Monthly Archives: September 2016
A recent press release on the FHA official site announces new proposals for FHA condo loan approval procedures. According to HUDNo.16-146, there are significant alterations to current FHA loan policy that are currently under review.
“In response to changing conditions in the condominium market, the Federal Housing Administration (FHA) today proposed new regulations governing the approval process for condominium developments. FHA proposes to reinstate single unit approvals in unapproved condominium developments and to require condo projects to recertify their approval status every three years rather than the current two-year requirement.”
Individual condo units in projects that are not currently on the FHA approved list would, under these proposed changes, have a better chance of getting single-unit loan approvals if the units meet FHA criteria including (but not limited to) the following:
-The unit is not a manufactured housing condominium project or located in a two-to-four-unit project;
-The condominium unit is not a manufactured home and is in a project that has at least five dwelling units;
-The unit is in a project in which the amount of Single-Unit Approvals is limited to a maximum of 20 percent of the total number of units in the project, which may be reduced to as low as zero percent via subsequent notice.
The ability to approve individual condo units could seriously improve the availability of such units to FHA borrowers. According to the press release, the purpose of these changes in policy (which are under review and have not been made into a final rule or codified at the time of this writing) is to be more responsive to a changing housing market.
There are also some other suggested revisions that could positively affect the FHA condo loan process. “FHA currently requires that approved condominium developments have a minimum of 50 percent of the units occupied by owners.”
Not having enough owner-occupiers may “detract from the viability of a project” according to the press release, but requiring too many owner-occupiers can hurt a condo project’s marketability. “Through this proposed rule, FHA is specifically inviting comment on this issue and is proposing to establish an allowable range between 25 and 75 percent. The range allows FHA to choose a specific percentage that is responsive to future market changes.”
The press release also adds some discussion about the non-residential nature of the floor space in a given condo project. “FHA currently requires that the commercial/nonresidential space within an approved condominium development not exceed 50 percent of the project’s total floor area, and anticipates maintaining this as a requirement in the near term.”
“However, as the agency gains experience with this program, it may wish to modify this limitation and is therefore proposing to establish a range between 25 and 60 percent, which may be specified via subsequent notice, giving the agency flexibility to make any needed future adjustment within this range.”
According to the press release, mixed-use developments are a way to integrate housing, land-use, economic and workforce development, “as well as transportation and infrastructure development. While the agency acknowledges the benefits of mixed-use developments, in the near term, it believes that allowing greater than 50 percent commercial/nonresidential space may have a negative impact on the residential character of a condominium project.”
We will report on future developments related to these FHA condo loan issues as details become available from the FHA.
Since we have gotten several questions lately about FHA loan rules regarding funding fees including the FHA Mortgage Insurance Premiums (MIP) and Up Front Mortgage Insurance Premiums (UFMIP), it seemed like a good idea to discuss the rules in HUD 4000.1 regarding these issues, starting with the UFMIP.
For FHA single-family forward mortgages, the rules for the Up Front Mortgage Insurance Premium are found on HUD 4000.1 on page 155. It begins with the explanation of both UFMIP and MIP:
“FHA collects a one-time Upfront Mortgage Insurance Premium (UFMIP) and an annual insurance premium, also referred to as the periodic or monthly MIP, which is collected in monthly installments.”
Some borrowers have questions about whether or not you can finance the UFMIP and how doing so might affect the amount of the mortgage loan. According to page 155:
“Most FHA mortgage insurance programs require the payment of UFMIP, which may be financed into the Mortgage. The UFMIP is not considered when calculating the area-based Nationwide Mortgage Limits and LTV limits.”
The UFMIP must either be included in the mortgage loan in its entirety, or paid in its entirety in cash. How is the UFMIP determined?
“The UFMIP charged for all amortization terms is 175 basis points (bps), unless otherwise stated in the applicable Programs and Products or in the MIP chart.”
What exactly ARE basis points? We turn to an article at TheStreet.com for the answer here:
“A basis point is a hundredth of a percentage point, or 0.01%”. The article uses bond yields to explain how basis points work. “For example, say that a bond’s price drops, causing its yield to rise from 6% to 6.10%. One would say its yield rose by 10 basis points. Another example: Say one bond has a yield of 6.5% and another has a yield of 6.75%. The difference can be expressed as 25 basis points.”
