Monthly Archives: April 2017
“Say for example a person owns a home in one city with an FHA mortgage and then has to relocate to another city for job reasons. While in this city there family size increases by several individuals via marriage and or kids. Would that person be able to get a 3rd FHA? mortgage.”
This reader question about FHA loans is in response to a blog post we did recently about the issue of applying for another FHA mortgage while currently paying on an existing FHA home loan. The gist of that post is that while FHA loan rules do not generally allow a borrower to get another FHA mortgage, two FHA loans may be possible if the borrower meets certain exceptions such as a change in family size, job relocation, etc.
The language of HUD 4000.1 seems to imply that two loans is the maximum:
“FHA will not insure more than one Property as a Principal Residence for any Borrower…(editor’s note: except for situations mentioned above and others listed in HUD 4000.1) 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.”
But before this rule comes into play, it is entirely possible that the debt-to-income ratio question might address the entire reader question first. The lender is required to insure the borrower’s outgoing debt (including the proposed amount of the new monthly mortgage payment) does not exceed a certain ratio.
If a borrower is paying multiple mortgages, it makes the debt to income question very important. If the borrower’s debts exceed a certain percentage of the income, the lender cannot approve the new loan application unless there are “compensating factors” that might work in the borrower’s favor.
Such instances would be handled on a case-by-case basis; state law and lender standards would also have a say.
In short, the quick answer is that FHA loan rules are not designed to permit second loans except in very specific circumstances and third loans seem out of the question based on the language of HUD 4000.1.
That said, borrowers should feel free to discuss their needs with a lender to see what may be possible. Each FHA loan is handled individually and depending on circumstances there may be alternatives to pursue.
A reader asked us a question in the comments section recently about FHA reverse mortgages and the appraisal process for them. “We have a detached garage with a 500 square foot “mother-in-law unit” on top. Will this structure be included in the appraisal in which the reverse mortgage is based on?”
FHA loan rules for appraisals are found in HUD 4000.1. Before quoting the rules for appraising what the FHA loan rule book classifies as an “accessory dwelling unit” or ADU, it’s important to remember that state law, and certain building code requirements may also apply.
FHA appraisals include determining whether an outbuilding is an ADU or not. The FHA definition of an ADU is as follows:
“An Accessory Dwelling Unit (ADU) refers to a habitable living unit added to, created within, or detached from a primary one-unit Single Family dwelling, which together constitute a single interest in real estate. It is a separate additional living unit, including kitchen, sleeping, and bathroom facilities.”
FHA loan requirements for the appraisal state:
“As part of the highest and best use analysis, the Appraiser must make the determination to classify the Property as a Single Family dwelling with an ADU, or a two-family dwelling. The conclusion of the highest and best use analysis will then determine the classification of the Property and the analysis and reporting required.”
“An ADU is usually subordinate in size, location and appearance to the primary Dwelling Unit and may or may not have separately metered utilities or separate means of ingress or egress.”
The answer to the reader’s question will be found in the next line of this set of rules, which is found in HUD 4000.1 on page 499:
“The Appraiser must not include the living area of the ADU in the calculation of the Gross Living Area (GLA) of the primary dwelling.”
So to restate; according to FHA loan rules, if the structure is question is classified as an ADU, it cannot be included in the gross living area for purposes of the appraisal. However, state law, lender standards, and building code may all have additional input where applicable. This is true of FHA reverse mortgages and forward mortgages alike.
A reader got in touch about bad credit home loans in our comments section this week. “I am looking for companies/banks/ or mortgage companies that help people refinance during bankruptcy 13 and bad credit.”
Does the FHA single family home loan program offer “bad credit” FHA mortgages?
This reader comment/question shows that there are still some misconceptions about how the FHA loan program works. There’s no such thing as a “bad credit” FHA mortgage. Borrowers either qualify for the home loan or they don’t. But what are the actual standards for FHA loan approval?
That’s complicated. There is a baseline minimum set of FICO scores that a borrower needs to have to even be considered under the FHA loan program. For maximum FHA financing with a required minimum down payment of 3.5%, a borrower must have a minimum FICO score of 580 or higher. That is the FHA standard, NOT the lender standard.
For applicants with FICO scores between 500 and 579, FHA loan rules say a mortgage is still technically possible, but with a higher down payment (10%).
But even borrowers with these scores may find that a “bad credit” FHA mortgage loan could be out of reach because lender standards are often higher than FHA minimum requirements.
You read that correctly, there are FHA loan standards and lender standards. The financial institution is free to require a higher FICO score for applicants as long as it does so in compliance with federal laws. Your bank can’t go BELOW the FHA minimums, but it can go higher.
What can a loan applicant do in cases where they are worried that their FICO scores may not be high enough to qualify? There are many courses of action to consider, but one of the most important ones? Contact the FHA directly to request a referral to a local, HUD-approved housing counselor who can assist with pre-purchase issues including building and maintaining a better credit rating.
Borrowers with bankruptcy issues will find this to be helpful, too. When dealing with bankruptcy there are mandatory waiting times that must be observed before the borrower can apply for a new mortgage loan. Depending on the nature of your bankruptcy you may be required to get the court’s permission to apply for a new mortgage.
Contact the FHA directly at their toll-free number, 1-800 CALL FHA to request a referral to a local housing counselor for more assistance in these areas.
Since our last report, we’ve seen rates climbing again, but the most recent uptick in numbers has a lot to do with global political headlines rather than domestic economic issues or market corrections.
