Monthly Archives: March 2015
The FHA and HUD have clarified rules that govern how FHA Home Equity Conversion Mortgage Loans are handled with regard to “life expectancy set-asides” and calculation of property taxes as part of a borrower’s debt-to-income ratio.
FHA Mortgagee Letter 2015-09, “establishes a monthly growth rate for Life Expectancy Set-Asides and clarifies a discrepancy between the HECM Financial Assessment and Property Charge Guide and the model HECM Financial Assessment Worksheet transmitted with Mortgagee Letter 2014-22.”
What is a “life expectancy set-aside” and how does the new clarification affect it?
According to the FHA, “The Life Expectancy Set-Aside (LESA) is used for the payment of property taxes, and hazard and flood insurance premiums, and will increase each month at a rate equal to one-twelfth of the sum of the mortgage interest rate (Note Rate), plus the annual mortgage insurance premium rate (currently 0.0125 or 1.25%), from the date the loan is funded. The LESA amount is determined at origination and its balance is adjusted monthly by applying the formula below. The LESA amount itself is not recalculated.”
Here is that formula for those who need it:
Formula PMLB * (1+d) – TMLD
- d–(Note Rate + 0.0125) /12
- PMLB–Prior Month LESA Balance
- TMLD–This Month LESA Distribution
When it comes to the property tax issue, the FHA mortgagee letter states:
“In Section 3.98, of the HECM Financial Assessment and Property Charge Guide attached to Mortgagee Letter 2014-22, the Federal Housing Administration (FHA) required mortgagees to compute property charges as a percentage of gross income.On the model HECM Financial Assessment Worksheet, Appendix 1 of the HECM Financial Assessment and Property Charge Guide, FHA provided a space for mortgagees to enter property taxes as a percentage of gross income.”
“In order to resolve this inconsistency, Section 3.98 is revised as follows: FHA has identified situations where property taxes exceed 10% of the mortgagor’s gross income as carrying greater levels of risk of default. Mortgagees must calculate property taxes as a percentage of gross income and enter this figure on the Financial Assessment Worksheet.”
Those who need additional clarification should contact the FHA directly at their toll-free number: 1-800 CALL FHA.
Do you have questions about FHA home loans? Ask us in the comments section.
This reader question refers to the FHA Short Refinance Loan Program which was extended last year to 2016 and is intended for borrowers who find theselves “upside down” or “underwater” on their home loans. According to an FHA fact sheet published at FHA.gov:
“FHA’s Refinance of Borrowers in Negative Equity Positions (“Short Refinance”) is available to help people who owe more on their mortgage than their home is worth because their local markets have seen large declines in home values. The temporary enhancements to the existing refinance program apply to loan applications with FHA case numbers issued on or after September 7, 2010 and closed on or before December 31, 2016.”
The rules of this program include a requirement that the loan to be refinance is NOT an FHA mortgage. The lender must agree to write off at least ten percent of the unpaid principal balance of the loan. Borrowers applying for this program must have a FICO score greater than 500, according to the FHA official site.
In response to the reader’s question about interest rates, the FHA does not set or regulate the interest rates on FHA loans; the lender and borrower must negotiate the interest rate on the loan. With regard to fees, a potential loan applicant would need to discuss any possible fees or expenses associated with the new loan with the lender.
Borrowers interested in this program should act as soon as possible since there is an expiration date–it’s true that the date isn’t until December 2016, but it’s always best to be proactive if you know being upside down on a mortgage is a need you want to address–shopping around for a participating lender willing to work with you may take longer than you think in order to find the most favorable rates and terms. Contact the FHA directly for more information on this program or speak to a loan officer.
Do you have questions about FHA home loans? Ask us in the comments section. All comments and questions are held for moderation.
A reader asks, “My husband recently contacted quicken loans which do fha loans, they pulled his credit and said he was short one point with a score of 619? If you guys are showing you can do loans with scores in the 500s. Why would he of been denied?”
One thing potential FHA borrowers should remember about FICO score requirements on FHA home loans is that FHA minimums are just that–the minimum requirement. An individual lender as mentioned in the reader question is free to require a higher FICO score in order to get a loan with that financial institution as long as that higher requirement is applied in accordance with federal laws.
It’s true that the FHA loan rules printed in HUD 4155.1 state that a borrower with a FICO score of 580 or higher is technically eligible for maximum FHA loan financing, which requires a 3.5% minimum down payment from the borrower.
But FHA loan FICO score standards at the lender mentioned in the reader question, or from any lender, may and often are be higher than that minimum 580 score. You may find lenders are looking for a minimum 620 FICO score or higher, in some cases 640 or even 680 depending. So key to the answer to this reader question is remembering that every lender has different standards.
That is why we continually emphasize the need to shop around for a lender–you may find some lenders willing to work with you and your circumstances where other lenders are not willing. A borrower with a “borderline” FICO score may be approved for an FHA loan if he or she has substantial contributing factors such as a large down payment, cash reserves, investments or other things that can work in the borrower’s favor.
