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

Monthly Archives: October 2014

FHA Loans: What Can Affect Your Loan Amount?

106One of the first questions on the minds of many borrowers is a logical one: “How much can I borrow?”

There’s no single answer for this as county loan guaranty limits apply, and in general the amount of the FHA home loan is based on the sale price of the home or the appraised value, whichever is lower. When it comes to home loan refinancing, the appraised value of the property is very important.

There are factors that can affect the amount of the FHA home loan for new purchases or refinance loans beyond those factors. For example, if you choose to finance allowable fees and expenses (including some discount points depending on the transaction and lender policies) your loan amount will increase.

If you make a larger down payment, naturally that brings down the total amount of the loan. And there are some factors that can lower the loan amount overall, but not in a good way.

Consider what FHA loan rules found in HUD 4155.1 say about certain things paid for by the seller that can result in a dollar-for-dollar reduction in the loan amount. This information is found in Chapter Two, Section A in a portion of the loan rules discussing something known as an “inducement to purchase”.

From Chapter Two:

“Certain expenses paid by the seller and/or another interested third party on behalf of the borrower are considered ‘inducements to purchase’ and 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.

These expenses include

• contributions exceeding 6% of the sales price
• 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 (HOC).”

Chapter Two also notes that a dollar-for-dollar sales price reduction is also required in cases where there has been one of the following paid:

• excess rent credit
• gift funds not meeting the requirements described in HUD 4155.1 5.B.5.

Borrowers who aren’t sure if their agreement between buyer and seller cross the line into inducement to purchase should discuss the agreement with the participating FHA lender to see what may apply and what steps can be taken to avoid getting into inducements to purchase.

Do you have questions about FHA home loans? Ask us in the comments section. All comments are held for moderation.

 

FHA Loans and Earnest Money: A Reader Question

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A reader asks, “I have a property listed and in escrow with an FHA buyer who was so confident that she would get the loan (the lender provided a fully approved letter, contingent on final review and appraisal), that she agreed to unconditionally release the EMD to my seller.”

“Long-story-short, the buyer decided that in light of suspicions that she might not be approved in the final review, she would cancel the loan process and kill the deal. Now she wants her released EMD back and her agent claims there are FHA regulations that demand the return. I cannot find them. Do they exist? What do they say?”

The reader doesn’t specify, but we assume the acronym “EMD” stands for “earnest money deposit”. With that in mind:

This is a tricky question to answer because it involves legal issues, contract language, and possibly the laws of your state depending on the circumstances of the cancellation of the home loan transaction.

A quick search of HUD 4155.1, which sets out many of the rules covering FHA home loan transactions for the lender, reveals only rules covering the source of earnest money.

In our research to answer this question, we found advice from lawyers that indicated a possibility of earnest money forfeiture in cases where the loan transaction was cancelled for reasons other than abeing denied the loan by the lender. However, we cannot offer legal advice and offer this as anecdotal information only.

The best course of action for this particular reader is to contact the FHA directly to get information on FHA loan earnest money refund policy based on the specifics of the situation–which may include additional information not given in the reader question that may have bearing on the case.

For example, was the borrower turned down for the loan at any time? Or did the process get stopped before a determination was made? Did the sales contract specify how and when earnest money would be forfeited and under what circumstances? Does state law have anything to say on the transaction in such cases?

These are details we arent’ privy to here, and so we refer the reader to the FHA: 1-800 CALL FHA.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Mortgage Rate News: Rates Move Higher After Fed Announcement

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Our discussion last week of mortgage rate trends going into this week’s Fed announcement included the notion that mortgage rates might retreat into a defensive posture–defensive as in, little change (if any) in the two trading days leading into Wednesday’s scheduled announcement by the Fed.

When the  word came from the Fed on Wednesday, talk included the end of the Fed’s Quantitative Easing (QE) program. QE saw the government putting billions of dollars into markets in order to help stabilize the nation economically. Those investments affected mortgage rates, but when talk began of tapering off the program and eventually ending it, investor reaction was negative. Mortgage loan rates can and did move higher with more talk of the ifs and whens of the end of that program.

