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

Monthly Archives: February 2017

FHA Loan Rules: Occupancy, Second Homes

Occupancy is a key issue for FHA single family home loans. When you purchase a residence with an FHA mortgage, one of the requirements loan approval is conditional upon is that the borrower is expected to occupy the home as the primary residence, usually within 60 days of the loan closing. Occupancy is required for both new purchase and FHA cash-out refinancing loans.

That’s one reason why FHA loan rules in HUD 4000.1 specify that FHA mortgages can’t be used for vacation properties, timeshares, etc. HUD 4000.1 states clearly, on page 135, the “standard for owner occupancy” which includes the following:

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

The rehab loan exception is helpful because not all rehab projects allow the owner to reside in the home while the renovation work is being done.

In addition to what’s mentioned above, there are other requirements related to occupancy that borrowers should be aware of, including the FHA stance on using an FHA mortgage to purchase a second home.

For the purposes of this blog post, “second home” refers to a property the borrower wants to buy when he or she already has an FHA mortgage. Is a second FHA loan possible?

Not unless the borrower’s circumstances meet the requirements found in HUD 4000.1.

“FHA will not insure more than one Property as a Principal Residence for any Borrower, except as noted below. FHA will not insure a Mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining Investment Properties, even if the Property to be insured will be the only one owned using FHA mortgage insurance.”

What are the exceptions listed in this section of HUD 4000.1?

“A Borrower may be eligible to obtain another FHA-insured Mortgage without being required to sell an existing Property covered by an FHA-insured Mortgage if the Borrower is:

-relocating or has relocated for an employment-related reason; and
-establishing or has established a new Principal Residence in an area more than 100 miles from the Borrowers current Principal Residence. If the Borrower moves back to the original area, the Borrower is not required to live in the original house and may obtain a new FHA-insured Mortgage on a new Principal Residence, provided the relocation meets the two requirements above.”

There are a few other exceptions, including an increase in family size:

“A Borrower may be eligible for another house with an FHA- insured Mortgage if the Borrower provides satisfactory evidence that:

-the Borrower has had an increase in legal dependents and the Property now fails to meet family needs; and
-the Loan-to-Value (LTV) ratio on the current Principal Residence is equal to or less than 75% or is paid down to that amount, based on the outstanding Mortgage balance and a current residential appraisal.”

If you need to explore second FHA mortgage loan options, discuss your needs with a loan officer to see if your circumstances qualify.

FHA Well Water Requirements: A Reader Question

What do FHA appraisal requirements have to say about the testing of well water?

A reader got in touch with us recently to ask us about well water testing: “Is there an automatic testing of the well required just because it is surrounded by extensive farm land? I know that is required for USDA but wasnt aware that FHA required it. A reviewer is telling me it is in the 4000.1 Handbook and I dont remember seeing that.”

The answer to this particular question is addressed in HUD 4000.1 on page 495, but before we get to the specifics, it’s important to point out that FHA loan standards are often not the only ones that must be met in situations like these.

The local health authority may require testing of well water for a variety of reasons not specifically mentioned in the FHA loan single family mortgage rule book, and HUD 4000.1 is not designed to address every single instance where state, local, or other ordinances may apply.

The bottom line? FHA loan rules don’t always have the final say-the laws of your state or local community are never overruled by FHA loan guidelines. Well water is an issue where there may be quite a bit of variation from one housing market to another when it comes to standards and requirements.

The answer to the reader question? Yes, in cases like the one mentioned above, well water testing may be required. According to page 495 of HUD 4000.1:

The Appraiser must note any readily observable deficiencies regarding the well and require test or inspection if any of the following apply:

the water supply relies upon a water purification system due to the presence of contaminates;
corrosion of pipes (plumbing);
areas of intensive agricultural uses within one quarter mile;
coal mining or gas drilling operations within one quarter mile;
a dump, junkyard, landfill, factory, gas station, or dry cleaning operation within one quarter mile; or
an unusually objectionable taste, smell, or appearance of well water.

The “one quarter mile” measurement is the FHA loan standard-local standards may be higher or require additional testing or action depending on the requirements in a given market.

Types of Homes Eligible For FHA Mortgages

What kinds of property types can be purchased with an FHA mortgage loan? It’s a simple question, but there are some occasional misconceptions about FHA requirements for single family homes that borrowers should know about as they plan their mortgage.

There are rules on eligible property types that can be purchased with an FHA mortgage loan. These rules are found in HUD 4000.1, and include the following guidance to the participating FHA lender:

“FHAs programs differ from one another primarily in terms of what types of Properties and financing are eligible. Except as otherwise stated in this SF Handbook, FHAs Single Family programs are limited to one- to four-family Properties that are owner-occupied Principal Residences.”

