Monthly Archives: October 2016
A reader asks, “We are trying to get a loan and the lender is claiming that the requirements say she cant commute for two hours one way to work..My wife is the qualifying buyer and I have never heard of such a thing.. Is this discrimination cause she is a woman? They want verification from transfer store that wife will get same pay when transferred too. This would cause grief at current employment because they wouldnt want to see her go. We dont want to do anything like that, transfer, until loan is finalized.. this all came up the day we were supposed to close…seems like discrimination, time to call a lawyer?”
Let’s work backwards on this reader question from the last issue to the first; FHA loan rules in HUD 4000.1 do require the lender to verify that employment and income are stable, reliable, and likely to continue.
This is an FHA requirement applied to all applicants regardless of gender or other non-financial factors. If the borrower is applying for an FHA-guaranteed loan, this would be a requirement for loan approval. The loan officer‘s need to verify that income will remain the same in spite of the transfer is, based on a reading of FHA loan rules for income verification, a reasonable one.
The commuting distance issue is a bit more situational. Lender standards would apply in such cases, so it’s important to establish what the lender’s standard would be (something we cannot do here, since all lenders are different).
FHA loan rules address “reasonable commuting distances” in HUD 4000.1, but in the context of whether or not it’s possible to get an FHA mortgage for a “second home” due to hardship created by certain situations including commutes.
Since individual lender standards apply, the borrower would need to work this commuting distance issue out with the lender. We don’t know if the reader already has an existing FHA mortgage and is looking to apply for another one, or what other factors may affect the transaction, but the “discrimination” issue as brought up in the reader question doesn’t seem to be an issue based on the information provided.
The income and commuting distance issues can be common problems, but in this particular case the best advice is to discuss them directly with the lender as lender standards, state law, and other guidelines may apply above and beyond the FHA loan rules found in HUD 4000.1.
Since our last report, rates have remained in an upward trend, but Friday saw a bit of relief after a spike on Thursday. Mortgage rates have been moving upward, hitting their highest levels in many months, but they are still below four percent even with the current trend.
Some market watchers blame bond market weakness for at least part of this upward trend, but there have been important economic developments abroad (Many have been keeping watch on European Central Bank news) and at home (scheduled economic data releases and news from the Fed) that have also contributed to the current rate environment.
Friday rates recovered a bit, reflected in closing costs for many rather than an actual change in the best-execution rates reported here. 30-year fixed rate conventional mortgages are still, best execution, at or near 3.625%.
FHA mortgage loan rates stayed in their comfort zone (best execution) between 3.25% and 3.5%. If rates continue an upward trend we could see this range move into a single, higher rate. Or if the next shift in rates is dramatic enough, we could watch rates move into a new range.
FHA rates tend to vary more among participating lenders. You may have to shop around to find the most competitive mortgage rates. The numbers you see listed here assume ideal conditions including a well-qualified borrower with outstanding FICO scores and loan repayment history. Your experience may vary. The rates seen here are not available to all borrowers or from all lenders.
This week has a LOT of important economic activity with the potential to influence mortgage rates. There’s an inflation report due out Monday, Fed will meet mid-week, and the Employment Situation Report comes out on Friday. All of these have potential to influence mortgage loan interest rates depending on how investors react to the information released or announcements made.
If you are unsure whether to lock or float this week, have a conversation about the timing of your your mortgage rate commitment with your loan officer to get some advice. This may be a tricky week, so making an informed choice on locking or floating is definitely a good idea.
FHA loan rules require all borrowers to be obligated on the loan to financially qualify, which would include verification of both employment and income. A co-signer or co-borrower may not be able to make up for financial shortcomings of the other borrower(s) on the mortgage loan, but lender standards would apply in this area and it’s best to have a conversation with a loan officer about those standards and what may be possible.
FHA loan rules for commission income, found in HUD 4000.1, state the following:
“Commission Income refers to income that is paid contingent upon the conducting of a business transaction or the performance of a service…The Mortgagee may use Commission Income as Effective Income if the Borrower earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue.”
The “likely to continue” factor is key. Furthermore, FHA loan rules break down the requirements for commission income based on the percentage of the borrower’s pay that comes from commission:
“For Commission Income less than or equal to 25 percent of the Borrowers total earnings, the Mortgagee must use traditional or alternative employment documentation.”
And for commission income greater than 25 percent? FHA loan rules in HUD 4000.1 require the lender to, “obtain signed tax returns, including all applicable schedules, for the last two years. In lieu of signed tax returns from the Borrower, the Mortgagee may obtain a signed IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-T, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, and tax transcripts directly from the IRS.”
To calculate a borrower’s income from commission pay, the lender is required to make a specific type of calculation, depending on the length of time commission income has been earned.
