Monthly Archives: August 2016
When the lender is adding up an FHA loan applicant’s income and monthly financial obligations for the purpose of calculating debt ratios, there are some debts that can be more complicated than others. Student loans, for example, can be tricky because a borrower may have student loan debt that is in “deferred” status, while others may be paying on their loans at the time of the loan application or soon thereafter.
Here’s a recent reader question on the subject:
“I cannot find anything that talks about NON deferred student loans. I have a client with a $63 payment on their credit report ($25,000 student loan balance). The loan is NOT in deferment, he pays $63 per month. The u/w is telling me I must use the greater of 1% of the balance or the statement that he provided. This makes sense for DEFERRED, but if it not deferred and the credit report shows the monthly, why cant I use that to qualify?”
FHA Mortgagee Letter 2016-08, released in April of 2016, has the following information regarding student loan debt:
“Regardless of the payment status, the Mortgagee must use either:
the greater of:
1 percent of the outstanding balance on the loan; or the monthly payment reported on the Borrower’s credit report:
the actual documented payment, provided the payment will fully amortize the loan over its term”.
As you can see, based on the reading of the above quote from the FHA/HUD official site, the FHA loan requirement according to this April 2016 update of FHA loan rules instructs the lender to use the GREATER amount.
So in cases where the borrower’s actual monthly payment is lower than the amount arrived at when calculating one percent of the outstanding balance on the loan, the lender must use that larger amount to calculate the debt-to-income ratio. Borrowers who have deferred student loans are, under this new rule, actually being given a break compared to other types of deferred obligations where the lender must use five percent instead of one percent to calculate the debt-to-income ratio.
Deferred obligations are defined by the FHA as follows:
“Deferred obligations (excluding Student Loans) refer to liabilities that have been incurred but where payment is deferred or has not yet commenced, including accounts in forbearance.”
For more information on your specific circumstances regarding deferred obligations and/or deferred student loans and how they affect your FHA loan application, speak to a loan officer.
Monday saw mortgage loan interest rates taking back a bit of ground from Friday’s move higher; Tuesday saw some lenders keeping things unchanged while others moved a bit higher.
There are some question marks around scheduled economic data releases on Wednesday and Friday, which could resolve as upward pressure on rates depending on investor reaction to Wednesday’s Pending Home Sales report and a national employment report also due on Weds.
These reports in and of themselves don’t “do” anything to mortgage loan rates, it’s the behavior of the investors in the wake of those reports that creates the changes in rates we see depending on how those reports go.
Friday is another day of employment data with the Employment Situation report-something that has moved rates in the past due to investor reaction to the data it contains. So it’s a tricky time to be on the fence about a mortgage loan interest rate lock. Many market watchers say locking is a good strategy in times like these, but don’t delay in at least getting some advice from your loan officer as soon as possible.
Locking is never risk-free, but this week seems to be a time of elevated risk for anyone holding off on making a mortgage loan interest rate lock commitment with the lender in hopes that interest rates might fall.
At the time of this writing, 30-year fixed rate conventional mortgages are still being reported in a best-execution range between 3.375% and 3.5%. FHA mortgage loans are also in a best-execution range of rates with 3.0% at the bottom end and 3.25% at the upper end.
FHA mortgage rates tend to vary more depending on the lender, so it’s definitely a good idea to shop around for the most competitive rate.
Remember, the rates you see listed here are quoted as “best execution” rates. This assumes a borrower with ideal financial qualifications including outstanding FICO scores, loan repayment history, etc. Your experience may vary and for FHA mortgages the availability of a participating lender willing to offer such best execution rates is also a factor.
According to HUDNo.16-127, “The Federal Housing Administration (FHA) today announced new procedures to strengthen the process mortgage servicers use to help struggling families avoid foreclosure and remain in their homes. FHA is streamlining its loss mitigation protocols that servicers must use when evaluating and deploying home retention options, foreclosure alternatives that allow delinquent borrowers to retain their home.”
By way of background, the FHA official site (in Mortgagee Letter 2016-14) explains, “The evolution of FHAs loss mitigation guidance has also led to improved consumer engagement, the streamlining of FHAs Pre-Foreclosure Sale option, and a new loan modification by which Mortgagees provide borrowers with a more sustainable monthly mortgage payment.”
The loss mitigation program referred to above was created in 2009, “at the height of the economic crisis”, and is known as the FHA Home Affordable Modification Program or FHA-HAMP mortgage.
Under the new guidelines, the goals include an effort to “reduce the number of steps that a servicer and borrower must take to resolve a delinquency and enter into a loss mitigation home retention product. In addition, FHA is removing certain obstacles that will allow servicers greater flexibility for evaluating an unemployed borrower for a special forbearance agreement” according to HUDNo.16-127.