Some borrowers want to know if they might be entitled to a refund of the Up Front Mortgage Insurance Premium when refinancing, but FHA loan rules in HUD 4000.1 state, “The UFMIP is not refundable, except in connection with the refinancing to a new FHA-insured Mortgage.” Such refunds work as described on page 396 of HUD 4000.1:
“If the Borrower is refinancing their current FHA-insured Mortgage to another FHA- insured Mortgage within 3 years, a refund credit is applied to reduce the amount of the Upfront Mortgage Insurance Premium (UFMIP) paid on the refinanced Mortgage”. Speak to your loan officer about how much refund might be applicable for your specific circumstances.
The Mortgage Insurance Premium is a different payment, described in FHA loan rules as follows: ”
The periodic MIP is an annual MIP that is payable monthly. The amount of the annual MIP is based on the LTV ratio, Base Loan Amount and the term of the Mortgage.”
As you can see from this blog post, there is no one fixed dollar amount for either UFMIP or MIP. All loans are different, and to get the dollar amount of the payment required in this area you will need to discuss the calculations with your lender.
In many cases borrowers would notice the Wednesday changes in closing costs rather than an actual higher rate, but as market watchers are fond of pointing out, even with recent moves higher we are still seeing rates at respectable lows.
30-year fixed rate conventional loans ended Wednesday at a best-execution rate of 3.375%, while FHA mortgage loan interest rates (best execution) are at or near their current comfort zone of 3.25% depending on the lender. You may notice greater variation in the actual rates offered by participating lenders, so it pays to look for the best rates and terms.
Best execution rates are listed here assuming an ideal borrower with excellent FICO scores and credit history. The rates listed here are not available from all lenders or to all borrowers, your experience may vary.
Some market watchers say today’s rate adjustment is a sign for some that locking, rather than floating, may be a good idea in the current rate environment.
That is to say that another move higher this week is not out of the question, and there are a variety of factors that can affect that including scheduled economic data release (the GDP report and Jobless claims are both due out Thursday, for example), breaking news and other issues.
So if you have not made a mortgage loan interest rate lock commitment with your lender yet, now may be a good time to have a conversation with the lender to get some advice about the rate environment and what may be in your best interests going forward.
It never hurts to have some good advice before you choose to lock or float (which refers to holding off on making a mortgage loan interest rate lock in hopes that rates may go lower before doing so).
A reader asks, “Does FHA include loans for a construction to permanent mortgage?If so, can the construction be done by a licensed general contractor that does custom builds or does it have to be done by a licensed general contractor that only does spec builds? Is there other criteria/inspections that are specific to construction to permanent mortgage that are specific to an FHA loan?”
This is a complex question, and FHA construction loans have issues far too numerous to address in a single blog post, but we’ll tackle the basics. FHA loan rules do allow for loans for new construction/proposed construction. This type of loan is more complex than a typical FHA mortgage and potential applicants are encouraged to discuss this option with a loan officer to learn what may be specifically required-lender standards will vary and there is no way to predict what may be allowed at one financial institution but not another.
HUD 4000.1 defines the construction-to-permanent loan as follows:
“A Construction to Permanent Mortgage combines the features of a construction loan (a short-term interim loan for financing the cost of construction) and the traditional long-term permanent residential Mortgage with a single mortgage closing prior to the start of construction.”
When it comes to who does the work on the construction, HUD 4000.1 states, “The Borrower must have contracted with a builder to construct the improvements. The builder must be a licensed general contractor. The Borrower may act as the general contractor, only if the Borrower is also a licensed general contractor.”
For inspection issues on FHA construction loans, we learn that the required inspections include, but may not be limited to the following requirements:
–copies of the building permit and CO (or equivalent);
–three inspections (footing, framing and final) performed by an FHA Roster Inspector on form HUD-92051, Compliance Inspection Report (for Modular Housing, footing and final only);
–three inspections (footing, framing and final) performed by the local authority with jurisdiction over the Property (for Modular Housing, footing and final only); or
–a 10-year warranty and final inspection issued by the local authority with jurisdiction over the Property or an FHA Roster Inspector.”
