Monthly Archives: January 2017
Eligibility rules for FHA loans are found in HUD 4000.1, which addresses who is permitted to apply for an FHA single-family home loans. Who can apply for an FHA loan and what do the rules say about these applicants?
The most basic eligibility rules for FHA loans include the requirement that the borrower be an owner-occupier of the property to be purchased.
FHA loan rules do not permit FHA single family home loans to be used for investment properties, so the borrower who wishes to buy a multi-unit property and rent out all of those units to other people would not be approved for the mortgage. The same is true of those who wish to purchase time shares, condo hotels, or other “transient occupancy” or short-duration occupancy properties.
That said, military members will find FHA loan rules favorable to their needs-if a military member purchases a property with an FHA mortgage but is deployed out of the local area, they are still considered owner-occupiers.
FHA loan rules don’t penalize the borrower for serving her country, but the rules do require the buyer to intend on using the home as the primary residence. Borrowers with immediate family members or co-borrowers who intend to occupy the property in the meantime should discuss those circumstances with the lender.
One thing that might surprise some potential borrowers is the section in the eligibility rules for FHA loans that addresses citizenship. According to HUD 4000.1, page 129, “U.S. citizenship is not required for Mortgage eligibility”. That’s good news for lawful permanent resident aliens and non-permanent resident aliens who want to purchase a home with an FHA mortgage.
FHA loan rules in HUD 4000.1 do require documentation and supplemental information to determine the status of an applicant who may be affected by the rules in this area; borrowers should come to the FHA loan process ready to show work authorization documents, Social Security Numbers, and indicators of residency or permanent residency where applicable.
If you aren’t sure how your military or residency status affects the processing of your FHA home loan, discuss your circumstances with a loan officer.
Mortgage rates ended last week nearly exactly where they started after some ups and downs, and on Monday rates opened the week a bit lower. However, the lower rate just pushes things back closer to the bottom part of what market watchers have labeled the new, higher range.
We started seeing that higher range come into plat at or near election time-markets hate uncertainty and investor behavior between November 2016 and January 2917 has demonstrated that rather well.
At first it wasn’t clear what was going to happen with short-term mortgage rate trends in general, but now we see that new and higher range at work in the short term. There are always influences (world news and events, economic data, unexpected changes in regulations or new legislation) that can alter trends like these, but at the time of this writing the current trend seems to be working within this higher range.
On Monday, 30-year fixed rate conventional mortgages found themselves in a best execution range between 4.125% and 4.375% depending on the lender.
According to our sources, the more prevalent best-execution rate is at or near 4.25%. Borrowers affected by Monday’s rate changes may likely notice the difference in the form of closing costs rather than an actual interest rate change.
FHA mortgage loan interest rates are, best execution, holding in the 3.75% comfort zone they have hovered at in the new year. FHA rates tend to vary more among participating lenders so your experience may vary.
And as always, the rates you see listed here are best execution rates; your FICO scores, credit history, and other financial qualifications will determine your access rates like the ones reported here. They are not available to all borrowers or from all lenders.
“Lock” is still the term many industry pros are giving when it comes to choosing to commit to a mortgage rate or “float” in hopes of getting a lower rate. Short term trends indicate an elevated risk with floating (which is never risk free even in the best of times) so if you aren’t sure about whether to commit yet or not, talk to your loan officer.
There are many factors this week that could affect rates in the short term. Manufacturing reports, consumer indexes, and on Friday, the important Employment Situation Report are all on the radar as having the power to affect rates. Friday could be a big day for rates one way or the other, so it’s a good idea to keep in mind the potential volatility that could bring.
We occasionally devote space to these issues because even in situations where the violations involve rental housing or other non-FHA loan transactions, they can affect borrowers seeking to apply for FHA loans. Some borrowers need rental housing to use in the planning stages of a mortgage before they can purchase a home, others may find themselves forced to house hunt due to job relocations, etc. Fair Housing laws protect Americans at all stages of the process of finding a home regardless of renting or buying.
This most recent announcement of Fair Housing action from HUD states, “The U.S. Department of Housing and Urban Development (HUD) announced agreements with two insurance companies in Ohio and Florida settling allegations the companies violated the Fair Housing Act by denying insurance coverage to properties that contain ‘subsidized housing’ and ‘low-income housing.'”
It is a violation of federal Fair Housing laws for providers of housing-related services or products, including insurance providers, “to discriminate because of race, color, religion, sex, national origin, disability, and familial status”.