How will it all work? According to the press release, the FHA will:
-Require servicers to convert successful 3-month trial modifications into permanent modifications within 60 days instead of the average four-to-six months;
-Allow borrowers with three missed mortgage payments to qualify for a partial claim to bring their arrearages current versus the previous requirement for a minimum of four missed payments;
-End the traditional stand-alone Loan Modification option so struggling borrowers can access the FHA-HAMP option, with its greater payment relief, sooner; and
-Eliminate the required 12-month term for FHAs special forbearance option. This will allow servicers to offer this option to more unemployed households.
We’ll provide further information about the FHA HAMP program in a future blog post. You can also browse the FHA official site’s HAMP page at http://portal.hud.gov/hudportal/HUD?src=/hudprograms/fhahamp
When you purchase your home with an FHA mortgage loan, chances are you’re thinking more about moving in, getting settled, and making the home your own than you are the possibility that you could encounter financial hardship at some point and miss mortgage payments.
But these things do happen to some borrowers, and the FHA has a program set up to help those who get into financial trouble. The FHA HAMP program was created to help borrowers avoid foreclosure and keep them in the home. FHA HAMP is a loan modification program and not a refinance loan, which is an important distinction to make.
Under the terms of the FHA HAMP program, the FHA permits ” the use of a partial claim up to 30 percent of the unpaid principal balance as of the date of default combined with a loan modification” according to the official site. But before the borrower can fully enter FHA HAMP, a trial payment plan period must be successfully completed.
“The trial payment plan shall be for a three month period and the mortgagor must make each scheduled payment on time. The mortgagor’s monthly payment required during the trial payment plan must be the amount of the future modified mortgage payment. The Mortgagee must service the mortgage during the trial period in the same manner as it would service a mortgage in forbearance” according to FHA.gov.
In the event that the borrower “does not successfully complete the trial payment plan by making the three payments on time”, the borrower cannot be considered for FHA-HAMP.
Trial payment plan considerations aside, who is eligible for an FHA HAMP loan modification? According to FHA.gov, “Mortgagors with FHA-insured mortgages that do not qualify for other loss mitigation programs and with adequate debt-to-income ratios.” A downloadable PDF at the FHA official site adds the following information on FHA HAMP eligibility where the number of late or missed payments is concerned. Borrowers are eligible for FHA HAMP when:
“The existing FHA-insured mortgage is in default, but is not more than 12 full mortgage payments past due. A default is defined as 1 payment past due more than 30 days. For default calculation purposes, all months are determined to have 30 days. For example, a mortgage due for the July payment is in default on August 1st”.
For more information on participating in the FHA Home Affordable Modification Program, speak to your participating FHA loan officer.
A reader asks, “So what do I do if I bought a house with an FHA loan and 2 weeks after closing the roof leaks? You can visually see more than 3 layers of roofing without setting foot on the roof or a Ladder? Obviously the roof didnt have 2 years of life left in it and obviously it was in need of repair. Also the inspector I hired didnt go up on the roof either. What are my options now? Also code in my area is no more than 3 layers of roofing and after getting estimates the house has 5 layers on it.”
FHA loan appraisals and home inspections are two different things. The reader question in this particular case seems to indicate that the borrower paid for the optional, but very crucial home inspection in addition to having the appraisal done. This is the recommended course of action for all borrowers according to the FHA official site.
The home inspection is a process the borrower pays for independently of the FHA appraisal, which is only designed to insure MINIMUM standards are met. The inspection is intended to be a much closer look at the property, and at the end of the process the borrower should have an inspection report to read over detailing the results.
So what happens when a borrower pays for the optional home inspection but defects are found after moving into the home that were not listed on the inspection report?
This is a tricky issue for a variety of reasons including state law, and the language of the agreement the borrower enters into with the home inspector.
To begin, in such cases a borrower should always re-examine the inspection report. It’s also crucial to carefully examine the language of the contract or written work agreement with the inspector to see what provisions may or may not be made for such problems.
The language of the legally binding agreement you make with the home inspector to pay for services rendered will determine a great deal of what may be possible in terms of recourse.
And finally, it’s important to consider a consultation with a lawyer or someone with legal expertise in real estate law. As mentioned above, the laws of your state may play an important role in determining next steps in cases like these. Borrowers can always contact the FHA directly for advice by calling them at their toll-free number, 1-800 CALL FHA.
Mortgage loan rates were mostly unchanged last week, budging a bit on Friday after Fed chairperson Janet Yellin’s speech at an important event in Jackson Hole, Wyoming. Rates seemed to be in defensive mode in advance of this speech, which many looked to as a possible spoiler for mortgage loan rates. Why?
Because at the present moment, investors are looking hard for any hint from the Fed that another interest rate hike might occur, the timing of such a hike, and the severity.