Today following the Fed announcement, mortgage loan rates hit three-week highs. Some believe the rates could improve based on the observation that in times like this, kneed-jerk investor reaction to the news can push rates up higher than they would be if cooler heads prevailed. It will take some time before we see which way rates could move in the wake of today’s Fed announcement.

30-year fixed rate conventional mortgages are back in the 4% best execution range, but for now, FHA mortgage loan interest rates best execution-wise are still offered by some lenders to well-qualified borrowers at 3.5%.

If upward pressure continues after today, FHA mortgage loan interest rates could begin a move out of the single 3.5% and into a range ofbest execution rates with the current best execution rate at the low end. If rates resist further upward movement, 3.5% may stick around a while longer for FHA rates, assuming no other factors change the game for rates in general.

Only time will tell how today’s Fed announcement affects rates outside the short-term, but at the time of this writing, 3.5% or higher is still the average best execution rate for extremely well qualified FHA loan applicants. Best execution rates are not available from all lenders or to all borrowers. Your personal experience may vary based on FICO scores, the availability of a participating lender, and other financial qualifications.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Loan Rules and Seller Costs: A Reader Question

088A reader asks, “What costs will a seller incur if a buyer is using an FHA loan to purchase?”

That is a difficult question to answer for a variety of reasons–state real estate law, lender requirements and FHA loan rules all have a say in the closing costs of a FHA home loan. There’s no itemized list of seller costs listed in the FHA loan rulebook, HUD 4155.1, but the FHA does make a list of certain costs and/or seller contributions to the sale that are and are not permitted.

For example, the borrower is not to be charged for pest/termite inspections. The borrower can’t pay for the lender’s legal counsel, and the FHA has a set of regulations that dictate how much the seller can contribute toward the sale of the property.

HUD 4155.1 Chapter Two has a section covering this issue, which states:

“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.

The six percent limit also includes

• 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.”

An inducement to purchase results in the loan amount being lowered dollar-for-dollar for any amount above the six percent limit.

Seller concessions and other seller costs may be subject to negotiation in certain cases between buyer and seller. If a seller isn’t sure how to proceed with an FHA loan, it’s a good idea to ask the advice of a real estate agent or a loan officer to learn what is permitted and what is not if there’s any doubt.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Appraisals and Leaking Roof Issues: A Reader Question

017A reader asks,  ”My daughter bought home with FHA approved loan FHA appraisal did not said roof is in bad condition. After 4 months roof is leaking in 4 spots. She called roofing company to see what’s going on and they said roof should be replaced but with FHA regulations roof should last at least 2 years. What should she do now?”

The FHA and HUD address this specific issue in a document for FHA loan applicants titled, “For Your Protection, Get A Home Inspection“. It says in part:

“An appraisal is different from a home inspection. Appraisals are for lenders; home inspections are for buyers. An appraisal is required to:

— Estimate the market value of a house;
— Make sure that the house meets FHA minimum property standards/requirements; and
— Make sure that the property is marketable.”

The FHA encourages borrowers to get a home inspection (again, not the same as an FHA appraisal) stating the following in the same document:

“FHA Does Not Guarantee the Value or Condition of your Potential New Home

If you find problems with your new home after closing, FHA can not give or lend you money for repairs,  and FHA can not buy the home back from you. That is why it is so important for you, the buyer, to get an independent home inspection. Ask a qualified home inspector to inspect your potential new home and give you the information you need to make a wise decision.”

The only recourse this buyer may have is to seek legal counsel to determine whether there is a course of relief that could be pursued. There is no guarantee that the help of a lawyer can actually help the borrower resolve this issue but it never hurts to know what your possibilities are.

The bottom line when it comes to FHA home loans–or ANY type of mortgage loan involving a new purchase–is to make sure you have paid for a home inspection instead of relying on the appraisal in hopes that important issues were caught at that time. The FHA does NOT “approve” or “guarantee” a home with the appraisal process except to state that it meets MINIMUM FHA loan guidelines.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Minimum Property Requirements: Acceptable Wells

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A reader asks, “I just inspected a home with a burried point well. Public water is not available. This type of well is common and legal in th area. Is this an acceptable well for FHA guidelines. No survey was provided so it is impossible for me to determine well location and distance from the septic.”

