last surviving Non- Borrowing Spouse or until another listed event occurs.”

This basically prevents (under qualifying circumstances) the home from being sold while the non-borrowing spouse is still alive as long as the non-borrowing spouse continues to meet the requirements of the HECM loan.

We’ll cover this rule change in greater detail in another blog post. The new rule changes are effective as of the date of the mortgagee letter, April 25, 2014.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

 

 

FHA Loan Rules For Adding Repairs To The Sales Price Of The Home

089When it comes to FHA appraisals, some borrowers and sellers have a common question. Can the cost of a repair or improvement be added to the sales price of the home? If an FHA appraiser requires the upgrade, repair or improvement, does this expense have to be negotiated separately instead?

FHA loan rules covering this question are found in HUD 4155.1 Chapter Two Section A, which explains:

“Repairs and improvements may be added to the sales price before calculating the mortgage amount when the repairs and improvements are required by the appraiser as essential for property eligibility, and paid by the borrower”.

But there’s more. These repairs must be included in the sales contract or an addition to the contract stating that the borrower is responsible for the payment of these repairs.

FHA loan rules in this section also add, “Only repairs and improvements required by the appraiser may be included.”

How is the amount to be added to the loan calculated? Chapter Two says, “The repair and improvement amount that may be added to the sales price before calculating the maximum mortgage amount is the lowest of the

• amount that the value of the property exceeds the sales price
• appraiser’s estimate of repairs and improvements, or
• amount of the contractor’s bid, if available.”

There are limitations to this process. Chapter Two clearly states that ONLY repairs done after the appraisal are allowed. “Repairs and improvements completed by the borrower before the appraisal are not eligible to be included when calculating the maximum mortgage. This amount becomes part of the borrower’s required cash investment.”

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loan Rules: Seller Paid Closing Costs

107The FHA loan rulebook, HUD 4155.1, has rules about how much a seller or other third party can contribute to the closing costs of a borrower purchasing a property using an FHA mortgage. According to the rules, it is possible for a seller to contribute toward closing costs, but there are limits.

“The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.”

Six percent of the sales price or appraised value (whichever amount is lower) also includes 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).”
  • Note: Contributions exceeding six percent are considered inducements to purchase.

It’s important to be aware of that last line, which warns (in so many words) about “inducements to purchase”. The reason for this warning? An inducement to purchase will result in “a dollar-for-dollar reduction to the lesser of the sales price or appraised value of the property before applying the appropriate loan-to-value (LTV) factor.”

And there are other items that could be paid for by the seller that are considered inducements to purchase. They include:

  • contributions exceeding the actual cost of prepaid expenses, discount points, and other financing concessions
  • decorating allowances
  • repair allowances
  • moving costs, and
  • other costs as determined by the appropriate Homeownership Center.

HUD 4155.1 also points out that, “A dollar-for-dollar sales price reduction is also required for

• excess rent credit, as described in HUD 4155.1 5.B.6.f, and
• gift funds not meeting the requirements described in HUD 4155.1 5.B.5.”

Talk to your loan officer if you have concerns about an aspect of your FHA loan closing cost payment or other areas that may become an issue related to inducements to purchase.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loan Reader Questions: Closing Cost Caps?

043A reader asks, “Is there a cap on what borrower can pay in order to close an FHA loan? In other words, after the down payment, is borrower limited in what they can pay to close the deal?”

There’s no set dollar amount limit on closing costs per se–all home loans are different–but FHA loan rules as spelled out in HUD 4155.1 do explain what expenses a borrower can be charged and what he or she is not allowed to be charged. For example, in Chapter Five, Section A, we learn:

“Lenders may charge and collect from borrowers those customary and reasonable costs necessary to close the mortgage loan. Borrowers may not pay a tax service fee.” Additionally, “FHA no longer limits the origination fee to one percent of the mortgage amount for its standard mortgage insurance programs.”

“However, both the Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance programs retain their statutory origination fee caps.”

FHA loans permit the seller or other third party to contribute up to six percent (but no more) of the sales price or appraised value (whichever is lower) to the borrower’s closing costs. FHA loan rules also spell out how broker fees can be paid. From Chapter Five:

“If a borrower is represented by a real estate broker and must pay any fee directly to the broker, that expense must

• be included in the total of the borrower’s settlement requirements, and

• appear on the HUD-1 Settlement Statement.

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.”

The lender is responsible for estimating all expenses including closing costs plus all “reasonable costs necessary to close the mortgage loan” according to HUD 4155.1. That estimate must include, where applicable:

  • prepaid items
  • discount points
  • non-realty or personal property
  • upfront mortgage insurance premium (UFMIP) amounts
  • repairs and improvements
  • real estate broker fees
  • mortgage broker fees
  • premium pricing on FHA-insured mortgages, and
  • yield spread premiums.

For more information on closing costs, talk to your lender or contact the FHA directly for assistance.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loan Reader Questions: FHA Loan Foreclosures

052A reader asks, “How long does it take to foreclose an FHA loan ?”

The FHA official site has much to say on this subject in general, but borrowers should know that FHA foreclosure times will vary by state. FHA.gov says, “Foreclosure processes are different in every state. If you are worried about making your mortgage payments, then you should learn about your state’s foreclosure laws and processes. Differences among states range from the notices that must be posted or mailed, redemption periods, and the scheduling and notices issued regarding the auctioning of the property.”

There is an FHA foreclosure timeline, however, that can give some good general information in this area. The timeline is very general and the amount of time this process takes will definitely vary. According to the official site:

“First month missed payment – your lender will contact you by letter or phone.  A housing counselor can help.” After the first missed payment, the financial institution will step up its efforts to contact you to discuss the situation. It’s crucial to avoid falling three months behind in order to avoid losing your home–quick action at this stage is the best thing you can do. Talk to the lender to work out the situation if possible.