Do you have questions about FHA home loans? Ask us in the comments section. All comments are held for review.
A reader asks, “I have taken the ‘back to work’ counseling class twice. the first one expired but we found a house after it expired. Do you know if FHA can or will waive or make an exception on ‘being completed a minimum of thirty (30) days’ rule. The house is a ‘Fanny Mae’ house and is in Foreclosure. We don’t want to lose it.”
The reader is referring to an earlier blog post we wrote about the FHA’s Back To Work Program which may permit, depending on circumstances, a borrower who has experienced foreclosure, bankruptcy or some other negative “economic event” to apply for an FHA home loan once more.
According to the FHA official site, “FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage. To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:
–certain credit impairments were the result of a Loss of Employment or a significant
–loss of Household Income beyond the borrower’s control;
–the borrower has demonstrated full recovery from the event; and,
–the borrower has completed housing counseling.”
The “30 days rule” refers to a requirement that the borrower complete housing counseling a minimum of 30 days and a maximum of 6 months before submitting the new loan application.
The borrower must, “receive homeownership counseling or a combination of homeownership education and counseling provided that each participant receives, at a minimum, one hour of one-on-one counseling from HUD-approved housing counseling agencies, as defined at 24 C.F.R. §214.100.”
“The counseling must address the cause of the economic event and the actions taken to overcome the economic event and reduce the likelihood of reoccurrence. The housing education may be provided by HUD-approved housing counseling agencies, state housing finance agencies, approved intermediaries or their sub-grantees, or through an on-line course, and be completed a minimum of thirty (30) days but no more than six (6) months prior to submitting a loan application to a lender”
The FHA doesn’t list an exception to this “30 days” requirement, so it’s entirely possible the borrower would be required to retake the counseling. However, since the publication of the original Back To Work rules changes may have been made to accomodate this type of scenario, so it’s best to contact the FHA directly by calling them at 1-800 CALL FHA for clarification.
Do you have questions about FHA loan rules? Ask us in the comments section.
A reader asks, “I have a previous property from my divorce showing as a foreclosure on my credit report. The property has actually been in litigation for the last three years and has not been forclosed. My current husband and I are trying to purchase a new home. Do you have any suggestions? Should I apply as a non purchasing spouse?”
The course of action suggested in the reader question may be a good one, but there are some variables that can affect whether or not it is possible to do so.
The first of these is whether or not the reader lives in a community property state where the laws dictate how shared financial responsibility in a legal marriage is handled.
Community property laws may require the applicant(s) and spouse to have their credit data and/or income details shared on the report. The state may or may not require this depending on circumstances, but all borrowers should know it would be at the lender’s discretion in such cases as to how to proceed in cases like those mentioned in the reader question.
That is to say, the borrower and spouse would need to discuss the issues at hand with a lender and see if that particular lender can and/or will work with the borrower. It’s unfortunately not the most specific answer in the world, but due to the variance in state law, it’s really the only one possible in these cases.
Borrowers who may have concerns in this area can also contact the FHA at their toll free number (1-800 CALL FHA) to request a referral to an FHA/HUD approved local housing counselor who may be able to give some advice depending on the counselor’s experience with such issues.
Do you have questions about FHA loans or refinance loans? Ask us in the comments section. Be aware that all comments are reviewed before they are posted to the site.
FHA loan rules covering the subject of loan-to-value calculations are found in HUD 4155.1 Chapter Two Section A, which states:
“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
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.”
The 3.5% investment, better known as the borrower’s down payment, is also covered in Chapter Two Section A with some important caveats all FHA loan applicants should know:
“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.”
The FHA loan rulebook also addresses the issue of Up Front Mortgage Insurance Premiums in relation to the LTV calculation issue:
“Most FHA mortgages require the payment of an upfront mortgage insurance premium (UFMIP). The statutory loan amounts and LTV limits discussed in this handbook do not include the UFMIP.”
For more information on calculating the LTV on your FHA home loan, discuss your concerns with your loan officer, especially if you aren’t sure how much down payment you might be required to make or how much you wish to make above and beyond the minimum requirement.
Do you have questions about FHA home loans? Ask us in the comments section. All questions and comments are held for review prior to appearing on the site.
“I HAVE A CREDIT SCORE OF 591, I HAVE WORKED FOR MY JOB FOR 18 YEAR. I WOULD LIKE TO PURCHASE A HOME AND AM WORKING ON MY CREDIT WITH MY CREDIT UNION. WHAT MORTGAGE COMPANY WOULD WORK WITH ME TO GET A HOME? I DON’T HAVE MONEY FOR A DOWN PAYMENT”.
Unfortunately, FHA home loans do not offer a zero downpayment option. FHA loan rules found in HUD 4155.1 states clearly that a “minimum borrower cash investment” or downpayment is required. The minimum down payment on any new purchase FHA home loan is 3.5% of the sale price or appraised value of the home (whichever is lower).
