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

Monthly Archives: July 2016

FHA Loan Questions: Appraisal Concerns

2015-29A reader asks, “I am about to put my house on the market. But now I’m starting to worry about a crack on the basement floor that has been there since I bought the house, I never worried about the crack, its due to the house settling to one side years ago. Other than that the house is structurally sound and basement is very dry. I think the house dips about 3/4 inch. Is this something that would cause an inspection to fail?”

There are several issues that can make questions like these difficult to answer. The first is to remind borrowers and sellers alike that an FHA appraisal is NOT an inspection, nor does passing the FHA appraisal process equal an FHA stamp of approval on a property that it is defect-free.

Borrowers should understand this and save money for the optional, but crucial home inspection which is a far more in-depth look at a property. FHA loan rules do not require this inspection, but borrowers should never purchase a home without paying for the optional inspection in addition to the mandatory FHA appraisal.

Another important issue is not knowing the nature of the crack mentioned in the question. Is this indicative of a foundation problem? Some other issue? Is it purely cosmetic? Foundation requirements are addressed in general in HUD 4000.1:

“The Mortgagee must confirm that all foundations will be serviceable for the life of the Mortgage and adequate to withstand all normal loads imposed.” If the appraisal shows that the foundation is not considered serviceable for the life of the mortgage, corrections may be required or the loan may be denied altogether depending on the severity of the problem.

Then there is state/local building code to contend with. FHA loan rules do not contain all state/local building codes, but these codes DO apply. FHA loan rules state that a home must be in compliance to be approved for a loan; if the FHA appraiser finds conditions that do not meet state or local code and recommends corrections, these corrections would be made as a condition of loan approval.

Basically in such cases it’s a very good idea to consult an authority on state/local code to see if a particular condition is considered in violation or not. It is very important for buyers and sellers alike to remember that FHA loan rules in HUD 4000.1 aren’t the only ones that can affect a real estate transaction if that transaction is to be paid for by an FHA mortgage.

State law, building code, and lender standards may all apply in one way or another above and beyond FHA loan rules. Yes, this can make for some complex issues when it comes to appraisals and getting a property approved for an FHA mortgage.

But these rules are often designed to protect buyers, sellers, and/or lenders. Appraisal rules are designed to insure a home has a “remaining economic life” for the duration of the home loan, among other things. A borrower who purchases a home with an FHA mortgage should have a reasonable expectation of being able to sell the property at some point. FHA minimum property standards help insure that is possible.

 

 

Conventional Loans Versus FHA Mortgages

What’s the major difference between FHA mortgage loans and conventional loans? Actually there are several, but the first and most basic difference is that an FHA mortgage is guaranteed by the government, where a conventional loan is not.

The government’s backing of an FHA mortgage makes the loan less of a risk to the financial institution offering you a line of credit to purchase your home.

And because the loan is backed by the government, FHA mortgages feature lower down payment requirements than many conventional mortgages. You may find conventional loans requiring 10 or even 20 percent down, where an FHA mortgage for qualified borrowers with FICO scores at 580 or above may qualify for maximum financing. That means a down payment requirement of only 3.5% of the adjusted value of the home.

It’s important to remember that the 580 FICO score is an FHA minimum standard and that lender requirements may apply. Lenders may ask for FICO scores of 620 or higher for maximum financing, and if you have marginal FICO scores your down payment requirement may increase.

FHA home loans do not permit lenders to penalize you for early payoff of your mortgage loan. You also must not be charged to get a final payoff amount or to get information “essential to the payoff” according to HUD 4000.1. FHA lenders may not charge you for “recording the Payoff of the Mortgage in states where recordation is the responsibility of the Mortgagee” according to the same rulebook.

Conventional loans require private mortgage insurance unless your down payment is high enough; FHA loans require a mortgage insurance premium. This is an area where the two are similar.

