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

Monthly Archives: March 2017

FHA Appraisal Rules: When Corrections Are Required

The FHA appraisal process is a typical part of purchasing a home. The appraisal establishes the fair market value of the property and also insures the home meets minimum FHA loan standards. These standards are know as MPS and MPRs-Minimum Property Standards and Minimum Property Requirements, respectively.

While the FHA appraisal is not designed to catch any/all problems with a home, it is a tool for the lender to use to determine whether the property is acceptable or not. Whether you’re applying for a fixed rate mortgage or adjustable rate loan, purchasing a condo, town home, or manufactured home, each transaction is subject to the FHA appraisal process.

What happens if the appraiser reviews the property only to find issues that do not meet FHA minimum standards? The answer is in HUD 4000.1, the FHA loan rule book for single-family mortgage loan transactions.

“When examination of New or Existing Construction reveals non-compliance with MPR and MPS, the Appraiser must report the repairs necessary to make the Property comply, provide an estimated cost to cure, provide descriptive photographs, and condition the appraisal for the required repairs.”

If compliance is only possible by starting major repairs or alterations, “the Appraiser must report all readily observable property deficiencies, as well as any adverse conditions discovered performing the research involved in completion of the appraisal, within the reporting form” according to HUD 4000.1. Some repairs are not considered “major” but rather, “limited”. In such cases, the FHA appraiser is required to, “limit required repairs to those repairs necessary to:

-maintain the safety, security and soundness of the Property;
-preserve the continued marketability of the Property; and
-protect the health and safety of the occupants.”

Is there ever a situation where the home may be appraised (for new purchase FHA loans) “as-is”? HUD 4000.1 addresses this issue, stating:

“The Appraiser may complete an as-is appraisal for existing Properties when minor property deficiencies, which generally result from deferred maintenance and normal wear and tear, do not affect the health and safety of the occupants or the security and soundness of the Property. Cosmetic or minor repairs are not required, but the Appraiser must report and consider them in the overall condition when rating and valuing the Property.”

In such cases, “Cosmetic repairs include missing handrails that do not pose a threat to safety, holes in window screens, cracked window glass, defective interior paint surfaces in housing constructed after 1978, minor plumbing leaks that do not cause damage (such as a dripping faucet), and other inoperable or damaged components that in the Appraisers professional judgment do not pose a health and safety issue to the occupants of the house.”

These rules are enforced in a different manner when it comes to FHA rehab loans-obviously a property in need of a rehab loan won’t be in compliance when it is first purchased, but must meet FHA minimum standards once the repair work is completed. Talk to a lender about how FHA rehab loan requirements may differ in this area to see how your transaction may be affected.

Hazard Insurance For FHA Loans

A reader got in touch recently with a question about hazard insurance and FHA mortgages. “Were fixing to close on a home and theyre telling us that we have to have a shed that is on the lot covered with flood insurance. Is this correct and how much coverage do you have to have on a shed if youre in a flood zone?”

We get a large number of “Is this correct?” type questions. Some ask because they don’t realize that FHA loan rules aren’t the only ones that must be followed in a mortgage loan transaction.

If the requirement is made by the lender, that lender’s standards would apply as long as the standards are in accordance with FHA loan guidelines, state law, and federal law. So the “Is this correct?” question is “Yes” when the lender’s standards require it.

Flood insurance requirements will vary from state to state. Borrowers who want to purchase property in known flood zones will be required to carry flood insurance. Some special flood zones may render a property ineligible for an FHA mortgage unless certain conditions are met. From HUD 4000.1:

“If any portion of the property improvements (the dwelling and related Structures/equipment essential to the value of the Property and subject to flood damage) is located within a Special Flood Hazard Area (SFHA), the Mortgagee must reject the Property” unless certain qualifying conditions are met. (See a loan officer to determine what may be possible in your circumstances.)

The second part of this reader question involves coverage amounts. However, there’s no single answer for this-lenders have different requirements depending on the locale, state law, or other factors. Borrowers should know that when it comes to coverage amounts and other details for hazard insurance, that a conversation with the loan officer is the best way to get that specific information.

The nature and potential severity of natural disaster hazards in a given area may vary. Some areas routinely flood after heavy winters, while other areas may be known as “100-year flood plains” or other such expected, but seldom-occurring issues.

The lender will require certain insurance coverage in such cases to protect the investment, but the details of that coverage will be worked out between the lender and borrower based on lender requirements, state law, etc.

Mortgage Rate Trends: Moving Lower

Mortgage Loan Rate TrendsSince our last mortgage rate report, the overall trend has been downward in the short-term. Over the past several business days we have seen rates see-saw back and forth within a certain range, but at the time of this writing, rates are lower than when we reported on them last.