Please note that the above is the requirement for site-built homes and condos, and is for proposed construction projects. Requirements vary for other types including under construction and new construction homes.
Again, this is just a quick overview-borrowers should get in touch with a loan officer to learn more about specific requirements. These may vary depending on state law, lender standards, changes in FHA policy, etc. You may find variations in down payment issues, escrow, and other features.
Here’s a version of a common question we’ve been asked recently about FHA mortgage insurance premiums: “I closed an FHA mortgage on a house I purchased in December 2014. The following month FHA reduced the mortgage insurance premium (MIP). Can I get the lower mortgage insurance rate and a reduced monthly payment without totally refinancing my mortgage?”
The FHA/HUD official site published a .pdf file that addresses this question directly. Back in 2015 the FHA lowered it’s mortgage insurance premium. The pdf states, “The reduction is effective as of January 26, 2015. Borrowers with case numbers assigned on and after January 26, 2015 will be eligible for reduced annual mortgage insurance premiums.”
Note the specific date when the lower premiums become effective-borrowers who have loans prior to these dates will be required to pay the FHA MIP described in the loan paperwork the borrower signed.
Other portions of the FHA MIP FAQ found on the FHA official site include answering questions such as, “What steps do I need to take to take advantage of these new lower premiums?” The FAQ instructs those eligible for the MIP reduction to “…contact an FHA-approved lender for information regarding FHAs new annual mortgage insurance premiums.”
Another question that was deemed important at the time of this document’s writing was, “What will the impact of FHAs new premiums be on my monthly mortgage costs?” The lower MIP now required by FHA loans means that, “Future borrowers who qualify for FHAs new reduced annual premiums will enjoy the benefits of a more affordable FHA loan with lower costs. HUD estimates these lower premiums will save more than two million FHA homeowners an average of $900 annually and spur 250,000 new homebuyers to purchase their first home over the next three years…”
The reader question above fits into a certain category of borrower affected by the following statement in the FHA MIP FAQ. The question, “I’ve had a FHA mortgage for years. Can I take advantage of these new lower premiums?” The FHA’s answer to this question:
“FHAs premium reduction takes effect for mortgages with case numbers assigned on or after January 26, 2015, and does not affect loans that have already closed. If you have closed your loan, you are not eligible for FHAs new premiums.” A quick re-reading of the reader question shows that the borrower in this case did NOT have the FHA loan “for years”. However, the FHA FAQ does address the following question, also:
“I just closed on my mortgage. What should I do?”
The answer? “FHAs premium reduction takes effect for mortgages with case numbers assigned on or after January 26, 2015, and does not affect loans that have already closed. If you have closed your loan, you are not eligible for FHAs new premiums.”
Zoning laws don’t come up much in our discussions about FHA mortgages, but when they do it’s usually about whether a property is eligible for an FHA loan because it is in a mixed-zoning area, or there is some zoning law concern that might affect the sale or purchase of a property.
But recently zoning laws came up in a completely different way, as we learn from the FHA/HUD official site. The Department of Housing and Urban Development has announced a settlement in a Fair Housing case alleging that zoning laws were applied in a discriminatory fashion.
According a press release at www.HUD.gov, “The U.S. Department of Housing and Urban Development (HUD) announced today an agreement with Ridgeland, Mississippi to resolve complaints the city violated the Fair Housing Act when it passed and enforced a zoning ordinance that HUD claimed was motivated by racial animus and created a discriminatory effect on the citys African American residents.”
Such incidents can affect a potential home loan applicant regardless of what stage in the loan application he or she might be; the stability and dependability of rental, temporary, or permanent housing for someone in the loan planning stages, for example, can be crucial to making financial plans for the future.
According to the press release, “In December of 2015, HUD filed a fair housing complaint against the city after receiving reports that a number of apartment complexes faced possible demolition after the city instituted a new zoning requirement that lowered the allowable density.”
Specifically, the HUD official site states, “HUD complained the citys new zoning ordinance called for several of the apartment complexes with the highest minority populations to be amortized, putting more than 1,400 units at risk of being replaced with mixed-use developments.” The agency also alleged that other housing complexes were subjected to “lower density restrictions” which could have resulted in a loss of hundreds of additional apartment units, according to the press release.