The Fed’s rate hike issues have affected mortgage rates in months and years past as investors react to the news or lack of it. Investor behavior is responsible for the Fed-related volatility in mortgage loan rates rather than the Fed itself, so it’s important to make the distinction between what the Fed is actually doing, and investor reaction to that (which can affect mortgage rates).
Friday rates crept a bit higher in the wake of the Jackson Hole event, but many borrowers would notice the difference in closing costs rather than actual higher interest rate numbers.
30-year fixed rate conventional mortgages were reported on Friday in a range between 3.375% and 3.5%, best execution. This has been the case for a while now, with daily fluctuations often being reflected (as mentioned above) in closing costs depending on the lender. FHA mortgage loan rates are, best execution, in a range between 3.0 and 3.25%, which is where they have camped out for some time now.
The rates mentioned here are “best execution” rates and may not be available to all borrowers or from all lenders. Your experience may vary.
Some market watches are using the word “volatile” to describe the short-term mortgage rate environment expected for the coming week. There are a number of scheduled economic data releases due out this week including an important employment report on Friday, which has the power to affect mortgage loan rates depending on investor reaction to the data in that report.
There are also some other releases which could affect things short term, but likely Friday’s event is the most significant. Monday a report known as the Core PCE (an inflation indicator) will be released, and Pending Home Sales stats come out on Wednesday.
Borrowers on the fence about locking or floating would do well to keep Friday in mind when planning a short-term strategy. It’s a good idea to have a discussion with your loan officer about this week’s potential volatility when planning ahead if you haven’t locked already.
There are many questions about FHA loans and bankruptcy. Here’s an example of the kinds of questions we answer on a regular basis about becoming eligible once more for an FHA mortgage in the wake of a bankruptcy discharge:
“My credit score is low and I will be discharged from bankruptcy coming this November. What can I do to raise my credit score and qualify for a FHA loan?”
It’s very important for borrowers in this situation to know that FHA loan rules in HUD 4000.1 require a minimum waiting time (also known as a ‘seasoning period’) before a borrower can apply for an FHA mortgage.
This waiting time begins at the time the bankruptcy is discharged, not from when it was initially filed. The waiting time depends on the type of bankruptcy, but in general borrowers can expect to wait between 12 and 24 months after the discharge of their bankruptcy.
During the seasoning period, FHA loan rules require the borrower to have established new credit and performed satisfactorily with on-time payments, but the rules also make provisions for those who choose not to establish new credit obligations. The on-time payment issue in the wake of a bankruptcy is critical, so borrowers should be prepared to meet all new financial obligations on time, every time in order to maximize chances for a new loan.
The reader mentions low credit scores. While FICO scores are not the only criteria for loan approval, credit scores are an important part of that equation. Reestablishing good credit is a crucial part of recovering from a bankruptcy in general, and borrowers can get help with pre-purchase planning including advice on how to prepare financially for a new loan.
This help is available by calling the FHA at their toll-free number (1-800 CALL FHA) and requesting a referral to a local, HUD-approved housing counselor or counseling agency.
Borrowers should avoid paying money to certain third-party “credit repair” agencies who may not actually be able to provide much lasting help for a borrower to prepare for a new home loan.
The government agency, The Consumer Financial Protection Bureau, offers some good advice on how to avoid being taken in by credit repair scams. Learn how to avoid being taken in by companies that aren’t actually trying to help you at the CFPB official site. (One warning sign is a requirement for you to pay before any services are rendered.)
The time between the bankruptcy discharge and your new application for a home loan is an opportunity to rebuild credit and become more creditworthy. It’s important to recognize the “seasoning period” is intended in part for a borrower to do just that and learn how to become a good credit risk.
A reader asks, “I have been told by my realtor and the lender that an appraisal on a house I own will be on record for 180 days. They said that the appraised value will be on record and no other FHA appraisal can be made during this 180 day period. Is there a master list that other lenders and appraisers cross reference during this six month period? My reading of your blog indicates that if another FHA buyer makes an offer on my property. a different appraisal would need to be performed.”
HUD 4000.1 does indeed contain language that leads one to believe that a new appraisal may be required. On page 120, we find the following:
“The Mortgagee must order a new appraisal for each Mortgage or refinance case number assignment and may not reuse an appraisal that was performed under another case number, even if the prior appraisal is not yet more than 120 Days old.”
However, a few pages later (on page 123) we learn:
“Where a Mortgagee uses an existing appraisal for a different Borrower, the Mortgagee must enter the new Borrowers information in FHAC. The Mortgagee must collect an appraisal fee from the new Borrower and refund the fee to the original Borrower. If a Case Transfer is involved, the new Mortgagee must enter the Borrowers information in FHAC. The new Mortgagee must collect an appraisal fee from the Borrower, and send the fee to the original Mortgagee, who, in turn, must refund the fee to the original Borrower.”