The phrase, “owner-occupied principal residences” is an important one-FHA mortgage loan rules include an occupancy requirement which states the borrower must intend to occupy the home as the primary residence, normally within two months of the closing date.

HUD 4000.1 also has guidelines on specific property types that can be purchased. “FHA insures Mortgages on Real Property secured by:

detached or semi-detached dwellings
Manufactured Housing
townhouses or row houses
individual units within FHA-approved Condominium Projects”

Manufactured homes may include mobile homes with a permanent foundation, modular housing, etc. Any property to be purchased with an FHA mortgage loan must be classifiable as “real property” for tax purposes. FHA loans don’t get approved for property that will not be permanently fixed to an approved foundation, so recreational vehicles and houseboats don’t qualify.

FHA single-family home loans are not possible for the following list of ineligible property types:

hotels, motels and condotels
bed and breakfasts
commercial enterprises
boarding houses
tourist houses
private clubs
any other transient housing
vacation Homes
fraternity and sorority houses

Basically, the residential nature of the property is key-the borrower is permitted to purchase a mixed-use property as long as the residential nature of the building overall is not compromised and the non-residential use takes up no more than 49% of the total floor space of the home according to page 142 of HUD 4000.1.

Mortgage Rate Trends: Third Day Lower

Mortgage Loan Rate TrendsMortgage rates fell for the third day in a row on Friday, though affected borrowers may have noticed the changes reflected in closing costs rather than an actual interest rate change. We’ve seen rates drop low enough that some market watchers are using phrases like “back to 2017 lows” and “lowest levels of the year”.

The mortgage rate trends we’ve seen as of late are within a narrow range, and it’s not clear whether that range will adjust in the short term. In 2017 we’ve seen rates break into the four percent range, even FHA mortgage rates are now moving within that range at the upper end of their current “comfort zone”.

At the time of this writing, 30-year fixed rate conventional mortgages are in a best execution range between 4.125% and 4.25% depending on the lender and other factors. The FHA mortgage rate numbers are reported in a best execution spread between 3.75% and 4.25%. FHA rates tend to vary more among participating lenders, so you’ll have to shop around to find the most competitive rates.

And as always, the numbers we list here are “best execution” rates, which assume ideal condition including a very well-qualified borrower. Your ability to access rates like the ones seen here depends on your FICO scores, loan repayment habits and credit history, plus other financial qualifications.

These rates are not available to all borrowers or from all lenders, your experience may vary.

It is still a tough environment to deal with if you are trying to decide whether to lock or float, meaning commit to a mortgage loan interest rate with your loan officer or hold off in hopes that mortgage rates might improve in the meantime.

Floating is never risk free, and it is advisable to set a limit for how high the mortgage rate trends might go before you cut your losses and make the jump.

Have a conversation with your lender if you are not sure what to do in this area-you can get some expert advice on the current rate environment and make a more fully informed choice. You’ll be glad you did.

Child Support Income and FHA Loans

A reader got in touch with us to ask a question about how a participating FHA lender will view child support payments. “My significant other and I want to apply for a house loan together. He technically still pays me child support, but it will end once we own a house together. Can we still count that as part of my income for a home loan? And/or does that effect his income for the loan at all?”

There are a variety of factors that could influence the answer to this question. One is state law. Does the borrower live in a community property state? Is the couple legally married and thus subject to such laws where applicable? Does other state law govern how child support and/or alimony can be handled in a line of credit transaction?

Those are important factors to keep in mind. All that said, FHA loan rules do have a very specific set of guidelines for the lender in cases where alimony, child support, and other court-ordered payments are to be handled when it comes to income.

The borrower who receives child support is required to show documentation of that income if it is to be counted in the borrower’s debt-to-income ratio. FHA loan rules in HUD 4000.1 state:

“The Mortgagee must obtain a fully executed copy of the Borrowers final divorce decree, legal separation agreement, court order, or voluntary payment agreement with documented receipt.”

Furthermore, “When using a final divorce decree, legal separation agreement or court order, the Mortgagee must obtain evidence of receipt using deposits on bank statements; canceled checks; or documentation from the child support agency for the most recent three months that supports the amount used in qualifying. The Mortgagee must document the voluntary payment agreement with 12 months of cancelled checks, deposit slips, or tax returns.”

But the crux of the matter, for the purpose of answering the reader question, comes in the very next paragraph in this section of HUD 4000.1:

“The Mortgagee must provide evidence that the claimed income will continue for at least three years. The Mortgagee may use the front and pertinent pages of the divorce decree/settlement agreement and/or court order showing the financial details.”

So, based on the information given in the reader question about the child support payments being stopped once the borrower and partner move in together would mean the child support does not meet the “three year” criteria for being likely to continue. That means the lender can’t count the payments as verifiable income for the purpose of determining the borrower’s ability to afford the mortgage loan.

