Monthly Archives: March 2016
We answer many questions about FHA home loans in the comments section. Here’s one of the most recent, on the subject of mixed-use properties, co-borrowing, and more: “My sister and I want to buy a house that is 1/2 apartment, 1/2 store. I already own a home and have an 820 credit score. She has a 620 score, and would be the owner occupant. I am married. Does my husbands income affect the debt to income ratio? If not, am I only calculated as responsible for 1/2 of our mortgage payment each month?”
There are several issues that can affect the answers to these questions. To begin with, let’s examine what FHA loan rules in HUD 4000.1 say about transactions with non-occupying co-borrowers:
“A Non-Occupying Borrower Transaction refers to a transaction involving two or more Borrowers in which one or more of the Borrower(s) will not occupy the Property as their Principal Residence.”
“Maximum LTV for Non-Occupying Borrower Transaction
For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent. The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members, provided the transaction does not involve:
a Family Member selling to a Family Member who will be a non-occupying co-Borrower; or a transaction on a two to four-unit Property”
The property in this transaction would seem to violate the “multi-unit” rule mentioned above, so it’s entirely possible the loan would require a higher down payment based on a reading of the rule above. It’s best to have a conversation with a loan officer to see what may be possible under FHA loan rules in this area.
Second, FHA loan rules generally limit the non-residential nature of a property to be purchased with an FHA loan mortgage to 49% or less. According to HUD 4000.1:
“The non-residential portion of the total floor area may not exceed 49 percent. Any non-residential use of the Property must be subordinate to its residential use, character and appearance. Non-residential use may not impair the residential character or marketability of the Property. The non-residential use of the Property must be legally permitted and conform to current zoning requirements.”
Again it’s best to talk to a loan officer to examine the specifics of a given property to see what may or may not be possible with an FHA mortgage.
The debt-to-income ratio question would depend greatly on state law–some community property states may have different requirements than others so it is important to have a conversation with a loan officer in this area, too in order to determine how/if state law affects an FHA loan application in cases like these. Lender standards would also apply.
Mortgage rates have reclaimed some lost ground in the wake of a speech this week by Fed chair Janet Yellin. The Fed is still committed to “carefully” raising interest rates–a gradual increase as the U.S. economy continues to improve. The markets that affect mortgage rates has responded to this (among other factors) and we’re seeing mortgage rates starting to move lower accordingly.
30-year fixed rate mortgages were reported moving into a best execution range between 3.625% and 3.75%. FHA mortgage rates haven’t moved out from the comfort zone we’ve been discussing for some time so in spite of the conventional move we still see FHA mortgage rates at a best execution range between 3.25% and 3.5%. FHA rates vary more among lenders than their conventional equivalents so your experience may vary.
“Best execution” rates assume ideal conditions so borrower access to such rates is determined by FICO scores, loan repayment history and other financial qualifications. The rates listed here are not available to all borrowers or from all lenders. Your experience may vary.
Locking and floating are tough decisions in a rate environment that is low–compare the current rates with previously held 4.0% or higher territory and it’s easy to see why people tend to favor locking in rates at these levels. Floating may be riskier than usual going into Friday’s scheduled jobs report–the Employment Situation Report always has the potential to move rates in one direction or another based on investor reaction to the data.
Floating is never risk-free, but ahead of a scheduled economic data release it can be more so–it may be best to have a discussion with your loan officer before deciding to float into the employment report which is scheduled to come out Friday morning. Markets will have all day to react to the data but there are times when other breaking news can overshadow events like these and change the playing field for rates that day. Get some advice ahead of Friday if you’re unsure whether to commit to a mortgage loan interest rate with your lender soon or wait and hope that rates continue to improve.
FHA loan rules cover a lot of ground when it comes to a borrower’s creditworthiness. There are minimum FICO score requirements, instructions to the lender for reviewing the borrower’s record on-time payments (12 months of reliable payments on all financial obligations is strongly recommended), and much more.
One area that is also covered in HUD 4000.1 is what the lender should do if collections are included in borrower’s credit history.
The presence of a collection action on a loan applicant’s record may be cause for concern, but there are instructions to the lender on how to view collection accounts and what to do if those collections fall within the lender’s “tolerance” for loan approval. What will the lender require under FHA loan rules if the loan can move forward?