30-year fixed rate mortgages are at 4.25%, best execution. That’s in the middle of the range we last reported, with 4.375% at the upper end and 4.125% at the lower end. FHA loans are finally seeing a mortgage rate range falling back into the sub-four percent range; depending on the lender FHA mortgage rate numbers are reported between 3.75% and 4.25% best execution.

Remember, “best execution” refers to rates offered to extremely well-qualified borrowers with outstanding FICO scores and other financial qualifications. Your credit score, repayment history and other factors will play a major part in determining your access to rates like the ones listed here. Best execution rates are not available to all borrowers or from all lenders. Your experience may vary.

Locking and floating in the current rate environment is tricky. There is still plenty of potential for volatility. Each day that passes with certain types of financial uncertainty thanks to a lack or perceived lack of clear economic policy, or worse yet, unresolved issues such as healthcare legislation that continue to make headlines without any resolution adds more potential for spikes and corrections in interest rates in the short term.

Floating, or holding off on a mortgage rate lock commitment in hopes that rates may improve, is never risk-free. In the current rate environment, the risks are elevated and borrowers should definitely talk their options over with the lender to get some expert advice on how to proceed. Locking, or making that interest rate commitment, protects the borrower from future rate spikes based on the terms of the agreement.

At present, if you lock (especially with an FHA mortgage loan) you avoid the ups and downs we’ve been seeing with rates. But those who have higher capacity to accept the risk that comes with floating may be tempted to see how far they can ride out the current trend. If you choose to do this, set a limit to how high rates might climb before you choose to commit.

Having that strategy in place ahead of time could spare you additional grief should rates begin an upward trajectory once more.

Cosigners and Co-Borrowers On FHA Loans

In our previous blog post we discussed an FHA loan reader question about co-borrowers and their status. What is the basic difference between a cosigner and a co-borrower and how does an FHA loan work in such cases?

FHA loan rules in HUD 4000.1 differentiate between a cosigner and co-borrower; the cosigner, while liable for the loan, does not have any ownership in the property. The co-borrower has both financial responsibility and ownership. Both cosigners and co-borrowers must have a legal primary residence in the United States or be U.S. citizens.

Borrowers, co-borrowers, and cosigners all must provide basic information to the lender including Social Security numbers. Co-borrowers and cosigners are subject to the rules of HUD 4000.1 that restrict who can participate in an FHA loan transaction:

“A party who has a financial interest in the mortgage transaction, such as the seller, builder or real estate agent, may not be a co-Borrower or a Cosigner. Exceptions may be granted when the party with the financial interest is a Family Member.”

Co-borrowers may choose to occupy the property or act as non-occupying co-borrowers. Those who choose to be non-occupying co-borrowers are subject to the following rules in HUD 4000.1:

“For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent. The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members, provided the transaction does not involve:

– a Family Member selling to a Family Member who will be a non-occupying co-Borrower; or
– a transaction on a two- to four-unit Property.”

Some borrowers want their spouses to co-borrow with them, others do not. These decisions may be affected by the laws of your state, specifically community property laws that dictate how the financial obligations incurred in a legal marriage are handled. It’s best to discuss your needs with the lender to determine how such laws may affect your transaction.

These laws vary from state to state and there is no national standard-each loan will be handled on a case-by-case basis subject to any applicable requirements in this area.

FHA Loans With A Non-Occupying Co-Borrower

How does having a non-occupying co-borrower affect your FHA mortgage? What happens if one of the borrowers decides they want a change in their status as occupying or non-occupying? A reader asked us a question along these lines recently in the comments section:

“I just purchased my home in November 2016 with my husband’s uncle as a co-borrower (not living in the property). Now he is getting a divorce and his soon-to-be ex-wife wants the househe basically just helped me qualify of put the down payment to purchase and pay the mortgage on my ownhe even signed hes rights to the title the day we signed for the property is I was told. I could put in that paper after about 6 months of having the property but now I have this problem, what can I do?”

FHA loan rules in HUD 4000.1 defines a non-occupying co-borrower loan transaction as follows:

“A Non-Occupying Borrower Transaction refers to a transaction involving two or more Borrowers in which one or more of the Borrower(s) will not occupy the Property as their Principal Residence.”

HUD 4000.1 instructs the lender that such transactions have different down payment/LTV rules. On new purchase loans, “For Non-Occupying Borrower Transactions, the maximum LTV is 75 percent. The LTV can be increased to a maximum of 96.5 percent if the Borrowers are Family Members, provided the transaction does not involve:

– a Family Member selling to a Family Member who will be a non- occupying co-Borrower; or
– a transaction on a two- to four-unit Property.”

We mention these rules to put the reader question in the right context-the borrower who agrees not to occupy is still eligible to apply for an FHA loan of their own, but co-borrowers are liable for the loan and have an ownership interest in the property. Compare that to cosigners, who are liable for the loan but do not have an ownership interest in the property.