FHA loan rules in this area tend to defer to the local authority. The FHA does not have detailed rules for wells that would cover all situations. The key to the acceptability of wells in connection with an FHA appraisal depends greatly on whether the wells are acceptable to the local authority.

It’s impossible to determine the nature of an individual well mentioned in a reader question, but in general borrowers should know that some wells may require health department certification, others may be acceptable in their existing state.

Still others may not be acceptable at all. Much depends on state/local laws, health code, etc.

Those who are in doubt as to the acceptability of a certain type of well should begin by consulting with the local authority to see if the well is within code/health regulations. That’s the first hurdle to being considered acceptable in connection with an FHA loan.

One type of well mentioned by name in FHA loan rules is the “dug well”. The FHA official site states:

“Properties served by dug wells are unacceptable unless a complete survey conducted by an engineer is delivered to the lender. To be considered acceptable, the engineer’s survey must include these items:

i. A health report with no qualifications
ii. A pump test indicating a flow of at least 3-5 gallons per minute supply for an existing well, and 5 gallons per minute for a new well
iii. No indication of exposure to environmental contamination, mechanical chlorination or anything else that adversely affects health and safety.”

This information is found in the HUD publication, “Frequently Asked Question: Valuation Protocol”.

Borrowers who have more general questions about wells and their acceptability under the FHA single-family home loan program should contact the FHA for assistance by calling 1-800 CALL FHA.

FHA Loan Refinancing: A Reader Question

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A reader asks, “We currently have a FHA loan on our house and our mortgage company says we can not do a refi with a adjustable rate even know we will not be in our house 5 yrs or more. and now we have a 4.75 fixed rate for 30 yrs so what is our best option to get a lower rate cause we will be taking our retirement and social security in the next 2 months and will be in a hardship crisis.”

This is a difficult reader question to answer. There are many reasons why a borrower could be turned down for a refinance loan, and some of those reasons can depend on the type of refinancing being applied for–cash out refinancing, for example, may be difficult for some borrowers on or approaching a fixed income if their debt-to-income ratio is too high.

We can’t speculate whether that’s the case in this instance, but one thing is certain–a borrower turned down for refinancing can always approach another lender.

You don’t have to use the same lender as your original mortgage loan when it comes time to refinance. You are free to shop around for a new lender to do the refinance loan. In this case that may be the best advice–look for a lender who may be willing to work with you in your current circumstances.

Borrowers should never feel they MUST use the original lender.

In cases where a borrower is turned down for financial reasons, it may help to get financial counseling from an FHA/HUD approved agency. You can call 1-800 CALL FHA to get a referral to a housing counselor near you. Housing counseling can assist on topics such as lowering your debt-to-income ratio, preparing for the new loan application, and other important areas.

Do you have questions about FHA home loans? Ask us in the comments section.

This Week’s FHA Mortgage Rate Trends

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This time last week, we reported mortgage rates headed for lower territory thanks to a variety of factors including market volatility. This week, the difference was definitely noticeable, with rates holding steady or edging slightly higher, but still maintaining at-or-below 4% rates for 30-year fixed rate conventional loans (best execution). FHA rates held steady at 3.5% best execution.

While FHA mortgage rates have managed to stay at 3.5% this week, how long that could number may persist? Next week is poised to be an important one for rates in the short term. Why?

There are a number of reasons why conditions might lead interest rates upward, but one of the most anticipated things scheduled for next week is the Fed announcement–a regular occurrence that can and often does push rates depending on the contents of that announcement.

No matter which way things go, we can theoretically anticipate some of next week’s rate behavior; ahead of the Fed announcement, markets sometimes go into a defensive posture. “Defensive” simply means there might be little or no rate movement ahead of the Fed. Or markets could be volatile as they were last week depending on conditions. Past performance is no indicator of future results, but some borrowers might not even want to bother waiting to see what happens with rates next week–at 3.5%, best execution, now is a very good time to think about committing to a home loan.