That’s according to the press release found on the HUD official site, which adds, “The agreements stemmed from a Secretary-Initiated complaint HUD filed after receiving reports the insurance companies policies and practices had a discriminatory effect because of race and national origin.”
According to the HUD official site, the agency’s complaint included allegations, “that the companies refused to provide umbrella coverage, which provides additional liability coverage when an insureds other primary policy limits have been reached, to properties containing subsidized or low-income housing”.
Under the agreement with the Department of Housing and Urban Development, McGowan and Company are required to remove the words subsidized and low-income from their lists of prohibited properties, and, “spend $100,000 to affirmatively market its services and products to the affordable and low-income housing markets and provide fair housing training for management and staff that review and/or approve applications for insurance.”
The other company named in the announcement, Mack & Waltz, agree to spend $10,000 “to affirmatively promote its services in affordable and low-income housing markets, and provide fair housing training for its management and staff” according to the press release.
If you believe you have experienced discrimination, file a complaint with the HUD Office of Fair Housing and Equal Opportunity at (800) 669-9777 (voice) or (800) 927-9275 (TTY). You can also file complaints online at www.hud.gov/fairhousing.
“I purchased a home that was funded by FHA but the foundation is in significant disrepair it. There are whole sections where the beams are not being supported by anything therefore the beams will eventually not be able to sustain the floor. Approximately 30 Jacks or posts need to be added, addition to a few beams, most significantly in one 8 X 31 foot section of the house where there is is nothing supporting it other than the outside foundation wall on one side.”
“Basically it needs $35.000+ of work. The FHA guideline say that a structure has to be in good repair and able to withstand all normal loads imposed upon it which clearly cannot. The appraisal says everything is in good working order so Im not sure why the appraiser didnt notice maybe its because he is unqualified. Youre inexperienced or just glanced at the crawlspace and really didnt take the time to do a thorough appraisal but anybody coming in could see that it shouldve been funded. I did not get a home inspection before committing to loan…Do I have any recourse?”
The only advice we can give in terms of recourse is to speak to legal counsel to learn what options may be open to you based on the laws of your state, and to call the FHA directly at their toll-free number at 1-800 CALL FHA. But addressing the rest of the reader question, we refer to the FHA/HUD publication titled, “For Your Protection, Get A Home Inspection” which states:
“Buying a home is one of the most important purchases you will make in your lifetime, so you should be sure that the home you want to buy is in good condition. A home inspection is an evaluation of a home’s condition by a trained expert. During a home inspection, a qualified inspector takes an in-depth and impartial look at the property you plan to buy.”
That impartial look at the property includes the following activities:
1.Evaluate the physical condition: the structure, construction and mechanical systems.
2. Identify items that should be repaired or replaced.
3. Estimate the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure and finishes.
The FHA does not perform home inspections, nor should FHA appraisals ever be mistaken for an inspection or a stamp of approval from the FHA.
According to For Your Protection, Get A Home Inspection, “Lenders require appraisals on properties prior to loan approval to ensure that the mortgage loan amount is not more than the value of the property. Appraisals are for lenders; home inspections are for buyers.” FHA loans cannot move forward without an appraisal, but they can do so without an inspection-it’s the borrower’s responsibility to get the inspection.
Borrowers who fail to pay for this optional, but very important home inspection cannot make a truly informed decision about purchasing the home, leading to situations such as the one mentioned in the reader question here. FHA appraisals are not meant to tell the borrower it’s “safe” to buy. Only a home inspection will make the true condition of the home apparent the way some mistakenly believe the FHA appraisal does.
Do you know how FHA loan rules affect the sale of a home deemed an “identity of interest” transaction? A reader asks, “My husband and I have a contract to purchase his parents home that they currently live in. This is their principal residence.”
“My loan officer is telling me that even though it is their principal residence and we are purchasing as our principal residence that the 85% LTV cannot be exceeded and we have to put 15% down. Is this correct?? If not, then what can I do to get them to make the exception? We were already pre-approved for 3.5% down.”
FHA loan rules governing identity-of-interest transactions do feature a higher down payment requirement in many cases. HUD 4000.1 defines such transactions as follows:
“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.”
“Family members” has a broad definition in this section, and can include in-laws, domestic partners, adopted family members, “regardless of actual or perceived sexual orientation, gender identity, or legal marital status”.
The reader’s question is answered in part by this portion of the FHA loan rules in HUD 4000.1:
“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.”