So the first thing that would need to be established in a situation like this is whether the reader is dealing with a cosigner or co-borrower. That would determine a great deal of what is to follow. And what are those followup actions?

That depends greatly on the laws of the state the loan was closed in, the language of the legally binding agreements signed at closing time, and other factors, but a borrower who has concerns similar to those in the reader’s question should consult a lawyer or legal expert who has experience in these issues.

We can’t dispense legal advice here. We are not lawyers and the law is generally outside the scope of this blog. But any time a borrower’s ownership rights and responsibilities are in question, a lawyer’s advice could be the most critical information needed to resolve such problems in a timely manner.

FHA Refinance Loans For Home Improvements

Weve been discussing FHA refinance loan options in our recent blog posts, and home improvements are one important option for those with existing FHA mortgages or non-FHA loans alike. How can FHA refinance loans help a borrower make upgrades or improvements?

There are multiple programs available through participating FHA lenders including the FHA Energy Efficient Mortgage program (EEM), and FHA Rehab loans. Most of these options will require the borrower to work more closely with the lender to determine what may be funded using FHA refinance loans, but many projects are possible.

For FHA Energy Efficient Mortgages, borrowers can apply to add funds to the refinance loan for upgrades that result in lower utility bills, including approved solar heating systems, storm windows or doors, or other alterations. The borrower will be required to discuss specifically how the upgrades will result in lower utility bills and efficiency, and all upgrades must be lender-approved.

FHA EEM loans are discussed in the FHA Single Family Home Loan rule book HUD 4000.1. That discussion includes the following about what is required to justify the upgrades/improvements in the proposed energy package.

The energy package is the set of improvements agreed to by the Borrower based on recommendations and analysis performed by a qualified home energy rater. The improvements can include energy-saving equipment, and active and passive solar and wind technologies. The energy package can include materials, labor, inspections, and the home energy assessment by a qualified energy rater. If the Borrower desires, labor may include the cost of an EEM Facilitator (general contractor).

FHA EEM loans must pass a cost effective test. HUD 4000.1 explains, The financed portion of an energy package must be cost-effective. A cost-effective energy package is one where the cost of the improvements, including maintenance and repair, is less than the value of the energy saved over the estimated useful life of those improvements. The lender will be responsible for making sure the improvements meet this requirement.

FHA EEMs are an option for FHA refinance loans, but an EEM isnt for everyone; some borrowers wish to refinance for other reasons such as getting into a lower mortgage payment. But if your home is in need of upgrades to make it greener or more efficient, ask a participating lender about this important option.

We will discuss FHA rehab loan refinancing options in a future blog post.

FHA Refinance Loans For Lower Interest Rate Or Fixed Rates

FHA refinance loans are an option for borrowers with existing FHA mortgages. But there are also options for non-FHA borrowers to refinance into FHA loans and get the benefits of having a lower interest rate or other options that come with FHA mortgages.

Refinancing a home loan can have a variety of benefits depending on the financial needs and goals of the home owner. There are many reasons to refinance including the desire to get into a lower interest rate, to get out of an adjustable rate mortgage, and sometimes even to fund repairs and upgrades to the property.

What does it mean to refinance a home loan? The answer depends on the type of transaction you need and the reasons you wish to refinance. For those who are looking for a lower mortgage payment, refinancing seems fairly simple. The borrower applies for a new mortgage loan that pays off the old mortgage and gets the borrower into more favorable terms that result in a lower payment or interest rate.

For FHA-to-FHA transactions this can be accomplished using an FHA streamline refinancing loan, which has no FHA required credit check or appraisal. Depending on the lender, one or both may be required anyway but from the FHA loan rules neither is a minimum requirement. FHA streamline refinance loans are for existing FHA mortgages only and according to HUD 4000.1 must result in either a lower interest rate or monthly payment, with some exceptions made depending on the nature of the refinance transaction.

For example, borrowers who refinance out of an adjustable rate mortgage into a fixed rate loan may not get a lower monthly payment or interest rate per se, but the advantage of the fixed rate mortgage is considered a tangible benefit and therefore makes the loan possible.

For non-FHA mortgages, its possible to refinance into an FHA loan and take advantage of potentially lower rates, especially if the borrower is currently paying on a conventional loan or an adjustable rate mortgage. FHA cash-out refinancing and non-cash-out FHA refinance loans are possible. When applying for these types of refinance loans, a new credit history check and appraisal will be required, so borrowers should anticipate these expenses and save accordingly.

FHA refinancing loans are available through participating lenders. You may qualify for fixed-rate refinancing or adjustable rate loans, depending on what the lender offers and your credit history.

FHA Loans and Co-Signers: A Reader Question

A reader asked us a question about FHA loans and co-signers recently. “If I cosigned for a friend and he refinanced to get everything put in his name and me taken off, am I eligible for an FHA loan for my own home?”