HUD 4000.1 page 183 begins by defining what it views as a “collections account”:
“A Collection Account refers to a Borrowers loan or debt that has been submitted to a collection agency by a creditor.” In cases where such an account is present the lender is instructed as follows:
“If the credit reports used in the TOTAL Mortgage Scorecard analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must:
–verify that the debt is paid in full at the time of or prior to settlement using acceptable sources of funds;
–verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrowers Debt To Income (DTI); or
–if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrowers DTI.”
There are also rules for the lender about collection accounts on a non-borrowing spouse’s record in “community property” states where state law may have a say in how a legally married couple’s joint debts are viewed or handled in the eyes of the law:
“Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrowers ability to pay all collection accounts, unless excluded by state law.”
In cases where collections accounts are present, the lender is required to provide the following documentation:
–evidence of payment in full, if paid prior to settlement;
–the payoff statement, if paid at settlement; or
–the payment arrangement with creditor, if not paid prior to or at settlement.
If the Mortgagee uses 5 percent of the outstanding balance, no documentation is required.”
If you aren’t sure how these rules may apply in your situation, discuss your needs or concerns with a loan officer to see what that financial institution may require in such cases.
It’s easy to forget that FICO scores are not the only credit issue lenders will examine when reviewing your FHA mortgage loan application. A lender isn’t just concerned with your scores; your ability to repay the loan and make your monthly mortgage payment requires a review of a potential borrower’s income and debt.
The lender has different standards depending on the type of debt. For example, changes to FHA loan rules published last year require the lender to take student loan debt into account–even if the loan isn’t payable yet. Such debts are known as “deferred obligations” and if no monthly payment is available, the lender must take a percentage of the total debt to make the monthly payment estimation.
FHA loan rules in HUD 4000.1 also include standards for reviewing a borrower’s installment loan debt and revolving charge accounts. According to the rules, installment debt has a strict definition:
“Installment Loans refer to loans, not secured by real estate, that require the periodic payment of Principal & Interest. A loan secured by an interest in a timeshare must be considered an Installment Loan.”
How is the lender directed to review such accounts?
“The Mortgagee must include the monthly payment shown on the credit report, loan agreement or payment statement to calculate the Borrowers debts. If the credit report does not include a monthly payment for the loan, the Mortgagee must use the amount of the monthly payment shown in the loan agreement or payment statement and enter it into TOTAL Mortgage Scorecard.”
When it comes to revolving charge accounts, FHA loan rules define such accounts as, “A Revolving Charge Account refers to a credit arrangement that requires the Borrower to make periodic payments but does not require full repayment by a specified point of time.”
HUD 4000.1 states the lender must, “The Mortgagee must use the credit report to document the terms, balance and payment amount on the account, if available. Where the credit report does not reflect the necessary information on the charge account, the Mortgagee must obtain a copy of the most recent charge account statement or use 5 percent of the outstanding balance to document the monthly payment.”
These accounts are not the same as a 30-day account, which is described as “a credit arrangement that requires the Borrower to pay off the outstanding balance on the account every month”. For these accounts, the lender must “verify the Borrower paid the outstanding balance in full on every 30-Day Account each month for the past 12 months. 30-Day Accounts that are paid monthly are not included in the Borrowers DTI. If the credit report reflects any late payments in the last 12 months, the Mortgagee must utilize 5 percent of the outstanding balance as the Borrowers monthly debt to be included in the DTI.”
We discuss a lot of aspects of the FHA home loan process, but sometimes it’s a very good idea to go right to the source–the FHA itself–to get the agency’s take on certain aspects of the FHA loan process. The FHA official site–www.FHA.gov–has some good advice for borrowers contemplating their loan options including interest-only loans and adjustable rate mortgages (ARMs).
What does the agency say to potential borrowers about these kinds of loans? One of the first pieces of advice is along the basic lines of, “do your homework, and be sure to read the fine print”. The FHA official site actually directs readers to look at another official government website–the FDIC official site–for some sound advice on how to approach the mortgage loan process where ARMs and interest-only mortgages are concerned:
“Owning a home is part of the American dream. But high home prices may make the dream seem out of reach. To make monthly mortgage payments more affordable, many lenders offer home loans that allow you to (1) pay only the interest on the loan during the first few years of the loan term or (2) make only a specified minimum payment that could be less than the monthly interest on the loan.”