What’s not similar is that FHA home loans can’t restrict your ability to resell the property as you see fit except for a 90 day restriction when the home is first purchased. This is to prevent “flipping”.

FHA loans are also assumable with the participation of the lender. This means that a borrower can permit another person to “take over” the loan at some point if needed. The lender will need to qualify the person assuming the mortgage, but the original borrower is not restricted from seeking an FHA loan assumption if needed.

FHA and conventional loans may have varying credit standards. An FHA loan, backed by the government, may have more forgiving terms than a conventional loan for the same amount and duration. Much depends on the lender, your financial qualifications, and your individual circumstances.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:

http://www.fha.com/fha_loan_limits_widget

Mortgage Rate Trends: Slightly Lower After Fed

2015-02All eyes were on the Fed on Wednesday, with investors looking for any sign of a Fed move to hike interest rates. Some market watchers thought the Fed might drop a hint or make specific statements about what it might do in the next meeting; the Fed made no such statements.

The reaction to this was mixed, some lenders repriced for the better, but not all. You may see changes in the next business day but as it stands at the time of this writing, things are (best execution) more or less where they were yesterday, with some lenders offering slightly lower rates or closing costs.

30-year fixed rate best execution interest rate numbers are at or near 3.5% at the time of this writing, with FHA mortgage rates still in the FHA comfort zone of 3.25%. It will be interesting to see what happens in the remainder of the week; some market watchers believe floating has a lower degree of risk in light of Wednesday’s events than it did the day prior. However that doesn’t factor in any developments overnight, so it pays to keep a close eye on the news if you are tempted to float.

The mortgage loan rates you see listed here may not be available to all borrowers or from all lenders. Your access to these rates, which are listed as “best execution”, depends greatly on your FICO scores, and other financial qualifications. Your experience may vary.

As always, floating is never risk-free, but it’s likely we could see a bit more improvement tomorrow, given that there are lenders who didn’t reprice for the better following a non-aggressive (towards raising rates) Fed statement and good news from bond markets (which also helped improve rates a bit).

There’s talk among industry professionals at the moment about the range that mortgage loan rates are moving in; for now it’s a small one, but being on the lower end of that range at the moment (especially for FHA rates) is sure to please borrowers who may wish to lock now and cut out any uncertainty over the FHA rate environment going forward through the end of this week and the start of next week.

If you are tempted to float, consider how far out your closing date might be, and decide in advance how high rates might climb before you cut your losses and commit to a mortgage loan interest rate lock with your lender. As mentioned above, floating is never without a degree of risk (we can’t emphasize that enough), but in the very short term than risk may be diminished somewhat. Don’t count on that sticking around for long as there are many variables that can and often do appear that can influence mortgage rates. Those variables include breaking news from home and abroad, which is important to keep in mind. Overnight many things can change.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:

http://www.fha.com/fha_loan_limits_widget

FHA Loan Questions: Income Verification

052A reader asks, “I threw out my pay stubs not knowing that I would be purchasing a home this soon. Is there anything else that can be used in place of pay stubs to get approved for an FHA loan?”

“I provided copies of my last four pay checks, a statement from my employer showing my cumulative earnings so far this year, my original W2s from 2014 and 2015, my federal and state taxes from 2014 and 2015, and three months worth of bank statements that show the direct deposit from my employer every two weeks for those three months.”

In general, you may find that tax documentation, current pay stubs, and bank statements COULD provide an acceptable substitute, depending on the lender.

However, this is a situation that requires a borrower to have a conversation with the loan officer to determine what might be acceptable. Income verification is an important part of the FHA loan application process; FHA has rules that govern what the lender must do to complete that verification. But FHA loan rules aren’t the only guidelines that affect how the lender must do her job-lender standards also apply.

That said, what does the FHA loan rulebook say about this type of documentation? FHA loan rules in HUD 4000.1, page 187 offer some guidelines to the lender:

“If using alternative documentation, the Mortgagee must:

–obtain copies of the most recent pay stub that shows the Borrowers year- to-date earnings;
–obtain copies of the original IRS W-2 forms from the previous two years;
and
–document current employment by telephone, sign and date the verification documentation, and note the name, title, and telephone number of the person with whom employment was verified.”