State law, and lender standards may apply in cases like these but according to the FHA loan rule book those who meet the exception’s requirements would not be required to make a 15% down payment. This information is found on pages 153 and 154 of HUD 4000.1, which is available on the FHA official site at FHA.gov.
Speak to a loan officer for further clarification of this FHA loan rule governing identity of interest transactions, and how the laws of the state where your loan is taken out may affect the mortgage.
FHA loan rules in HUD 4000.1 have specific guidelines where gift funds to the borrower are concerned. Gift funds are commonly used for home loan expenses including down payments, but when the borrower accepts gift funds for the purpose of making that down payment, the funds must meet FHA acceptability standards.
What does this mean?
FHA loan rules are very precise when it comes to the source of money used for a down payment. A borrower cannot use proceeds from a non-collateralized loan such as a payday loan or credit card cash advance to make a down payment, and if gift funds are used the money must come to the borrower with no obligations.
HUD 4000.1 has the guidelines for these gifts, which includes the following definition:
“Gifts refer to the contributions of cash or equity with no expectation of repayment.” Note that equity can be provided instead of money. Who can provide cash or equity to the borrower? Specifically, HUD 4000.1 states:
“Gifts may be provided by:
-the Borrowers Family Member;
-the Borrowers employer or labor union;
-a close friend with a clearly defined and documented interest in the Borrower;
-a charitable organization;
-a governmental agency or public Entity that has a program providing homeownership assistance to low or moderate income families; or first-time homebuyers.”
Documentation of funds used for the down payment is an important task for the loan officer. HUD 4000.1 says:
“If the gift funds have been verified in the Borrowers account, obtain the donors bank statement showing the withdrawal and evidence of the deposit into the Borrowers account. If the gift funds are not verified in the Borrowers account, obtain the certified check or money order or cashiers check or wire transfer or other official check, and a bank statement showing the withdrawal from the donors account.”
As you can see, it’s best to be prepared to show the “paper trail” or supporting documentation for the source of any financial gift associated with your home loan transaction.
FHA loan rules in this section of HUD 4000.1 also offer a caveat for situations where the lender may offer some form of “gift funds” as part of the transaction:
“The Mortgagee and its Affiliates are prohibited from providing the loan of gift funds to the donor unless the terms of the loan are equivalent to those available to the general public.
Regardless of when gift funds are made available to a Borrower, the Mortgagee must be able to make a reasonable determination that the gift funds were not provided by an unacceptable source.”
FHA home loans offer an alternative to the more strict requirements of conventional mortgages. FHA loans typically feature a lower down payment requirement than many conventional loans, and have more forgiving credit standards (though lender standards will still apply).
Some apply for an FHA mortgage unsure of how their past credit activity or even their current FICO score might affect their chances at loan approval. If you are one of those people, there are some things you can do for greater peace of mind going into the loan process.
The catch is that advance planning is required-it’s best to start preparing for a major financial commitment like a mortgage a full year or more before applying. The planning time is crucial since you will need to save up money for closing costs, the down payment, appraisal and home inspection fees, etc.
But it’s also important because checking your credit report, examining your FICO scores, and correcting any erroneous information (or contesting it) takes time. The last thing a borrower wants to be doing as their loan application is being reviewed is to worry about whether certain items have “fallen off” a credit report or whether the lender will overlook mistaken or erroneous entries.
What issues could be a problem for borrowers who don’t give themselves enough time to address credit report problems? One good example-old data that should have come off the report by now-if you have outdated information on your report, for example, it’s not safe to assume it simply falls off your report automatically. Sometimes it does not, or there are mitigating factors that cause an old credit problem to come back to haunt you.
The borrower with an old collection on the report who pays it off, or who makes a partial payment may discover that the old collection data has updated with the new activity. Will this cause the lender to look twice at your loan application? Much of what could or should be done is circumstantial and the lender will review your credit information on a case-by-case basis when dealing with such problems.
The key is to discover such potential problems early so you have ample time to deal with them before it becomes a matter of wondering if the lender will say “no”. Start examining your credit reports as soon as you have decided it might be time to buy a home-you’ll be glad you did.
Do FHA loans permit cash back to the borrower? We get many reader questions in our comments section about this subject. Some want to know if they can borrow more than the cost of the home and use the excess funds for personal use. Others want to know if cash-back refinance options are available on FHA mortgages.