It doesn’t matter whether a borrower is contemplating a new purchase loan or a refinance loan with either of these two options–the same basic advice applies to both transactions. The FDIC urges potential borrowers to carefully view the risks and benefits of these loans compared to fixed rate mortgages to decide which the applicant is more comfortable with.
For example, when it comes to Interest Only mortgages or refinancing, the FDIC site explains, ” Traditional mortgages require that each month you pay back some of the money you borrowed (the principal) plus the interest on that money. The principal you owe on your mortgage decreases over the term of the loan. In contrast, an I-O payment plan allows you to pay only the interest for a specified number of years. After that, you must repay both the principal and the interest.”
Borrowers will find that interest only payment plans feature adjustable interest rates, “which means that the interest rate and monthly payment will change over the term of the loan. The changes may be as often as once a month or as seldom as every 3 to 5 years, depending on the terms of your loan. For example, a 5/1 ARM has a fixed interest rate for the first 5 years; after that, the rate can change once a year (the “1” in 5/1) during the rest of the loan.”
Furthermore, “The I-O payment period is typically between 3 and 10 years. After that, your monthly payment will increase–even if interest rates stay the same–because you must pay back the principal as well as the interest. For example, if you take out a 30-year mortgage loan with a 5-year I-O payment period, you can pay only interest for 5 years and then both principal and interest over the next 25 years. Because you begin to pay back the principal, your payments increase after year 5.”
Some borrowers apply for an ARM loan with the intention of refinancing later into a fixed-rate mortgage. This type of long term borrowing strategy is good to consider regardless of whether you plan to use a fixed-rate or ARM loan or any other type of loan product; the idea that the borrower has a long term plan for dealing with the loan is the important thing. Looking ahead and planning for the future is an important aspect of being a fully informed borrower.
You can learn more about interest only loans and ARM loans in general at the FDIC official site.
Once reader asks, “What about student loans, that are ‘in school’, and not even due and payable? We tried to get the Income Based Repayment, from the servicer, and they told us the loans are not due payable yet, therefore they can not be calculated for the Income Based Repayment. That doesnt seem fair. The statement says they are not due for 5 years, and then an additional 6 months after I graduate.”
FHA loan rules in HUD 4000.1 address student loans that have not yet come due as “deferred obligations” which page 180 of HUD 4000.1 describes as, “liabilities that have been incurred but where payment is deferred or has not yet commenced, including accounts in forbearance”.
What do FHA loan rules say about student loans that have been incurred but have not been declared payable yet? To begin, these debts, which may not be due for some time, still must be included in a borrower’s financial obligations for the purpose of the loan. But if no monthly payment amount is available, how is the lender supposed to calculate what the financial obligation might be?
HUD 4000.1 states, on pages 180 and 181 that it’s the lender’s job to verify the debt by getting a statement from the financial institution issuing the student loan that the payment is indeed deferred. “The Mortgagee must obtain written documentation of the deferral of the liability from the creditor and evidence of the outstanding balance and terms of the deferred liability. The Mortgagee must obtain evidence of the anticipated monthly payment obligation, if available.”
In cases where the anticipated amount is not available, or when the payment is currently at “zero”, FHA loan rules are clear.
“The Mortgagee must use the actual monthly payment to be paid on a deferred liability, whenever available. If the actual monthly payment is not available for installment debt, the Mortgagee must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment. For a student loan, if the actual monthly payment is zero or is not available, the Mortgagee must utilize 2 percent of the outstanding balance to establish the monthly payment.”
So the answer to the reader’s question is that the “2 percent rule” mentioned above would apply in any case where there is a deferred student loan and the anticipated monthly payment is not available.
Last week, mortgage rates were on an upward trend, moving higher in small increments three out of the four business days before the long weekend. On Wednesday there was a glimmer of recovery, but on Thursday rates were back on the move upward, eliminating the previous range of rates for conventional mortgages and consolidating into one fixed-rate best execution number.