That information is found in HUD 4155.1 Chapter Five Section B, which states:
“Under most FHA programs, the borrower is required to make a minimum downpayment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price.”
“Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement. Funds used to cover the required minimum downpayment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented.”
Borrowers should take note–the FHA minimum FICO score (580 and above for maximum financing, with credit scores between 500 and 579 requiring a higher down payment) is a baseline only.
The lender can and often does require a higher FICO score in order to work with an FHA loan applicant. You may be expected to bring a credit score of 620 or higher in order to be approved for an FHA loan. The lender’s standards may vary from company to company.
Do you have questions about FHA mortgage loans? Ask us in the comments section.
Our last look at mortgage loan interest rate trends saw rates making an impressive comeback after some upwards momentum that pushed 30-year fixed rate conventional mortgages up into territory close to the four percent range earlier in the month. That improvement trend has been fairly consistent until yesterday, March 25, 2015, when rates took a big single-day move higher.
For about a dozen days now rates have been on the downward trajectory, but yesterday’s move puts 30-year fixed rate conventional mortgages at a best-execution rate of 3.75% depending on the lender.
Best execution rates are not available to all borrowers or from all lenders–your FICO scores, loan repayment history and other financial qualifications will play a large role in determining your access to mortgage loan rates.
When it comes to FHA loans, the best execution rate has moved into a range between 3.25% and 3.5%, depending on the lender. You’ll noticed more variation in FHA mortgage rates among lenders, which is why it’s a good idea to shop around for a lender who offers the most competitive rates and terms based on your financial qualifications.
Some industry professionals and market watchers feel that after sustained improvement in mortgage loan rates over the last dozen days, we were bound for some pushback–could yesterday’s move higher be the start of a trend? Or a one-day hiccup in an overall downward momentum that has a bit more life in it?
Only time will tell, but there seems to be a consensus among some that locking a mortgage loan rate now instead of “floating” in hopes of a better rate might be the smart move for now.
Do you have questions about FHA loans? Ask us in the comments section.
A reader asks, “Hello. Im a first time buyer my income its from 45 to 50g a year, as i understand i qualify base on my income and fico score. my question is, since my wife did bankruptcy last year , can i include her in the loan for ours first home?”
When answering reader questions like this, it’s important to note that state laws have a lot to say in cases where the borrower lives in a community property state. Community property laws govern how new debts are incurred once the legal marriage begins; FHA loans address mortgage loan approval rules in general, but the FHA loan rulebook does not override the law.
FHA loan rules in HUD 4155.1 state that all borrowers must credit qualify for the FHA home loan. “A credit report submitted with a loan application must contain all credit information available in the accessed repositories. Additionally, for each borrower responsible for the debt, the report must contain all of the information available in the credit repositories pertaining to
• residence history, and
• public records information.”
That is true for co-borrowers, too. A co-borrower who has filed bankruptcy is required to wait out a seasoning period before he or she can apply for another FHA home loan. This seasoning period varies depending on circumstances, the type of bankruptcy, and whether the borrower has re-established good credit and credit patterns since the bankruptcy.
In short, there’s no single answer to this reader’s question. Borrowers will need to confer with a participating FHA loan officer to see what might be possible for an FHA home loan under such circumstances.
Do you have questions about FHA loans? Ask us in the comments section.
There are many situations where a new borrower might want to apply for an FHA home loan, but without bringing a “traditional” credit history to the process. Do FHA loan rules permit a loan even when the borrower doesn’t have a typical credit history, has chosen not to use credit cards, etc?
HUD 4155.1, the FHA rulebook for lenders, does make provisions for this. There’s a section of the rules governing what the FHA terms a “Non-Traditional Credit Report” or NTMCR for short:
“NTMCRs are designed to assess the credit history of borrowers who do not have the types of trade references that normally appear on a traditional credit report. An NTMCR can be used as a
• substitute for a TRMCR or an RMCR for a borrower without a credit history with traditional credit grantors, or
• supplement to a traditional credit report that has an insufficient number of trade items reported.”
This information is found in HUD 4155.1 Chapter One, Section C, which also adds some restrictions on how the NTMCR can be used:
“An NTMCR cannot be used to
• enhance the credit history of a borrower with a poor payment record
• manufacture a credit report for a borrower without a verifiable credit history, or
• offset derogatory references found in the borrower’s traditional credit report, such as collections and judgments.”
What kind of credit references should a borrower who needs this type of credit report bring to the table or be prepared to furnish details for? Rental payments, utilities, insurance, leases, savings account deposit history and any other record of regular payments and financial dependability may be necessary.
Borrowers who rent from family members will need to provide proof of rent payment such as cancelled checks or other documentation to show a record of timely payment.
Your lender will have specific needs for this information (including how it may be delivered or furnished as part of the loan application/approval process) so it’s best to have a conversation about what you may be required to supply and how it can be sourced in order to complete your FHA loan paperwork.
Do you have FHA loan or refinance loan questions? Ask us in the comments section.