So using alternates to a set of pay stubs may be acceptable under FHA loan rules, but the lender may have additional requirements. Also, state law or other factors could also have a say in how such situations are handled depending on circumstances.

The most important thing for many potential FHA borrowers to remember is that you can gather these details or find out how to collect them at the appropriate time while in the planning stages of your loan.

It’s important to come to the FHA loan application process as fully prepared as possible. If you start planning for an FHA mortgage, you may wish to start gathering your required documentation during this time including making copies of your tax records, etc.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:

http://www.fha.com/fha_loan_limits_widget

Mortgage Loan Interest Rate Trends: Highest In Four Weeks

2015-02There have been many influences on lower mortgage rates as of late, and as the trend has shifted to a move higher, we’re seeing stateside economic data returning to a greater place of influence over rates than Brexit headlines.

One good example? All eyes are turning to the Fed this week-nobody expects the Fed to make any earth-shattering pronouncements, but investor reaction to this week’s activity could well pressure rates higher depending on circumstances.

In the shadow of a Fed policy announcement on Wednesday, mortgage rates pushed higher on Tuesday, putting 30-year conventional fixed rate loans more solidly in 3.5% best execution territory. FHA mortgage loan rates, at the time of this writing, are at a best execution 3.25%.

As always, best execution rates assume ideal conditions. A borrowers FICO scores, loan repayment history and other financial qualifications will play an important role in determining access to rates like the ones listed here. Your experience may vary. The rates seen here are not available from all lenders or to all borrowers.

Advice seems almost unified to borrowers not sure whether to lock a mortgage rate commitment with the lender now, or “float” in hopes of lower rates to come. Floating definitely carries an elevated risk this week, especially ahead of the Fed. The prevailing advice seems to be pro-locking for any borrower with a closing date soon, but even for those with more thinking time, floating could be more risky this week.

As mentioned above, nobody expects a major announcement from the Fed, but the statement it does make could be a hint of things to come, and investors are likely to pounce on anything associated with rate hikes in the future. The Fed talking about hiking interest rates does not directly affect mortgage loan interest rates, but investor reaction to that talk might.

Have a conversation with your loan officer before choosing to float this week-you may be glad you did. We will likely devote some extra attention to mortgage rates in the coming few days depending on the outcome of Tuesday’s Fed activity.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:

http://www.fha.com/fha_loan_limits_widget

 

FHA Loan Questions: Unpaid Tax Liens

2015-35A reader asks, “I entered into an electronic direct withdrawal from my checking account repayment plan with with IRS for tax underpayment…after meeting with IRS, payment agreement request was approved. After the agreement was approved IRS filed a lien on the owed amount. I am not currently not a property owner, but I would like to buy a home in the next year.”

“However the tax lien caused my credit score to drop to 649. I currently earn $92,000.00 from retirement income, and $40,000.00 from employment income. debt ration is where it should be. My question is can I ever qualify for FHA home loan, if the lien is not paid? Or (does) the lien (have) to be paid in full, along with a paid document submitted to all credit bureaus?”

FHA loan rules in HUD 4000.1 page 131 cover this issue, stating that there’s a major difference in how delinquent federal tax debts are viewed compared to those where the borrower has entered into a repayment agreement.

According to that section of the FHA loan rule book, “Borrowers with delinquent Federal Tax Debt are ineligible. Tax liens may remain unpaid if the Borrower has entered into a valid repayment agreement with the federal agency owed to make regular payments on the debt and the Borrower has made timely payments for at least three months of scheduled payments. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.”

Such payment agreements can and do count toward the borrower’s debt to income ratio (DTI): “The Mortgagee must include the payment amount in the agreement in the calculation of the Borrowers Debt-to-Income (DTI) ratio.”