30-year fixed rate conventional mortgages had been in a best execution range between as low as 3.625% (the previous Friday) and 3.875%. We closed out the week with rates moving into a best execution 3.75% depending on the lender. In some cases borrowers may notice changes in closing costs rather than actual rates, but suffice it to say that it’s been a bumpy road for these rates lately.
FHA mortgage rates are still being reported in a best execution comfort zone range between 3.25% and 3.5%. If an upward trend persists we will likely see that range disappear soon in favor of a 3.5% best execution rate. That is dependent on market forces, investor reaction to the latest trends, breaking news, and other factors.
The best execution rates you see here are not available to all borrowers or from all lenders. Your ability to access these rates depends greatly on your FICO scores and other loan qualifications. Your experience may vary.
What’s ahead for rates this week? It’s not clear but there are some scheduled events that could have the power to move rates one way or the other. Fed Chair Janet Yellin is scheduled to speak on Tuesday, the same day a consumer confidence report is due out.
Friday, April Fool’s Day, the always-important Employment Situation Report is due, so that could also have an effect on rates. If you are on the fence this week about locking or floating it may be best to have a conversation with your lender sooner rather than later. Floating is never without risks, but this week you should definitely get some advice about possible elevated risk ahead of those scheduled events.
Housing discrimination affects people in all stages of the journey to find a home. It doesn’t matter whether you are a renter, a prospective borrower, or somewhere in between; the rules that make up the Fair Housing Act apply across the board for those looking for a place to live.
The FHA/HUD official site recently published a press release announcing a settlement in a California housing discrimination case; sometimes the victims of housing discrimination are the only ones who can prevent further discrimination from happening. Those who report their experiences do a service to themselves and to future borrowers and renters by helping to end illegal practices such as the ones mentioned in HUDNo.16-035:
“The U.S. Department of Housing and Urban Development (HUD) announced today an agreement with a Cupertino, California-based property management company, its agents and the owners of a Santa Clara apartment complex to resolve allegations they discriminated against applicants based upon their national origin.”
HUD claims that “…the Salwasser Group, Inc. (doing business as Income Property Specialists) and property owners Gary and Mary Drieger discriminated against prospective renters by refusing to accept Mexican forms of identification, while encouraging a Canadian passport holder to apply for an apartment.”
As the press release points out, federal law prohibits such discriminatory practices. “The Fair Housing Act prohibits discrimination in rental, sales or home lending transactions based on a persons national origin. This includes discrimination based on a persons ancestry or country of birth outside the United States.
“Where a person is from should not influence the housing options that are available to them, says Gustavo Velasquez, HUD Assistant Secretary for Fair Housing and Equal Opportunity, who was quoted in the press release. He adds, The Fair Housing Act requires property owners to treat everyone equally and HUD will continue to take action when they fail to meet that obligation.”
How did this case get the attention of HUD? “Project Sentinel, a fair housing organization based in Santa Clara, filed a complaint after performing fair housing testing that allegedly showed that the owners, through the management company, discriminated on the basis of national origin by refusing to rent, and imposing different terms and conditions regarding government-issued forms of identification.”
According to the press release the respondents allegedly informed testers who offered a Mexican passport and a Mexican consular identification that such identification would not be accepted, but encouraged testers using a Canadian passport to apply.
Under the settlement agreement, “…the owners and management company agreed to pay Project Sentinel a monetary settlement; obtain fair housing training on how not to discriminate; and implement a HUD-approved non-discrimination policy. The owners and manager also agreed to implement a HUD-approved procedure for accepting government-issued forms of identification and post a HUD-approved fair housing poster in the public area of its rental property”.
Any borrower or renter who has experienced discrimination should file a complaint by contacting the HUD Office of Fair Housing and Equal Opportunity at (800) 669-9777 (voice) or (800) 927-9275 (TTY).
