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

Monthly Archives: May 2014

FHA Loan Rules: Adding Repairs To The Sale Price Of The Home

078FHA loan rules for new purchase home loans include regulations on how the cost of repairs can be added to the sale price of the home to be purchased with an FHA mortgage. Th rules for this are found in HUD 4155.1, Chapter 2 Section Five, which states:

“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, and
• sales contract or addendum identifies the borrower as responsible for payment, and completion of the repairs.”

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

How does this all work? Chapter Five has a subsection titled, “Repair and Improvement That Can Be Added To The Sale Price”, which states:

“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.”

However, the FHA anticipates one situation that borrowers should know is restricted–repairs and improvements cannot be included in the sale price when they have been completed PRIOR TO THE FHA APPRAISAL. That’s a very important item to take note of.

FHA loans also permit certain weatherization upgrades to be added to the sale price under the proper circumstances. Chapter Five states, “The mortgage amount may be increased if the cost of energy-related weatherization items paid by the borrower is added to the property. Examples of energy-related weatherization items include

• thermostats
• insulation
• storm windows and doors, and
• weather stripping and caulking.

These items may be added to both the sales price and the appraised value before determining the maximum mortgage amount. Note: A contractor’s statement of the cost of work completed, or the buyer’s estimate of the cost of materials must be submitted.”

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 Interest Rates: The Interest Rate Lock

108Under the rules of the FHA loan program, borrowers and lenders negotiate together on interest rates for the FHA loan. The FHA does not set interest rates, and it’s also not responsible for regulating them aside from a general requirement that the rates be comparable to similar types of loans.

In recent times you may have noticed headlines and advertising discussing the idea that mortgage loan rates in general are as low as they’ve been in some time.

At the moment it’s a very good time to be exploring your options as an FHA loan applicant or refinance loan applicant. Rates have recently hit eleven month lows and qualified borrowers with excellent FICO scores have found rates as low as 4.0% or even lower depending on what’s being offered by a particular lender.

But how do the borrower and lender arrive at an agreement on an interest rate when the rates are subject to change depending on current events, economic news or other market-moving factors?

Something called the interest rate lock or interest rate lock-in agreement protects the borrower from fluctuations in the rate once the commitment has been made to lock the rate. The rules for this procedure are found in HUD 4155.1 which says the lender is permitted to charge a fee for this service, but there are rules governing that practice:

“Under all currently active FHA single family mortgage insurance programs, the borrower and the lender negotiate the interest rate and any discount points. Lenders are permitted to charge a commitment fee to guarantee, in writing, the interest rate and any discount points for a specific period of time, or to limit the extent to which the interest rate or discount points may change.”

FHA loan rules specify a minimum of 15 days for an interest rate lock. The loan may close sooner than that, but the lender is still entitled to the interest rate lock fee. In cases where a Home Equity Conversion Mortgage loan is concerned, there may be different procedures or requirements than for other types of FHA home loans–check with your loan officer to see what may be needed in such cases.

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 Fees: A Reader Question

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A reader asks, “Are there any fees associated, with a FHA loan? I was contacted after inquiring online about a loan and the representative informed me that it would be a fee of $11.00 for credit reports and a fee of $149.00 which normally would cost $350.00 for the application process and additional fees of about $49.00 until credit score was at least 620..need to know if this is legitimate before I pay these fees.”

FHA loans do involve fees. A reading of HUD 4155.1 Chapter Five reveals the following:

“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.”

Chapter Five also states, “FHA no longer limits the origination fee to one percent of the mortgage amount for its standard mortgage insurance programs.”

What kinds of fees are common with FHA loans? It depends on the lender, as fees may vary from financial institution to financial institution, but here is an incomplete list–note that FHA loan rules require the lender to estimate all expenses associated with the loan including all “reasonable costs” to close the deal. That estimate must include the following if 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.

Borrowers can and do pay for credit reports, appraisal fees, compliance inspections and other items, but if you have doubts about the legitimacy of a set of fees charged by the lender in association with an FHA home loan, contact the FHA directly at 1-800 CALL FHA to discuss your situation.

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 Income Rules: A Reader Question

109A reader asks, “Whats the least amount of income for an FHA home loan?”

This is a common question, but the real question a borrower should be asking in these cases has more to do with how much money goes out in payment to financial obligations versus how much money is coming in.

That is known in lending circles as the debt-to-income ratio. The specific answer to the borrower’s question here is that there is NO minimum income requirement listed in the FHA loan rulebook.