“The Mortgagee must calculate Effective Income for commission by using the lesser of (a) the average net Commission Income earned over the previous two years, or the length of time Commission Income has been earned if less than two years; or (b) the average net Commission Income earned over the previous one year. The Mortgagee must calculate net Commission Income by subtracting the unreimbursed business expenses from the gross Commission Income.”
FHA appraisal rules cover a variety of aspects of the home. FHA appraisal requirements are found in HUD 40001., and include guidelines for electrical systems, plumbing, paint, and also requirements for the roof.
FHA appraisers perform a review of the property to make sure it meets minimum standards, but the appraisal is NOT a home inspection, a guarantee that a home is defect-free, etc. Borrowers should never rely on the FHA appraisal as a stamp of approval or anything similar to a home inspection. Your appraisal fee does not cover this inspection, but the inspection is an investment that could save you thousands of dollars later on.
When it comes to FHA appraisal rules for the roof, HUD 4000.1 begins on page 488, stating, “The Appraiser must notify the Mortgagee of the deficiency…if the roof covering does not prevent entrance of moisture or provide reasonable future utility, durability and economy of maintenance and does not have a remaining physical life of at least two years.”
FHA loan rules state that the appraiser is required to see the roof, but does not specifically have to step out onto the surface of the roof. “The Appraiser must observe the roof to determine whether there are deficiencies that present a health and safety hazard or do not allow for reasonable future utility. The Appraiser must identify the roofing material type and the condition observed in the ‘Improvements’ section of the report.”
Again, borrowers should take note that the above does NOT instruct the appraiser to step out onto the roof. A home inspection, paid for by the borrower, would include a closer look at the roof than what is required here by HUD 4000.1.
Page 489 adds the following:
“The Appraiser must report if the roof has less than two years of remaining life, and make the appraisal subject to inspection by a professional roofer. When the Appraiser is unable to view the roof, the Appraiser must explain why the roof is unobservable and report the results of the assessment of the underside of the roof, the attic, and the ceilings.”
As you can see, the appraisal is not meant to be a top-to-bottom inspection of the roof. The FHA official site has a section titled, For Your Protection Get A Home Inspection, which urges borrowers to pay for the optional procedure. The FHA official site also warns borrowers that there is no financial help from the FHA for those who opt not to get the inspection and later discover defects or other problems with their home after the FHA loan has closed.
When reviewing your closing checklist or simply trying to plan for all the expenses of your FHA home loan, the appraisal and the optional (but vital) home inspection are two of the expenses you’ll need to save for. The appraisal is required as a condition of loan approval, the inspection is optional but borrowers cannot make a truly informed decision about a home without the inspection.
When it comes to FHA appraisal requirements, the rules are designed only to insure the property meets MINIMUM FHA standards. The appraisal is never to be taken as a message from the FHA that the home is free of defects or problems-only an home inspection can tell you what the true condition of the property might be.
FHA minimum standards for appraisals include requirements for basements and crawlspaces. These requirements are found in HUD 4000.1, starting on page 490. When it comes to the basement, this portion of the FHA mortgage loan rules state, “The Appraiser must notify the Mortgagee of the deficiency…if the basement is not free of dampness, wetness, or obvious structural problems that might affect the health and safety of occupants or the soundness of the Structure.”
Basement requirements in this section also include some instructions to the appraiser about sump pumps. “The Appraiser must notify the Mortgagee of the deficiency…if the sump pump is not properly functioning at the time of appraisal. A sump pump may be hard-wired by an acceptable wiring method or may have a factory electrical cord that is to be connected to a receptacle suitable for such use.”
Crawl spaces have more detailed instructions to the appraiser:
“The Appraiser must visually observe all areas of the crawl space and notify the Mortgagee of the deficiency of MPR and MPS when the crawl space does not satisfy any of the following criteria:
-The floor joists must be sufficiently above ground level to provide access for maintaining and repairing ductwork and plumbing.
-If the crawl space contains any system components, the minimum required vertical clearance is 18 inches between grade and the bottom of the floor joists.
-The crawl space must be properly vented unless the area is mechanically conditioned.
-The crawl space must be free of trash, debris, and vermin.
-The crawl space must not be excessively damp and must not have any water pooling.If moisture problems are evident, a vapor barrier and/or prevention of water infiltration must be required.”
This section ends by stating that the FHA appraiser must “report any evidence that may indicate issues with structural support, dampness, damage, or vermin” that has the potential to affect the safety, security or soundness of the home.
FHA appraisal rules are found in HUD 4000.1, which is the rule book for all FHA single family mortgage loans, refinancing, and reverse mortgages. There are some specific instructions where aspects of the appraisal are concerned, including systems found in the home such as heating, cooling, and plumbing.