FHA Loan Employment Rules: A Reader Question

A reader asked us a question in the comments section recently about FHA loan rules for employment verification. “I just got denied a FHA loan because I had a gap in employment for only 3 months. I wanted to know does having a gap for only 3 months qualify me for getting denied?”

It’s important to remember that FHA loan standards found in HUD 4000.1 (the FHA single family loan rule book) are not the only standards that are recognized or enforced when the lender is processing a home loan application.

FHA loan rules, state law, lender standards, and even things that are considered “customary” in the local housing market may all play a part in FHA loan approval and processing. So what’s found in HUD 4000.1 is a good starting point, but does not mean the last word on the matter is found within those pages.

Having said that, let’s look at what HUD 4000.1 says about gaps in employment and frequent changes of employment:

“If the Borrower has changed jobs more than three times in the previous 12-month period, or has changed lines of work, the Mortgagee must take additional steps to verify and document the stability of the Borrowers Employment Income. The Mortgagee must obtain:

  • transcripts of training and education demonstrating qualification for a new position; or
  • employment documentation evidencing continual increases in income and/or benefits.”

So it’s clear that in cases where there have been frequent changes of employment, the lender needs some added verification that the borrower is a good credit risk. What about gaps in employment?

“For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrowers current income as Effective Income if it can verify and document that…the Borrower has been employed in the current job for at least six months at the time of case number assignment; and…a two year work history prior to the absence from employment using standard or alternative employment verification.”

The “three month gap” mentioned in the reader question would technically fit within the FHA loan standard (not longer than six months) but the question does not mention whether the two year work history factor is an issue or not.

Could lender standards require such a work history even for shorter gaps in employment?

That is entirely possible, and permitted under the rules of the FHA single family mortgage loan program. Lenders can require stricter standards as long as those standards are applied according to the law.

There are two things possible with situations like the one mentioned in the reader question-the lender may have more stringent standards in this area, or there are other factors that may have present that cause a lender to deny an FHA loan application such as the “two year work history” requirement seen in the HUD 4000.1 quote above.

We can’t speculate as to why the lender decided to deny this particular loan, but borrowers should know that FHA loan rules aren’t always the final word on the matter.

Mortgage Rates: Moving Lower

Mortgage Loan Rate TrendsMortgage loan interest rates have been moving downwards since our last report, but the moves have been small, and we still see a familiar range of rates.

30-year fixed rate conventional mortgages are still within a best execution range between 4.125% and 4.25%, even after the Fed made statements about future rate hikes. Our sources state that while hikes were mentioned, the information wasn’t quite what was expected and more favorable to mortgage rates (based on investor reaction to the less aggressive news from the Fed).

FHA mortgage rates are also hovering in a best execution range between 3.75 and 4.25% at the time of this writing, and it’s unclear whether conditions will bring a return to a sub-four percent FHA rate or not in the short term. In fact, some market watchers and industry professionals believe that there’s enough volatility in the market right now that it’s near impossible to predict in the short term where the trend might be headed.

And that’s the trouble for borrowers who have not yet committed to a mortgage rate lock or not. “Floating” or holding off on that commitment with the lender is always risky, but in the current rate environment that risk is elevated and there is little benefit in taking a risk (in the minds of some professionals) when the rewards are unclear. Will rates remain in their current best execution range?

Will they move higher based on unexpected news from Washington D.C. or from breaking economic news at home or abroad? There are a lot of factors are work that affect investor behavior in the short term-markets don’t like uncertainty and we have plenty of that going around for now.

And that’s why some professionals are using the word “lock” in their advice for those not yet in a mortgage rate lock commitment. If you are worried about the risk, chances are you should discuss your situation with your loan officer to get some advice about how to proceed. Make the most informed decision you can-you’ll be glad you did. Financially, these days are uncertain with respect to the fluctuations of the market and interest rates in general. It’s best to respect the volatility of the market over the short term when making lock/float choices.

(Editor’s note: the rates discussed here are “best execution” rates. Your ability to access such rates depends greatly on your financial qualifications. Best execution rates are not available to all borrowers or from all lenders. Your experience may vary.)

Credit Score Questions

Credit score issues are some of the most popular topics in our comments section-many want to know if their FICO scores are high enough to qualify for an FHA mortgage. One reader asked recently, “(Can) i can buy a (home using) FHA or HUD at a credit score from 500 to 579? With 10% down? How much is 10%?”

This reader is referring to a recent blog post about FHA FICO score requirements which included the following:

“FHA loan rules state that borrowers with credit scores at 580 or higher are eligible for maximum financing for FHA home loans, which requires a 3.5% down payment from the borrower. For those with credit scores between 579 and 500, 10% down is required.”