“FHA’s mortgage programs do not typically have maximum income limits for qualifying, although you must have sufficient income to qualify for the mortgage payment and other debts.” That’ is a quote from according to a HUD publication titled “100 Questions And Answers About Buying a New Home.”

Instead, the borrower’s employment must be verified, which also includes a review of monthly income. The borrower’s total monthly debt–including the amount of the proposed mortgage–would be examined versus the borrower’s total monthly income. If the lender determines that the borrower cannot afford the loan based on those calculations, the loan would be denied.

If the lender determines that the ratio of debt to income is within standards, the loan may be approved provided the borrower meets other qualifying requirements including FICO scores, reliable debt repayment history, etc.

Again, there are no minimum income requirements, but FHA loan rules do state the borrower must be able to afford the FHA loan and his or her other financial obligations. The lender will make the calculations to determine the affordability of the mortgage.

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 Credit Scores: A Reader’s Question

052A reader asks, “Hello, my credit score is 540, I’m a single parent, husband left me with a foreclosed house and a debt of about $135,000+ just from the house no credit cards. I have been separated for 3 years. I want to purchase a home again. Are there any programs for a person like me in this situation?”

Borrowers who need assistance with issues like these should first call the FHA at 1-800 CALL FHA to request a referral to a HUD-approved housing counselor who may be able to assist with advice and pre-purchase counseling.

There are no specific FHA programs that are offered to borrowers in a specific category (bad credit, foreclosure, bankruptcy, etc) but the FHA and HUD have recently announced a new pilot program aimed at borrowers who are “underserved”.

According to HUDNo.14-048, “Under the new pilot, homebuyers will qualify for savings on their FHA-insured loans by completing HUD-approved housing counseling provided through independent nonprofit organizations that give people the tools they need to understand the rights and responsibilities of homeownership.”

“This counseling is aimed at improving buyers’ budgeting skills and housing decisions. In addition the Blueprint for Access includes enhancing FHA’s quality assurance efforts. Today HUD announced more information on FHA’s Quality Assurance Initiative, intended to provide greater clarity and transparency to FHA approved lenders to encourage lending to qualified borrowers across the credit spectrum.”

The program is called HAWK, “Homeowners Armed with Knowledge”. Some of the details of HAWK, according to the FHA, include major savings on the FHA loan with successful completion of the housing counseling program and on-time mortgage payments for a minimum amount of time.

“Under the four-year HAWK for New Homebuyers pilot program notice, homebuyers who commit to housing counseling will qualify for tangible savings on their FHA-insured loans. The average buyer would save approximately $325 a year – or almost $9,800 over the life of their loan. FHA proposes that homeowners who complete housing counseling before signing a contract to purchase a home and who complete additional pre-closing housing counseling will receive a 50 basis point reduction in the upfront FHA mortgage insurance premium (MIP) and a 10 basis point reduction in the annual FHA MIP.”

Contact the FHA directly for more information on the HAWK program, or discuss it with your loan officer.

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.

Happy Memorial Day!

american flagToday we pause our usual posts about FHA loans and related issues, in honor of Memorial Day. We’ll resume our regularly scheduled posts and answers to reader questions tomorrow. Thanks for reading and be sure to thank the veterans in your life for all the service and sacrifices made in the name of freedom. To our veterans, THANK YOU for serving!

FHA Loan Requirements For Occupancy: What The Rulebook Says

046When you want to purchase a home using a single-family FHA home loan, you should know what the FHA loan program’s requirements are for occupancy of the property. Did you know you are required as a borrower to certify you’ll use the home as your personal residence?

FHA loan rules in HUD 4155.1 explain these rules and how they apply to the borrower. There are many questions about occupancy including whether or not a borrower can purchase a single family home and rent out individual rooms, or whether a multi-unit property can be obtained and rented out.

Essentially, the FHA single-family home loan program rules state the following:

“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 FHA also has a definition of that phrase, principal residence. It reads as follows:

“A principal residence is a property that will be occupied by the borrower for the majority of the calendar year.”

Another question relating to occupancy is whether or not the FHA will allow a borrower to have more than one FHA loan at a time. HUD 4155.1 Chapter Four addresses this question:

“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 FHA describes some of those situations as a change in family size, a job-related relocation, or in the case where a borrower leaves a jointly-owned property. This can apply in situations such as divorce, etc.