Additionally, “The Mortgagee must include documentation from the IRS evidencing the repayment agreement and verification of payments made, if applicable.” So documentation will be required to show the agreement has been made.

There are no exceptions made for the three months of payment requirement, borrowers would need to wait to apply for the mortgage loan until they can show the minimum required payments have been made.

The FICO score issue raised in the reader question is important; borrowers should know that while FHA mortgage loan standards permit FICO scores as low as 580 for maximum financing, many lenders will require higher FICO scores. These scores are often in a range between 620 and 640.

Potential FHA borrowers in situations like these should consider contacting the FHA directly at their toll free number, 1-800 CALL FHA, to request a referral to a local, HUD-approved housing counselor who may be able to offer pre-purchase planning advice including how to re-establish good credit in the wake of a financial problem or “economic event”. Pre-purchase counseling has helped many to better understand what it takes to qualify for an FHA mortgage loan and prepare for the application.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease.

Get yours today:

http://www.fha.com/fha_loan_limits_widget

FHA Loan Questions: Occupancy Rules

104What are the FHA home loan rules for occupancy? A reader got in touch with us recently with a question that pertains to this important issue, asking, “I live in California, but I want to purchase a home in Virginia Beach, Va. Can I still use FHA loan to purchase a home in Virginia. My son will be living at the house that Im planning to purchase. He lives and works in Virginia.”

FHA loan rules that govern this issue can be found on page 135 of HUD 4000.1. FHA home loans are intended for borrowers purchasing principal residences, but what does that term mean? HUD 4000.1 has a specific definition of a “principal residence” on page 135, which states:

“A Principal Residence refers to a dwelling where the Borrower maintains or will maintain their permanent place of abode, and which the Borrower typically occupies or will occupy for the majority of the calendar year. A person may have only one Principal Residence at any one time.”

With respect to the reader’s question, FHA loan rules state:

“At least one Borrower must occupy the Property within 60 Days of signing the security instrument and intend to continue occupancy for at least one year.” Furthermore, FHA loan rules also add, “203(k) Rehabilitation products may have different requirements for the length of time to occupy the Property”.

The situation that is described in the reader question would not be permitted unless both people mentioned in the question-the parent and the son-were obligated on the FHA loan together. A non-occupying co-borrower situation is permitted by FHA home loans, but a situation where a single borrower purchases a home as an absentee owner would not be allowed.

Furthermore, FHA loan rules state that borrowers who already have a principal residence and want to purchase a home with an FHA mortgage would have to make the new purchase property their principal residence.

This is to prevent borrowers from using FHA mortgages to purchase investment properties, or buy a home to rent out to another person. According to HUD 4000.1, “FHA will not insure a Mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining Investment Properties, even if the Property to be insured will be the only one owned using FHA mortgage insurance.”

In situations like the one mentioned in the reader question above, it’s best to discuss options with the lender that include a non-occupying co-borrower. Depending on circumstances, a higher down payment may be required in such cases, but there may be exceptions for family members borrowing together.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:

http://www.fha.com/fha_loan_limits_widget

FHA Loan Questions: Credit Scores and Down Payments

108We get many questions about FHA loan standards for FICO scores and similar issues. Here’s one of the latest:

“I am looking to purchase a mobile home for 25000. I have a 610 credit score and a stable job (been there for 8 years). I want to put down 40% of the loan. Do you think I would have any major issues even with a low credit score?”

Questions like these are a good reminded that plenty of misconceptions about the home loan process exist. Unfortunately one of the prevailing misconceptions is that FICO scores are THE determining factor in home loan approval.

That is not to dismiss the importance of FICO scores. Lender standards require a borrower to have a minimum FICO score (often between 620 and 640 depending on the lender) but once the FICO score part of the equation has been settled, there are other requirements that are just as important.