You might not be sure which is the right thing to do, get an interest rate lock or “float” into next week hoping rates might go lower once more. But there’s no guarantee that will or won’t happen. You can make an educated guess (such as our speculation that rates could go into a defensive posture until after Wednesday’s Fed announcement) but guesswork isn’t risk-free.

Many industry professionals advise against floating ahead of a Fed announcement, but in the end, it’s up to the borrower to decide. As it stands, the FHA loan best execution rate of 3.5% is very attractive to qualified borrowers who examined their options earlier this year when rates were at 3.75% or higher.

Remember, all the rates we mention here are discussed as “best execution rates” which assumes ideal conditions such as a very qualified borrower with outstanding FICO scores. These rates aren’t available to all borrowers or from all lenders. Your experience may vary.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Loan Interest Rates: The Rate Lock

109We write weekly, sometimes more frequently, about the state of FHA loan interest rates. We discuss trends, terminology, and the possible future of those rates. But some potential FHA borrowers are confused by terms like “locking” and “floating”. What does it mean to get an interest rate lock on an FHA mortgage loan?

Let’s start by examining the basic rules of negotiating FHA rates on the loan. According to the FHA loan rulebook, HUD 4155.1, the lender and borrower are expected to come to an agreement on interest rates on the loan–the FHA does not set the rates.

“Under all currently active FHA single family mortgage insurance programs, the borrower and the lender negotiate the interest rate and any discount points.”

That’s found in the opening chapter of HUD 4155.1. When the interest rate is negotiated, it is subject to change until the lender and borrower have entered into an agreement to “protect” the agreed-upon rate for a specific time frame. This is called the “lock” and is what is referred to when we discuss whether a borrower should “lock” the rate agreed upon with the lender, or “float” and renegotiate the rate on another day when it might be lower.

The lender may charge a fee to lock in the interest rate, which is a practice permitted by FHA loan rules. From HUD 4155.1:

“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.”

How long can the lock last? It’s certainly not an indefinite lock as that would provide a severe disadvantage to the lender should the borrower hold off on committing to the loan for a long period of time.

But there must be a minimum time that the lock can be honored for in order to help protect the borrower’s interests, too. FHA loan rules state:

“The minimum time for lock-ins or rate locks is 15 days. The loan may close in less than 15 days at the convenience of the borrower, and the lender may still earn the lock-in fees. Lenders must honor all such commitments.”

Do you have questions about FHA home loans? Ask us in the comments section.

 

FHA Loans, Foreclosure, and New FHA Loan Applications: A Reader Question

108A reader asks, “I was a cosigner on a FHA loan in 2007 and my ex boyfriend let the home go into a foreclosure process, the home was paid in full before it was foreclosed. it has been a year that the home has been paid off. Will I still be able to qualify for a FHA loan now? My credit score is good and I have all bills paid up to date including credit cards.”

This is a situation that may or may not have applicable FHA loan requirements depending on the circumstances of the foreclosure. Since the reader indicates that the foreclosure didn’t actually happen, there may be a gray area that’s not fully addressed by FHA loan rules.

However, lender standards may play a big part in whether a new loan could be approved in such cases. Is the lender willing to work with the borrower in these circumstances? That is likely the big question in cases like these.

That’s one reason why it may be best to build in some extra time to shop around for the right lender–when a borrower has a more complex set of circumstances that can affect the FHA loan application, some additional conversation time may be required with a lender to see what’s possible.

The first lender you speak to may not be able to help depending on the rules of that financial institution. But you may find one flexible enough to work with again, depending on circumstances.

It’s always important to keep in mind that FHA loan rules can’t force a lender to issue a loan when the applicant is on the margins of what the financial institution is willing to take a risk on. As long as a lender’s approval or denial of the FHA loan application (or any home loan application, for that matter) complies with federal Fair Housing Laws, the approval or denial of a new loan from an applicant may not what what’s consider to be “ideal circumstances” may depend on what’s been done in the past with that lender.

Do you have questions about FHA home loans? Ask us in the comments section. All comments are held for moderation so yours may not appear right away until it has been reviewed.