The short answer to the reader question is that FICO score requirements listed in HUD 4000.1, (the FHA loan rule book for single family mortgages) are only the minimums and that higher lender standards can and often do apply. The lender’s FICO score requirements would apply above and beyond FHA loan minimums.

You may need to discuss your specific circumstances with a loan officer to see what lender standards may affect your application.

Borrowers who have FICO scores between 500 and 579 may technically be eligible for an FHA loan (albeit at the higher down payment requirement mentioned above), but lender standards may require a higher score. The lender’s standards don’t get overruled by the FHA loan minimums.

We mention this to clear up confusion over how the FHA loan process works-some believe (mistakenly) that if it’s written down in the FHA loan rule book, that’s the final say in the matter.

But often times, lender standards, state law, or other factors may have a say in how the transaction is to be carried out.

The answer to the reader question, “how much is 10%?” depends greatly on the transaction since down payment requirements are based on the adjusted value of the property. Borrowers will find help with down payment amounts by using an online mortgage calculator such as the ones found at FHA.com.

You may need to have some basic estimated dollar amounts handy, such as the estimated cost of the home, potential interest rate, state taxes, etc. depending on which type of calculator you need to use.

Divorce And FHA Loans: A Reader Question

A reader asks, “I was divorced 5 years ago but he stayed in the house. He is always behind on the payments and it affects my credit. I have divorce papers that state he is solely responsible for the house and payment. Also he was court ordered to get the house in his name but hasnt and the courts wont do anything about it but extend his time. Can I buy a house even though because of his late payments has made my credit score less than 500. How do I handle this?”

This reader question should be answered by legal counsel-giving legal advice is outside the scope of this blog, except to recommend that when legal help is needed that it’s best to get the services of someone with specific expertise in the applicable laws in your case.

The applicable laws that may affect a circumstance like the one mentioned in the reader question vary from state to state. It’s not possible to give a generalized answer to questions like these except to remind borrowers that state laws are not uniform across the country.

What may apply in one state in cases like these may not in another. A borrower or co-borrower should know or take the time to learn how such laws might affect their transaction-being a fully informed borrower is important.

Borrowers should know that these state laws play big role in determining how to proceed with the legal process. Community property states, for example, have laws that govern how debts accumulated in a legal marriage are to be divided between the parties involved in a divorce.

The procedures for dividing the financial responsibility for a mortgage and other major debt could require the assistance of trained legal counsel in some cases, or a simple written and legally formalized document in others.

The laws of your state will determine how complicated these agreements might have to be, and how they are to be enforced.

Buying property with a bad credit rating is difficult, regardless of divorce or other circumstances. FHA loan minimum standards include provisions for borrowers with FICO scores between 500-579, but with a 10% down payment requirement. However, borrowers will find that these FHA minimums are not the only standards at work in an FHA loan transaction. Lender requirements also apply.

Many lenders require FICO scores in the mid-600s, so it is important to anticipate that when considering your FHA mortgage loan options.

One good step for potential FHA borrowers? Calling the FHA directly at their toll-free number (1-800 CALL FHA) to request a referral to a local, HUD approved housing counselor who can help with pre-purchase planning and advice. That advice may include help on issues of credit, budgeting, and becoming a good credit risk.

Commission Income and FHA Loans: A Reader Question

FHA loan down paymentHow does commission income count when applying for an FHA mortgage? A reader asked us recently, “I was denied a mortgage because of a commissioned salary, even though Im full time and am guaranteed 15.75/hr. Interestingly, everything was all ready to go on my measly 12/hour salary before I got this better job. Now Im thinking that may have been a mistake on the part of the lender…”

FHA loan rules governing this type of income (as verifiable income that is stable and likely to continue) are found in HUD 4000.1. The reader question does not state as much, but it seems implied that the commission income situation is recent. If so, the lender may need the borrower to have more time on the job as an employee earning commissions in order to meet FHA loan rules.

HUD 4000.1 states:

“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.”

So if the income hasn’t been earned for a full year at the time of the loan application, the lender may have no other choice but to deny the loan unless there are compensating factors that might work in the borrower’s favor.

Such factors may be circumstantial (for example, the borrower’s one year date for receiving income from commissions is close), or depend on state law and/or lender standards.

When figuring this type of income, the lender is required by HUD 4000.1 as follows:

“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.”

A borrower’s debt-to-income ratio is also important. If income from commissions AND debt-to-income ratio are factors together, that could strongly influence a lender’s decision.

That’s not to say that such a scenario is at work in the reader question, but rather to point out that there are often multiple reasons that add up to the single explanation of why a mortgage loan could be denied.