Under the settlement agreement, “…the city of Ridgeland agrees to amend the 2014 Ordinance so that multifamily properties are treated as they were prior to the Ordinance when it comes to use and density; provide notice to property managers and/or owners of multifamily properties in advance of any public hearings contemplating changes to existing zoning, land use, and occupancy policies; and process all zoning, land use, building and occupancy approvals and permits in good faith and in a timely manner.”
The city of Ridgeland “also agreed to submit to HUD a proposed Affordable and Fair Housing Marketing Plan which encourages the development of mixed income communities and provides tangible steps for conducting outreach and engaging the residents of Southeastern Ridgeland in the community planning process.”
Sometimes it’s the residents or home loan applicants who are the only line of defense against continued illegal practices-those who report Fair Housing Act violations can help the FHA and HUD settle the issue and prevent more violations. Those who suspect their Fair Housing Act rights have been violated should report the incident to HUD:
1-(800) 669-9777 (voice) or 1-(800) 927-9275 (TTY). Housing discrimination complaints may also be filed by going to www.hud.gov/fairhousing.
Mortgage loan interest rates improved on Monday, the fourth business day in a row that rates have recovered. There was an upward trend for some time, but some market watchers and industry professionals are using the word “rally” to describe what they’ve been seeing lately.
There was considerable attention on the latest Fed statement about interest rates, but once “Fed day” came and went there was no significant change in investor activity-that is to say no increase activity unfavorable to interest rates in specific reaction to the Fed announcement.
30 year fixed rate conventional mortgage loan rates were reported at 3.375%, best execution, on Monday. That puts conventional loan rates in a single number rather than the range of best execution rates we saw previously.
FHA mortgage loan rates are holding for now at a best-execution 3.25%, which is also a breakout from the previously reported range between 3.0% and 3.25% (best execution) before the upward pressure began ahead of the Fed.
Best execution rates like those reported here assume ideal conditions-an extremely well-qualified borrower with outstanding FICO scores, loan repayment history, etc. The rates listed here are not available from all lenders or to all borrowers. Your experience may vary depending on your financial qualifications.
The week ahead has some economic data releases scheduled that may (or may not) affect mortgage rates depending on investor reaction to the data. Those releases include a consumer confidence report (Tuesday morning), a Durable Goods report, GDP, and Jobless Claims. Fed Chair Janet Yellin is scheduled to speak on Wednesday. Any time the Fed makes an announcement or the Fed Chair makes a speech, investor ears perk up (however briefly) so Wednesday might be a day to pay attention to just in case.
If you are not certain whether to lock or float at this stage, it’s a good idea to have a conversation with your loan officer. Some market watchers are more inclined to float at the time of this writing.
That may be because it seems that rates are in a recovery mode in the short term, but like all other things related to rates, investments, and money in general, the winds of fortune can change at any moment. Get some expert advice before choosing to float-an informed borrower is much happier with the results of his or her transaction.
We’ve gotten a number of FHA loan questions lately about well water, and properties that are served by wells. It’s true that a home that is served by an individual well or a shared well can be approved for an FHA mortgage loan, but the well must meet FHA requirements. The latest reader question about wells and FHA mortgage loans asks:
“Can a single family residence use a water tank to bring the flow test up? This is highly common in the area.”
What the reader is asking about is covered-in part-by an FHA mortgage loan rule found in HUD 4000.1, on page 162. There are varying standards for wells depending on whether the well serves an individual home or is considered a “shared well” that services multiple properties.
For shared wells, FHA loan rules state that the shared well must be, “capable of providing a continuous supply of water to involved Dwelling Units so that each existing Property simultaneously will be assured of at least three gallons per minute (five gallons per minute for Proposed Construction) over a continuous four-hour period.”
The rules go on to say that for shared wells, “The well itself may have a lesser yield if pressurized storage is provided in an amount that will make 720 gallons of water available to each connected existing dwelling during a continuous four-hour period or 1,200 gallons of water available to each proposed dwelling during a continuous four-hour period. The shared well system yield must be demonstrated by a certified pumping test or other means acceptable to all agreeing parties.”