Based strictly on the reading of these two sections of HUD 4000.1, it’s easy to see that there may be circumstances where the borrower is able to use an existing appraisal for a different borrower. Lender standards, state law, and other factors may affect how or whether this is possible, but in any case the borrower who winds up using the appraisal for a given property is responsible for paying for that service rendered.
FHA loans in general don’t permit “second appraisals” when the desire is simply to increase the market value of the property. Exceptions are made when there are deficiencies in the original appraisal. From HUD 4000.1:
“A second appraisal may only be ordered if the Direct Endorsement (DE) underwriter (underwriter) determines the first appraisal is materially deficient and the Appraiser is unable or uncooperative in resolving the deficiency. The Mortgagee must fully document the deficiency and status of the appraisal in the mortgage file. The Mortgagee must pay for the second appraisal. Material deficiencies on appraisals are those deficiencies that have a direct impact on value and marketability.”
Borrowers who have further questions on this should discuss their needs with the loan officer to see what may be possible in a given circumstance. The appraisal fee is paid for by the borrower regardless of the outcome of the appraisal, so it’s important to remember that this is a charge for services rendered rather than a fee paid to obtain a specific result.
A reader asks, “I have a client that inherited property along with 2 siblings from the Mothers estate. The client has resided in the subject property for 1 year and now wants to buy the other siblings out. Is it correct, that this scenario would meet the exempt status of identity of interest guidelines?”
The reader is asking this question in reference to an earlier post we wrote about FHA loans and identity of interest transactions. An FHA mortgage typically requires a minimum 3.5% down payment for new purchase loans. But the required down payment can be higher if there is an “identity of interest” as described in HUD 4000.1:
“An Identity-of-Interest Transaction is a sale between parties with an existing Business Relationship or between Family Members. Business Relationship refers to an association between individuals or companies entered into for commercial purposes.” An identity of interest transaction requires a 15% down payment unless the borrower meets certain exemption guidelines.
In the situation described by the reader, is an exemption possible? The short answer to the reader’s question is, “It depends”. Why? HUD 4000.1 states in part:
“The 85 percent LTV restriction may be exceeded if a Borrower purchases as their Principal Residence:
-the Principal Residence of another Family Member; or
-a Property owned by another Family Member in which the Borrower has been a tenant for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.”
If the borrower meets one or both requirements above an exemption may be possible. It’s important to note that in the situation where the borrower is a tenant of the property, a written lease or alternative documentation as required/permitted by the lender will be a condition of the exception.
Also, lender standards, probate law, and/or state law may also have a say in how such a transaction may be carried out, so FHA loan rules are not the only ones at work in cases like these. A borrower may find that while he or she technically qualifies for the exemption, other factors may affect the transaction in general.
It’s important to seek advice on issues like these to see what other issues might play a role in the transaction. Discussing the situation with a loan officer may be the best place to begin.
Here’s a great example of a common question we are often asked: “How much is the minimum downpayment required for FHA loan? I am planning to purchase this property with my partner as primary residence. Are we qualified?”
The main issue with questions like these is that the question isn’t specific enough to answer to the reader’s satisfaction. Why? Because good credit scores aren’t enough, and lender FICO score requirements in general can vary between one financial institution and another.
Essentially, what a borrower needs to know when preparing to apply for an FHA mortgage includes (but is not limited to) a list of items. That list will include FICO scores (many lenders look for scores starting at between 620 and 640), but also includes your most recent 12 months of payment history on all financial obligations, the nature and duration of your employment, and the amount of down payment you have (3.5% of the adjusted purchase price is the minimum required down payment).
There are also things that the lender needs to calculate that can affect whether or not you are qualified for an FHA home loan. One of those calculations is your debt-to-income ratio.
FHA home loans do not have a minimum income dollar amount specified, nor do they have a maximum dollar amount you can earn and still be qualified to borrower. Instead, participating FHA lenders will review your verifiable income and compare that income to your financial obligations (including a projected monthly mortgage payment) to see what the percentage of total debt compared to the total income (calculated monthly) might be.
This ratio is very important for the purposes of approving or denying an FHA loan and it’s not something a borrower can get a specific decision for ahead of time. One can speculate based on approximate numbers whether loan qualification is possible (borrowers with a debt to income ratio at or higher than 50% for example, may have a difficult time getting loan approval unless there are compensating factors).
Because FHA requirements state the lender must review the applicant’s income sources to verify that they are stable, reliable, and likely to continue. This is a process that requires the lender to get pay stubs, tax information, and other data. Some kinds of income may not qualify to be included in the borrower’s debt to income calculation, and it’s the lender’s job to determine whether or not the borrower’s earnings meets FHA and lender standards.
This may sound complex, but it’s a necessary part of the process. Borrowers who aren’t sure if they financially qualify can call the FHA directly to request a referral to a local, HUD-approved housing counseling agency that can help with pre-purchase planning, budgeting, and credit issues.