When you buy a home with an FHA mortgage, one of the appraisal requirements that must be met on certain older homes is that there must be an awareness of potential lead paint hazards in the property. A home that was built prior to 1978 may contain lead paint, and HUD 4000.1 page 115 states clearly:
“If the Property was built before 1978, the seller must disclose any information known about lead-based paint and lead-based paint hazards before selling the house, in accordance with the HUD-EPA Lead Disclosure Rule (24 CFR 35, subpart A, and the identical 40 CFR 745, subpart F). For such Properties, the Mortgagee must ensure that:
–the Borrower has been provided the EPA-approved information pamphlet on identifying and controlling lead-based paint hazards (Protect Your Family From Lead In Your Home);
–the Borrower was given a 10-Day period before becoming obligated to purchase the home to conduct a lead-based paint inspection or risk assessment to determine the presence of lead-based paint or lead-based paint hazards, or waived the opportunity;”
Now, the Department of Housing and Urban Development is offering a multi-million dollar grant program to state and local agencies to help clean up lead paint hazards in the home.
According to a recent press release issued on the FHA/HUD official site, “The U.S. Department of Housing and Urban Development today announced that it is making more than $100 million in grants available to help eliminate dangerous lead-based paint hazards from the homes of lower income families. These grants are intended to protect young children from lead poisoning and provide an opportunity for states and local communities to establish programs to control health and safety hazards by assessing and remediating lead-based paint and other housing related health hazards”.
HUD Secretary Julian Castro says it is important to insure the quality and safety of housing by managing the hazards of lead-based paint. “Since 1973, HUD has been leading the charge in lead hazard identification and abatement throughout the housing industry” Castro says in the press release. “We know that there’s no more important mission than to protect our children and give them the greatest opportunity in their lives. These important grants will help keep thousands of children safe and healthy, free of debilitating lead poisoning.”
The HUD grants are made to state and local governments via HUD’s Lead-Based Paint Hazard Control Program totaling $43 million, and its Lead Hazard Reduction Demonstration Program. According to the press release, “In these grant programs, HUD is providing nearly $13 million in healthy homes supplemental funds to promote identify and remediate additional housing related health hazards in homes with lead based paint hazards”.
We get many comments and questions about FHA home loan rules in our comments section. Here’s one of the most recent. “I have some money saved up, however I have not been employed for 2.5 years. I would like FHA loan if possible. My main issue is all my money is cash and not in the bank, and I have NO employment history for the past 2 years.”
Basically it seems that the reader is asking whether an FHA loan is possible without a job. This is a complex issue-FHA loans permit the lender to consider public assistance, for example, as income.
The source of income must be verifiable by the lender and deemed likely to continue. However, in the case of this reader question, there is no income at all mentioned. What do FHA loan rules in HUD 4000.1 say about income/employment as a requirement of loan approval? The answer is found on page 186:
“The Mortgagee must document the Borrowers income and employment history, verify the accuracy of the amounts of income being reported, and determine if the income can be considered as Effective Income in accordance with the requirements listed below. The Mortgagee may only consider income if it is legally derived and, when required, properly reported as income on the Borrowers tax returns. Negative income must be subtracted from the Borrowers gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.”
The lender is required to document two years of employment, though that two years may be with different employers. The lender will require pay stubs, tax documents and/or other paperwork that shows the borrower’s income as it is now or has been in the past. Where there is no job or income to document, the lender would have no way to establish a borrower’s debt-to-income ratio.
While it is true that some borrowers pay for a home in cash, in this case the reader wants to take out an FHA mortgage loan using only cash reserves to secure the loan. Could this be permitted?
It seems unlikely, but if a borrower had cash reserves (and no income) that covered the loan to the lender’s satisfaction that is a situation that might be “theoretically possible” depending on lender standards. However the lender would need documentation of this and a way to prove those cash reserves exist. In “real world” FHA loan situations, it seems likely that a prolonged and current lack of employment would work against a borrower in most cases.
That said, FHA loan rules DO provide guidance to the lender for “cash on hand” which refers to cash a borrower has that is held “outside a financial institution”. IF the situation described by the reader is acceptable to the lender, FHA loan rules state that in many instances the lender would be required to “verify that the Borrowers Cash on Hand is deposited in a financial institution or held by the escrow/title company” with additional documentation required for that source of funds.
“The Mortgagee must verify and document the Borrowers Cash on Hand by obtaining an explanation from the Borrower describing how the funds were accumulated and the amount of time it took to accumulate the funds. The Mortgagee must also determine the reasonableness of the accumulation based on the time period during which the funds were saved and the Borrowers:
–documented expenses; and
–history of using financial institutions”.