For example, where heating the home is concerned, FHA loan rules begin by stating, “The Appraiser must examine the heating system to determine if it is adequate for healthful and comfortable living conditions, regardless of design, fuel or heat source.”
There may be situations where the heating system installed is not quite up to the task of managing the entire residence. Rules for the FHA appraisal address this directly:
“The Appraiser must notify the Mortgagee of the deficiency of MPR or MPS if the permanently installed heating system does not:
-automatically heat the living areas of the house to a minimum of 50 degrees Fahrenheit in all GLAs, as well as in non-GLAs containing building or system components subject to failure or damage due to freezing;
-provide healthful and comfortable heat or is not safe to operate;
-rely upon a fuel source that is readily obtainable within the subjects geographic area;
-have market acceptance within the subjects marketplace; and
-operate without human intervention for extended periods of time”
The rules state that centralized systems are not required, but “if installed, must be operational. If the air conditioning system is not operational, the Appraiser must indicate the level of deferred maintenance, analyze and report the effect on marketability, and include the cost to cure”.
Where plumbing is concerned, HUD 4000.1 states, “The Appraiser must notify the Mortgagee of the deficiency of MPR or MPS if the plumbing system does not function to supply water pressure, flow and waste removal.”
This section of the rules give the appraiser specific instructions. “The Appraiser must flush the toilets and operate a sample of faucets to check water pressure and flow, to determine that the plumbing system is intact, that it does not emit foul odors, that faucets function appropriately, that both cold and hot water run, and that there is no readily observable evidence of leaks or structural damage under fixtures.”
And when it comes to the water heater, there are some additional requirements of the appraiser:
“The Appraiser must examine the water heater to ensure that it has a temperature and pressure-relief valve with piping to safely divert escaping steam or hot water. If the Property has a septic system, the Appraiser must examine it for any signs of failure or surface evidence of malfunction. If there are deficiencies, the Appraiser must require repair or further inspection.”
Septic systems may be subject to additional regulation due to local or state ordinances, so it is good to remember that FHA appraisal rules are not the only guidelines that can affect the appraisal in this area.
FHA home loans feature a maximum loan amount that varies depending on the housing market and other factors. There’s no single set dollar amount that establishes a limit for how much loan the FHA will guarantee, though many housing markets do feature the same general FHA loan limit based on calculations made on a yearly basis.
The reason a specific loan limit dollar amount cannot be given is because FHA loan limits are also affected by the loan-to-value (LTV) ratio which may vary in each transaction. This ratio is basically a calculation of the percentage of the loan satisfied by the down payment. With a typical FHA single family forward mortgage, the LTV is 96.5% based on a minimum down payment of 3.5%.
HUD 4000.1 discusses maximum mortgage loan amounts in HUD 4000.1, which opens the section by explaining, “A Mortgage that is to be insured by FHA cannot exceed the Nationwide Mortgage Limits, the nationwide area mortgage limit, or the maximum Loan-to-Value (LTV) ratio. The maximum LTV ratios vary depending upon the type of Borrower, type of transaction (purchase or refinance), program type, and stage of construction.”
HUD 4000.1 also adds, “Under most programs, the maximum Mortgage is the lesser of the Nationwide Mortgage Limit for the area, or a percentage of the Adjusted Value.”
For typical purchase loans, also known as FHA forward mortgages, HUD 4000.1 explains, “For purchase transactions, the Adjusted Value is the lesser of…purchase price less any inducements to purchase or the Property Value.”
For refinance loans, “For Properties acquired by the Borrower within 12 months of the case number assignment date, the Adjusted Value is the lesser of:
– the Borrowers purchase price, plus any documented improvements made subsequent to the purchase; or o the Property Value.
– Properties acquired by the Borrower within 12 months of case number assignment by inheritance or through a gift from a Family Member may utilize the calculation of Adjusted Value for properties purchased 12 months or greater.
-For properties acquired by the Borrower greater than or equal to 12 months prior to the case number assignment date, the Adjusted Value is the Property Value.”
And finally, this section of HUD 4000.1 also addresses how mortgage limits are calculated on a yearly basis. “Mortgage limits are calculated based on the median house prices in accordance with the statute. FHAs Single Family mortgage limits are set by Metropolitan Statistical Area and county and will be published periodically. FHAs Single Family mortgage limits are available by MSA and county, or by downloading a complete listing. FHA publishes updated limits effective for each calendar year. These limits will be set at or between the low cost area and high cost area limits based on the median house prices for the area.”
Talk to a loan officer for information about maximum loan amounts in your area.
A reader got in touch with us recently via our comments section, with a question about FHA loan assumptions. She asked, “Are FHA refinance mortgages assumable?”