However, for individual wells, there is no written provision for pressurized storage. However, this section of the rules does not specifically prohibit the practice, so it would seem there is a gray area here.
In cases like these, the borrower would do well to speak to the lender to see what is customary in that housing market in such situations. It may be that lender standards, state law, or even local code or other ordinances may dictate what is possible.
When a borrower pays the appraisal fee and has an FHA fee appraiser review the property, he or she will make recommendations for areas that do not meet FHA loan minimum property standards. It may be that in that housing market, an individual well with a water tank may (or may not) be acceptable. If the appraiser notes that the water tank is not acceptable to bring the well water flow requirements to FHA minimum standards, if corrections are possible they will be recommended. Where corrections are not possible, the home may be declared unfit for an FHA mortgage.
A reader asks, “I am trying to qualify for an FHA Loan. I have been apart from my husband for over 13 yrs but not legally divorced. I am currently applying for an FHA Loan and DO NOT want him to be a part of anything Im doing and have FINALLY filed for divorce. House buying is a short sale and I need a fast approval.”
“My divorce will take 3 months, I dont have the time! Do I qualify for any type of exception considering we have been apart for 13 years and the IRS has accepted me as an Innocent Spouse Relief and Separation of Liability and Equitable Relief?”
This is a difficult question to answer for one important reason: state law is a determining factor in circumstances such as these. A borrower who resides in a community property state, where state law plays a big role in how debts are considered for couples getting a divorce, may find it more challenging to get an FHA mortgage loan if the divorce is in a legally ambiguous place at the time of the loan application.
Lender standards also play an important role in any mortgage loan application. A borrower who resides in a community property state and is affected by those laws may also find the lender has certain requirements in such cases.
The only advice we can provide, unfortunately, is this: borrowers who find themselves in predicaments like these when trying to apply for a mortgage loan should contact a lawyer with expertise in the applicable laws that may affect the transaction.
Potential borrowers can also ask the advice of the lender. Will an FHA loan in such cases be approved? What is typical with that lender? The loan officer may have experience processing loans under such conditions and can explain what traditionally has and has not been permitted.
That may not be the answer the reader was hoping for, but it’s the most realistic one. FHA loan rules are not the only ones that govern mortgage loan transactions. Lender standards, state and federal law, and even local ordinances can all play a part in how a loan is to proceed.
A reader asks, “FHA use to only require that these top items need to pass. Lead (first draw), Nitrate, Nitrite, Total Nitrate/Nitrite,Total Coliforms, Fecal Coliforms or E. Coli. Is this still true? I am hearing that a full water panel is required to be done, is this now true and if so,is FHA major focus still on the top items passing? Also what is required by FHA if one of these items fails?”
This question is in reference to FHA requirements for properties that are served by wells. In general, the local health authority would set the standards, so the reader would need to consult with the local authority to get the answer to the first part of this question. Health standards, procedures, and requirements can and do vary from housing market to housing market, so the local standard may vary depending on location.
HUD 4000.1 states that in the absence of a local health standards, a national standard would apply:
“When an Individual Water Supply System is present, the Mortgagee must ensure that the water quality meets the requirements of the health authority with jurisdiction. If there are no local (or state) water quality standards, then water quality must meet the standards set by the EPA, as presented in the National Primary Drinking Water regulations in 40 CFR 141 and 142.”
Note that the above is in reference to an individual well water supply. Shared wells are governed by this portion of HUD 4000.1:
“An inspection is required under the same circumstances as an individual well. This may be evidenced by a letter from the health authority having jurisdiction or, in the absence of local health department standards, by a certified water quality analysis demonstrating that the well water complies with the EPAs National Interim Primary Drinking Water Regulations…”
As you can see, the local health authority will have the specific details of the drinking water requirements, not the FHA.
When it comes to passing or failing the inspection, we refer back to the overall FHA loan appraisal policy. If corrections can be made to an aspect of the property that fails to meet standards, it may be possible to make the required corrections and have the property declared fit for an FHA mortgage.
But if corrections cannot be made, or are attempted but not up to the required standard, it’s likely the property would not be approved for an FHA mortgage.