Second month missed payment – your lender is likely to begin calling you to discuss why you have not made your payments. It is important that you take their phone calls. Talk to your lender and explain your situation and what you are trying to do to resolve it. At this time, you still may be able to make one payment to prevent yourself from falling three months behind.”

By the time the borrower gets to the third missed payment, things are quite serious. At this stage, FHA.gov warns, “you will receive a letter from your lender stating the amount you are delinquent, and that you have 30 days to bring your mortgage current.”

This contact is known in the industry as a “Demand Letter” or “Notice to Accelerate.” At this point, FHA.gov warns borrowers that immediate action is needed. “If you do not pay the specified amount or make some type of arrangements by the given date, the lender may begin foreclosure proceedings. They are unlikely to accept less than the total due without arrangements being made if you receive this letter. You still have time to work something out with your lender.”

When the fourth missed payment occurs, time is running out–according to the FHA, the borrower is close to, “the end of time allowed in your Demand or Notice to Accelerate Letter. When the 30 days ends, if you have not paid the full amount or worked our arrangements you will be referred to your lender’s attorneys. You will incur all attorney fees as part of your delinquency.”

After this, foreclosure is imminent. Borrowers should not delay at any stage in this process to contact the lender to make arrangements to save the home. For more information call the lender and/or the FHA directly

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loan Appraisals–When Do They Expire?

099One common question about FHA loans involves the length of time an appraisal is valid. How much time before a current appraisal expires on the property you want to purchase with an FHA mortgage loan?

According to FHA loan rules, “The validity period for all appraisals on existing, proposed and under construction properties is 120 days.” That is found in HUD 4155.2 Chapter Four, which also adds some instructions to the lender about when the appraisal is considered valid–the actual starting date for the validity period:

“The term of the appraisal begins on the day the home is inspected by the FHA-approved appraiser and this date appears on the URAR.”

The existence of these rules begs an important question. Can an FHA borrower refinance with an “appraisal required” FHA refinancing loan package and re-use the same appraisal if the loan application is submitted and approved before the expiration date of the current appraisal?

HUD 4155.2 Chapter Four says the answer is no. “Appraisals cannot be reused after the mortgage for which the appraisal was ordered has closed. A new appraisal is required for each refinance transaction requiring an appraisal.”To clarify, HUD 4155.2 Chapter Four provides an example. “An appraisal used for the purchase of a property cannot be used again for a subsequent refinance, even if six months has not passed.”

But what about in situations where the borrower is applying for a new purchase FHA loan but needs more time because the sales contract or loan is approved but the loan won’t close before the expiration of the current appraisal? From Chapter Four:

“If a borrower signs a valid sales contract or is approved for a loan prior to the expiration date of the appraisal, the term of the appraisal may be extended, at the option of the lender, for 30 days to allow for the approval of the borrower and closing of the loan.”

As you can see from this, you may be permitted to get extra time if the lender approves–it’s best to discuss this contingency with your loan officer before you need to learn whether or not the exception will be granted.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loan Down Payments

016One important question about any home loan transaction involves the down payment.

How much should a borrower save? When it comes to FHA home loans, there are rules about the minimum required “cash investment” (down payment) specified in HUD 4155.1 Chapter Two. The amount of the down payment depends on the appraised value and/or the sale price of the home.

According to Chapter Two, the maximum amount the borrower can get with the FHA loan guarantee is calculated as follows “The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s

• sales price, subject to certain required adjustments, or

• appraised value.”

The next step according to this portion of Chapter Two is calculating the down payment. “In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.”

But what does this down payment consist of? Can other payments such as the appraisal cost or similar expenses be factored into the down payment amount? Could the money you pay for flood zone determination, for example, count toward the down payment?

Not according to Chapter Two, which basically states that the down payment is a completely separate expense that must be paid in full. “Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower’s minimum required investment.”

For more information on closing costs versus down payment costs, speak to your loan officer or contact the FHA directly for assistance.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.

FHA Loan Reader Questions: Complaints About Substandard Work

052A reader asks, “I am looking for how to report substandard work with FHA home loan and FHA inspection being done by pictures. I purchased my home in November of 2013 and still have not received the needed corrections on the home that in turn is adding more cost to me for repairs.”

There are several possibilities based on the reading of this question. Is the reader complaining about an FHA appraisal that had required corrections that never took place? Or does the reader’s mention of an “FHA inspection” mean that the borrower paid for a home inspection that made recommendations that were never carried out to the borrower’s satisfaction?

In the case of the latter, if the borrower contracted for home repairs based on the recommendation of a privately hired home inspector, he or she would need to contact the company responsible for doing the work to complain. FHA loan rules don’t have any jurisdiction in such cases unless the repairs or corrections are related to an appraisal issue.

If the borrower is complaining that an FHA appraisal (which is not the same as a home inspection) wasn’t carried out properly, the first thing to do is to contact the FHA directly to discuss the issue and file a complaint. Contact the FHA by calling 1-800 CALL FHA to begin the process.

An FHA appraisal that had required corrections as a condition of loan approval must, in general, either have those corrections finished as per the recommendations of the appraiser or there must be scheduled repairs that address the issue to the satisfaction of the appraiser as discussed in the appraisal report. If such work was not done, a call to the FHA may be required.

In any case, if there are problems with the appraisal process, contacting the FHA directly is always the best course of action. Remember, the FHA appraisal is not a stamp of approval or a guarantee that a property is free from defects. That’s why FHA borrowers are encouraged to pay for a home inspection which can and often does reveal issues that an FHA appraisal does not address.

Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting pre-approved for an FHA loan at FHA.com, a private company and not a government website.