Finally, FHA loan rules also give this instruction to the lender:

“Under no circumstances may investors use the exceptions described in the table above to circumvent FHA’s ban on loans to private investors and acquire rental properties through purportedly purchasing “principal residences.”

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 Debt Ratios and Student Loans: A Reader Question

014A reader asks, “My student loans are in my name, because my parents wanted to get my credit/payment history started early, but they pay the loans…It is a blessing that they pay them every month, but if I went to get an FHA mortgage for a first time home buyer would I have to count that $350.00 per month loan expense or could they write a letter or prove that they are actually the ones that get the bill and pay it? This really makes a difference when I check the amount I could potentially be approved for.”

The answer to this question may depend on the lender, but in general the student loan debt is in the borrower’s name and that is the key to understanding the issue.

The lender may (or may not) be willing to work with a borrower who can show documentation that this loan is being paid by a third party (the parents, in this case) every month, but nothing requires the lender to do so. The borrower’s debt to income ratio still needs to be calculated by the lender and this would be a factor.

The bests thing may be to discuss this situation with the loan officer ahead of time and see what paperwork may be required if the lender is willing to consider the payment as a compensating factor.

Any debt in the borrower’s name could be counted against the debt-to-income ratio. The lender is required to ask tough questions–for example, what if the parents stopped paying the monthly student loan amount? Can the borrower still afford the home loan?

Knowing that the lender must answer such questions is half the battle when it comes to understanding the processes at work in determining loan approval.

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: Employment

042When you apply for an FHA mortgage loan, you’re required to submit a variety of data including your employment history. It’s the FHA loan officer’s job to insure an applicant has sufficient income to afford the loan, and to make sure that income is likely to continue.

How does the lender do this? FHA loan rules spell out clearly what’s to be done–HUD 4155.1 Chapter One, Section B explains how it works. To begin:

“The lender must obtain the most recent pay stub showing year-to-date earnings of at least one month, and one of the following to verify current employment:

• a written VOE verbal verification of employment,
or
• electronic verification acceptable to FHA.”

The pay stub is documentation that the applicant is currently employed. But when it comes to documenting the past 24 months of employment, Chapter One states:

“The lender is required to verify the applicant’s employment history for the previous two years. However, 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.”

FHA loan rules also tell the lender how to proceed in cases where a borrower has not been employed by the same company for the last two years. It should be pointed out that such scenarios are common and aren’t necessarily a problem, but the lender does have to take steps to verify employment according to Chapter One Section B:

“If the borrower was not employed with the same employer for the previous two years, and/or the above conditions cannot be met, the lender must verify the most recent two years of employment history by obtaining

• copies of W-2s
• written VOEs, or
• electronic verification acceptable to FHA.”

Chapter One adds, “No explanation is required for gaps in employment of six months or less during the most recent two years.”

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 Payment Rules: Acceptable Sources

109In a recent blog post we were asked about FHA down payment requirements–is there such a thing as a “no down payment” FHA loan? Some borrowers might mistake the VA loan program’s zero down payment option for something the FHA officers, but the truth is that FHA loans require a minimum of 3.5% down for single-family home loans.

Not only that, but the money for your down payment has to be documented and come from an acceptable source.

The reason for this is twofold–it prevents borrowers from over-leveraging themselves with cash withdrawls or cash advances on credit cards (credit card cash advances can’t be used to make down payments on an FHA home loan) and it keeps people with a financial interest in the transaction from loaning money for the down payment.

According to HUD 4155.1, down payment funds may be received in the form of gifts, but the definition of gift funds by the FHA loan rulebook is very strict. Specifically:

“In order for funds to be considered a gift, there must be no expected or implied repayment of the funds to the donor by the borrower.”

Who can provide such a gift? That is also governed strictly in HUD 4155.1. “An outright gift of the cash investment is acceptable if the donor is

• the borrower’s relative
• the borrower’s employer or labor union
• a close friend with a clearly defined and documented interest in the borrower
• a charitable organization
• a governmental agency or public entity that has a program providing home ownership assistance to low-and moderate-income families, or first-time homebuyers.”

Note that the FHA does not offer such programs–you would need to check your local directories to see who may be offering home buyer assistance programs.

Does the FHA have a list of who cannot provide gift funds? Yes. According to HUD 4155.1:

“The gift donor may not be a person or entity with an interest in the sale of the property, such as

• the seller
• the real estate agent or broker
• the builder, or
• an associated entity.

Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price.”

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.