This is an interesting take on the loan assumption question, since many of our prior questions in the comments section are asking if FHA loan assumptions are possible in a general sense. The specific query about refinanced loans is one we haven’t seen in recent months, but FHA loan rules in HUD 4000.1 are quite specific:
“All FHA-insured Mortgages are assumable.” That is found on page 691 of HUD 4000.1, which also adds, “The Mortgagee must not impose, agree to, or enforce legal restrictions on conveyances or assumptions after closing except when:
-specifically permitted by HUD regulations; or
-the restriction had been specified in a junior lien granted to the Mortgagee after
The Mortgagee must review the mortgage documents to determine what restrictions have been placed on the Mortgage.”
What IS an FHA loan assumption? It’s the process where a home owner with an FHA mortgage basically agrees to sign over the property and the existing mortgage to another person.
In most modern FHA loan assumptions, the lender’s participation is required, so the new borrower and the current owner of the home will have to work with the loan officer to see what is possible and what might be required.
There may be fees associated with an FHA loan assumption, so that is another area the lender will need to address with all parties involved. FHA loan rules do not set dollar amounts for these fees, they are set by the lender.
Additional lender standards may also apply in addition to FHA loan rules. The assuming party may be required to pass a credit check, for example. State law and city ordinances may also affect transactions like these, so it’s important to have a conversation with your lender to see what issues may be associated with an assumption.
We’ve watched an overall upward trend in interest rate behavior for mortgages in recent weeks, and while there have been some days of recovery, it seems that at present there are a variety of factors putting upward pressure on rates.
Market watchers have been using the phrase “the trend is not your friend” for a while now, and Monday’s rate movement showed no signs of proving that phrase wrong in the short term.
Rates moved higher on Monday, not enough to push actual numbers up, but enough so that affected borrowers may notice a difference in closing costs. 30-year fixed rate conventional mortgages are still being reported at or near 3.625% (best execution), and the FHA mortgage loan interest rate range between 3.25% and 3.5% is still there (again, best execution).
It may take several days of sustained upward movement or one day of dramatic change to push the current FHA rates into new territory, but FHA rates do tend to vary more among participating lenders, so you may need to look at several financial institutions to see where the most competitive rates are.
As always, the numbers you see reported here are “best execution” rates, which assume ideal conditions. Your FICO scores, loan repayment history and other financial qualifiers will play a big role in determining your access to rates like these. They are not available to all borrowers or from all lenders and your experience may vary.
The key to locking or floating at the time of this writing is “risk tolerance”. If you have not yet entered into a mortgage loan interest rate lock commitment with your lender, knowing how high rates will climb before you decide to commit is an important thing. Those who float, hoping for rates to move lower, do so with a degree of risk no matter what market conditions are like, but in the current rate environment that risk may be elevated.
It’s best to get the advice of your lender on short-term interest rate trends if you haven’t committed and are within 90 days or less of closing. Those who are farther out may feel more comfortable floating for the time being, but that conversation with your loan officer can only help you make up your mind on the timing of your rate lock commitment.
The FHA does not set or regulate such health issues, deferring instead to federal, state, or local authority where applicable. According to the Environmental Protection Agency’s official site, we learn the following about mold as it relates to exposure in buildings (in general):
“Is sampling for mold needed? In most cases, if visible mold growth is present, sampling is unnecessary. Since no EPA or other federal limits have been set for mold or mold spores, sampling cannot be used to check a building’s compliance with federal mold standards. Surface sampling may be useful to determine if an area has been adequately cleaned or remediated. Sampling for mold should be conducted by professionals who have specific experience in designing mold sampling protocols, sampling methods and interpreting results.”
That information can be found at https://www.epa.gov/mold/mold-testing-or-sampling.
A quick check of the FHA loan rules for single family home loans in HUD 4000.1 turns up two references to mold-one specifically mentioning it in the overall context of the FHA appraisal:
“The Appraiser must report known environmental and safety hazards and adverse conditions that may affect the health and safety of the occupants, the Propertys ability to serve as collateral, and the structural soundness of the improvements. Environmental and safety hazards may include defective lead-based paint, mold, toxic chemicals, radioactive materials, other pollution, hazardous activities, and potential damage to the Structure from soil or other differential ground movements, subsidence, flood, and other hazards.”
If mold is present and detected by the FHA appraiser, it is entirely likely that the appraiser will recommend corrections/repairs to fix the issue.
However, FHA appraisers are not mold experts and just because a property “passes” an FHA appraisal does not mean the property is free of mold or any other problem. Borrowers will need to pay for an optional home inspection to determine whether or not a home has defects or other issues that could affect the borrower’s use of the property once the loan has closed.
Borrowers who want to learn more about mold and EPA advice about it should download the EPA’s guide, A Brief Guide To Mold, Moisture, And Your Home which is a downloadable .pdf file.