For example, a borrower’s debt-to-income ratio is a significant part of a lender’s decision to approve or deny a loan. If your monthly debts take up too much of your monthly salary, the lender may decide that the loan isn’t affordable for the borrower.

Another important factor is the borrower’s record of timely payments on financial obligations. In general, you should never come to the home loan application process with anything less than 12 months of on-time payments on all financial obligations. Anything less jeopardizes your chances at loan approval.

The reader’s question includes mention of a higher mortgage down payment. This is what industry professionals can use as a “compensating factor” where other qualifications may be lacking. A lower FICO score may be offset by a higher down payment depending on circumstances.

So the short answer is that the borrower should have a conversation with a loan officer to see what may be possible. Lender standards and requirements vary, so what may be acceptable at one financial institution may not be permitted at another. Talking to a lender to see what is possible is a very good idea in cases like these.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:

http://www.fha.com/fha_loan_limits_widget

Mortgage Rate Trends: Pushing Higher

2015-02Since our last report, mortgage loan rates have pushed forward; they moved higher on both Thursday and Friday of last week. We have several scheduled economic data releases this week and a Fed meeting that could push rates further depending on investor reaction to them.

At the time of this writing, 30-year fixed rate conventional mortgages are in a best-execution range between 3.375% and 3.625% depending on the lender. 3.5% is likely more common according to our sources but your experience may vary depending on a variety of factors.

FHA loan rates are still holding in the best execution 3.25% comfort zone, but if upward movement continues we may see FHA rates break out into a range with 3.25% at the bottom end initially.

Best execution rates assume ideal conditions; your FICO scores, loan repayment history and a variety of other financial qualifications will play an important part in determining your access to these rates. These rates are not available from all lenders or to all borrowers.

This week does offer some potential for rising rates. New home sales data is due out Tuesday, the Fed has its scheduled meeting on Wednesday, a pending home sales report is due out on Wednesday and there’s a Gross Domestic Product report coming out on Friday. Depending on investor reaction to any or all of these, we could see elevated potential for upward pressure on mortgage loan rates.

The “lock or float” question at present may depend on how close you are to your closing date. Borrowers tempted to float should think about how much time they have between now and closing; the shorter the wait, the higher your risk could be (based on what is coming from our sources). Those who have more time until closing might fare better if floating is the goal.

Floating-holding off on a mortgage loan interest rate lock commitment with the lender-is never free of risk, but in the current rate environment that risk can be elevated. Talk to your loan officer before choosing to float, especially if your closing date is in 90 days or less.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:

http://www.fha.com/fha_loan_limits_widget

FHA Mortgage Loan Terms: Understanding Equity

Home equity is an important term to understand when you’re applying for any kind of mortgage loan, but for some loans equity is a larger factor than others. For example, when you apply for a new purchase FHA loan to buy a home, you start out with 3.5% of the adjusted price of the home as your equity. That’s the amount of your down payment, and the equity grows over time with the number of payments you make.

When you apply for a home equity loan, a home equity line of credit, or an FHA Home Equity Conversion Mortgage (HECM), you’re applying for a loan based on the amount of equity you have built up. HECM loans in particular require the property to be either paid in full or very close to being paid off. You are taking out a loan against that full equity in the property, and in general for HECM loans the note is not due until the borrower dies or sells the home.

Equity in the home is not the same as the appraised value of the property. The equity is the current market value of the property minus any remaining payments you have to make, so equity depends on the market value of the home. That is why, in 2008 when property values dropped, many home owners reported being “underwater” on their homes, owning more than the property was worth on the market at the time.

As the housing market recovered and property values rose once again, the amount of equity a homeowner had also went up depending on how many payments were left on the mortgage. A property that grows in value also grows in equity.

Equity is not what people in the financial industry call “liquid”, so you can’t “spend” the equity in your property as such, but you can take out a loan to take advantage of that equity. Borrowers who have paid on their mortgages for a long time have more equity to take advantage of than those who have only been paying for a few years.