FHA mortgage loan requirements refer to co-signer arrangements and “contingent liabilities”. HUD 4000.1 says:

“A Contingent Liability refers to a liability that may result in the obligation to repay only when a specific event occurs. For example, a contingent liability exists when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment. Contingent liabilities may include Cosigner liabilities and liabilities resulting from a mortgage assumption without release of liability.”

If the reader’s circumstances meet that definition of a contingent liability, the following could apply if the record shows the borrower is obligated on the co-signed loan in any way:

“The Mortgagee must include monthly payments on contingent liabilities in the calculation of the Borrowers monthly obligations unless the Mortgagee verifies and documents that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default or the other legally obligated party has made 12 months of timely payments.”

Having co-signers legally removed from obligation on the mortgage may depend on state law, lender standards, and other factors. Assuming the borrower is legally free and clear and is otherwise financially qualified, an FHA loan may be possible. The lender will require documentation of this, so a borrower who finds themselves in the reader’s situation will do best to assume that such documentation is required at application time.

The situation mentioned in the reader’s question depends greatly on non-FHA rules and regulations depending on the state and other factors. It’s never safe to assume FHA and lender standards are met-obtaining supporting documentation should definitely be on the borrower’s to-do list long before applying for the loan, whenever possible.

FHA Loan Rules For Part-Time Income

A reader asked us a question in the comments section this week about part-time income and how it may or may not qualify as verifiable income for an FHA loan. The reader asks:

“My file is with the underwriter for review, they have asked for an VOE from my employer but they stated I work 16 hours a week (position hired into) but I always work more the 16 hr a week for the last 5-6 months and I’m going to continue to work more then that, they have already seen check stubs and both w2 from 2015 and 2016. Could this deny me for my loan?”

We first have to determine what the FHA definition of part-time income. HUD 4000.1 gives lenders guidance in this area beginning with the following:

“Part-Time Employment refers to employment that is not the Borrowers primary employment and is generally performed for less than 40 hours per week.”

Already we see that FHA loan rules seem to differentiate from a potential borrower’s “main income” sources and part time labor. However, FHA loan rules do not seem to draw a specific prohibition for the lender on using part time income as a main source of funds.

That said, HUD 4000.1, also states:

“The Mortgagee may use Employment Income from Part-Time Employment as Effective Income if the Borrower has worked a part-time job uninterrupted for the past two years and the current position is reasonably likely to continue…The Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use a 12-month average of hours at the current pay rate.”

So for the purposes of answering this reader’s question, HUD 4000.1 makes it clear, the lender cannot use any part-time income to help the borrower qualify for the FHA loan unless it meets the above criteria.

It is also important to remind readers that state law and lender standards may also apply above and beyond what is mentioned in the reader’s question. Your loan application requirements and required documentation may vary from lender to lender, and employment requirements may vary too. It is always good to get the advice of a participating FHA lender to determine what may be possible in a given situation.


FHA Loans For Non-Standard Properties

FHA loan
In a recent blog post we discussed FHA loan requirements for properties that had non-residential zoning or other non-standard features that could make it subject to local zoning laws or other ordinances. But what about properties that may be zoned residential, have all the usual characteristics of a residential property or typical home, but are still considered non-standard?

FHA mortgage loan rules in HUD 4000.1 address such conditions. On page 498, in the section where appraisal rules are located, there is a section titled Non-Standard House Styles, which includes the following:

Non-Standard House Style refers to unique Properties in the market area, including log houses, earth sheltered housing, dome houses, houses with lower than normal ceiling heights, and other houses that in the Appraisers professional opinion, are unique.

Note that much depends on the appraiser in these circumstances, as referenced above. What does HUD 4000.1 tell the appraiser and the lender about such non-standard properties?

The Appraiser must provide a comment that the non-standard house style appears structurally sound and readily marketable and must apply appropriate techniques for analysis and evaluation. In order for such a Property to be fully marketable, the Appraiser must demonstrate that it is located in an area of other similar types of construction and blend in with the landscape.

This section of the FHA loan appraisal rules adds, The Appraiser may require additional education, experience, or assistance for these types of Properties. It is clear that FHA mortgage loans are possible for such homes, provided they meet FHA minimum standards. Whats not so clear is how state law, state/local building code, or other requirements could affect the transaction. FHA mortgage loan rules may be silent on these issues, depending on their nature, but where a state or local ordinance applies, borrowers should expect that those rules have the final say.

FHA loan rules cant and do not address all contingencies-many times HUD 4000.1 defers to local requirements or other guidance, especially where building code is concerned. Just because FHA minimum standards dont address a situation-especially one that may be encountered when a home is non-standard or unusual in some way-doesnt mean there isnt a requirement that must be met.

Speak to a loan officer to determine how FHA loans might work for non-standard properties, those with excess land, or a mixed-use multi-purpose building.