The rules that govern cash back to the borrower can be found in HUD 4000.1. As a general rule, FHA loans for “forward mortgages”, which means typical house purchases, do not allow cash back to the borrower.
There’s an exception for money that was paid up front for something that was later permitted to be included into the loan amount. That would be considered a refund and is not forbidden by FHA loan rules. But simply taking cash out of the transaction is generally not allowed.
HUD 4000.1 has specific guidance for the lender that prevent cash back on certain aspects of an FHA mortgage loan transaction, such as the use of sweat equity, manufactured housing trade-ins, etc.
However, certain FHA loans do provide additional funds for repairs, improvements, upgrades, etc. In such cases an escrow account would be set up and cash disbursements for the specific costs of such activities would be permitted. There may be cases where the borrower is permitted to act as her own contractor, but these would be handled by the lender on a case-by-case basis.
In the case of cash-out refinancing, the borrower may be entitled to any remaining funds left over once the original loan plus any required fees are paid off.
In all cases where an FHA refinance loan features cash back to the borrower, a new credit check and appraisal are required. The appraisal establishes the market value of the home at the time of the new transaction for the purpose of determining the new loan amount, and the credit check is required to insure the borrower can afford the new loan and is still a good credit risk.
A reader asked a question about the FHA appraisal process in our comments section recently; “I am currently selling my house. The buyer is getting a FHA loan.”
“The appraiser asked us to repair any broken brick on the outside of the house. My husband scraped off the parts of the bricks falling apart and filled each hole with mortar and painted it as close to the brick as he could. Will this be an acceptable fix according to the appraiser?”
When an FHA appraiser requires corrections as a condition of loan approval, borrowers will likely have to pay for an additional compliance inspection, which allows the appraiser to verify that the corrections were made to the satisfaction of FHA minimum standards.
Whether or not a certain correction or repair passes is left up to the judgment of the appraiser, so it’s impossible to determine whether or not the appraiser will approve such corrections, especially sight unseen.
It’s also very important to remember that state or local building codes also have a say in such cases; if the compliance inspection determines that the corrections or repairs are not up to code, the borrower may be back to square one (though how often that actually happens is unknown).
The basic answer to this reader question about FHA appraisals is that it depends on the appraiser and applicable building code.
While we’re on the subject, borrowers should remember that an FHA appraisal is not a home inspection, is not intended to be used as a home inspection, and insures ONLY that properties meet FHA minimum standards. An FHA appraisal cannot and should not be taken as stamp of approval on a home, or a guarantee that the home is free of problems.
Only the more in-depth home inspection (which is optional but an additional expense for the borrower separate from the appraisal fee) can give a more complete picture of the home’s condition. Bottom line? If you purchase a home without paying for the optional home inspection, you are not making a fully informed purchase.
Furthermore, the FHA has no recourse for borrowers who purchase the home on the strength of the appraisal alone and without a home inspection.
A reader asks, “I am an inheritor of a reverse mortgage home. I have declared to the bank that I am paying off the loan in cash at 95% of the appraised value. The appraisal came in to my benefit.”
“The appraisal is less than two weeks old and the bank has already stated they may not be able to close before the expiration date because of their workload and may require another appraisal. There is over 100 days left before the expiration date.I told them this was unethical. Should I call HUD? Hire a lawyer?”
The only legal advice comments we can give out in cases like these is that it’s never a bad idea to consult legal counsel with specific experience in these issues. There are a number of things that can affect the outcome of situations like this including state law, federal regulations, and the specific legally binding terms of the reverse mortgage.
The reader question does not indicate whether or not the reverse mortgage is an FHA Home Equity Conversion Mortgage, or some other kind of reverse mortgage loan. Where FHA reverse mortgages, it’s never a bad idea to contact the FHA directly at their toll-free number (1-800 CALL FHA) to get advice or information.
FHA reverse mortgages are designed to become due in full when the borrower dies or no longer uses the home as the primary residence. In cases where the borrower dies, FHA reverse mortgages are designed to allow for the sale of the property with the proceeds of the sale going to the lender. The FHA official site has a page dedicated to basic information about FHA HECM/Reverse Mortgage loans, which includes the following:
“When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.”
Non-FHA reverse mortgages may have different terms and conditions than FHA HECM loans/reverse mortgages. It’s important to read the legally binding agreement for the reverse mortgage to see what may be required in the event that the HECM loan becomes due and payable. The terms the borrower agreed upon with the lender will apply. Speak to the loan officer if you are uncertain about any of the terms of the reverse mortgage.