The election results in France have certain implications-one candidate favors a French version of Brexit and investors watching the results unfold have reacted in ways unfavorable to mortgage loan interest rates.
At the time of this writing, we’re seeing upward movement in rates; 30-year fixed rate conventional mortgages are in a best execution range between 4.0 and 4.125%-remember last week we reported some aggressive lenders were offering best execution rates below the four percent line for the first time in a long while.
FHA mortgage loan rates are reported at the time of this writing in a best execution range between 3.5% and 3.75%. Remember that it’s been a while since FHA rates have fallen to these lows, and while rates may vary more among participating lenders than non-FHA mortgages, the return to mid-three percent territory is welcome regardless of how long or short-lived that return might be.
Rates have been, in the last few business days, been either “sideways” or only slightly higher. Some will notice the increases in higher closing costs rather than actual increased rates.
Others may see their actual interest rates go up depending on circumstances. We watched rates move downward for a bit, then watched them creep upward again. This makes a tricky decision when choosing between locking in a mortgage rate commitment with your lender, or floating to see whether downward movement resumes.
Floating is never risk-free, and borrowers should decide in advance how far rates might climb before they cut the losses and make the commitment. If you are unsure, have a conversation with your lender about the best course of action and get sound advice based on your loan officer’s experience. An informed decision is the best one.
As always, the mortgage rate numbers listed here are best execution, which means ideal conditions are assumed. Your FICO scores, loan repayment history, and other financial qualifications will play a big part in determining your access to rates like the ones listed here. They are not available to all borrowers or from all lenders. Your experience may vary.
Are you ready to apply for an FHA mortgage in 2017? There are several areas that borrowers should spend plenty of time examining before filling out paperwork or online forms to apply or get pre-approved for a mortgage loan.
If you do not know what your lender will see when she pulls your credit report, there’s a good chance you are not ready to fill out FHA loan paperwork. Why? Because if there are errors on your report, questions over certain accounts that may need to be disputed or contested, evidence of identity theft, those will all need to be dealt with before you apply for your loan.
A lender can work with a borrower who has disputed accounts still pending (assuming the lender’s standards permit) but if you learn about identity theft issues or errors on your report after applying for the loan, your chances at FHA mortgage loan approval are potentially lower.
Borrowers should expect to come to the home loan application process with 12 full months of on-time payments on all financial obligations. Doing anything less can jeopardize your chances at loan approval. Remember, the lender wants to find evidence that you are a good credit risk. The lender wants to approve your application, but will have a harder time justifying the loan if there are lates/missed payments within the last year.
Have you given yourself enough time to save up for a down payment on your FHA home loan? A minimum 3.5% down is required and there are no FHA loan provisions for a “zero money down” loan. The down payment is a critical part of your FHA loan, don’t come to the application process without having your down payment saved or having lined up sources of down payment gift funds where permitted.
Remember, FHA mortgage loan down payment rules say you cannot use unapproved sources for the down payment. Borrowers cannot use credit card cash advances, payday loans, or other types of “non-collateralized loans” to make the down payment. The lender will be required to verify the sources of all down payment funds including cash saved at home, savings accounts, family member contributions, etc.
Closing costs are another important area to prepare for. Some borrowers save up for closing costs, others plan a budget that will factor in these costs. Some closing costs may be included in the loan amount, and others may be paid by the seller (up to six percent of the sale price of the home). Remember, closing costs are not the same as your down payment and your closing costs cannot be used to meet the down payment requirement.
FHA loan rules, state law, and lender standards will all apply for situations involving issues or questions about any or all of the above. It’s best to ask your loan officer if you aren’t sure about how FHA loan rules or lender standards may apply in a given situation. FHA loan rules provide minimum standards, but often state law and other rules apply in addition to the guidelines in HUD 4000.1.
A reader asked a question in our comments section about FHA loan rules for alimony and child support payments:
“What is a voluntary payment agreement? I am divorced its a closed case and I actually pay a little more than what we agreed to in the official settlement agreement. Shes now trying to buy a house and will be dealing with the whole proving amount of alimony/child support and its very difficult to amend a closed case.”
“If we have an agreement between ourselves for (x) dollars/month for (x) amount of time and have this notarized, would this constitute a voluntary payment agreement?”
The reader is referencing an earlier blog post from 2013, which includes the following about how the lender may consider alimony and child support as part of a borrower’s effective income for purposes of calculating the debt to income ratio:
“Alimony, child support, or maintenance income may be considered effective, if
payments are likely to be received consistently for the first three years of the mortgage
the borrower provides the required documentation, which includes a copy of the
− final divorce decree
− legal separation agreement,
− court order, or
− voluntary payment agreement, and
the borrower can provide acceptable evidence that payments have been received during the last 12 months, such as
− cancelled checks
− deposit slips
− tax returns, or
− court records.”
Basically, FHA loan rules don’t spell out what is considered an acceptable voluntary payment agreement-the lender may have a standard that the borrower will need to know about, but in any case the lender will be required to document the income by means of the cancelled checks and other evidence as mentioned above.
The reader question references an older version of the FHA loan rules-let’s examine the rules from HUD 4000.1 to see if anything has changed since 2013, starting with the FHA definition of alimony, child support, et cetera:
“Alimony, Child Support, and Maintenance Income refers to income received from a former spouse or partner or from a non-custodial parent of the Borrowers minor dependent.”
“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. 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 canceled checks, deposit slips, or tax returns. 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.”
Speak to your loan officer to determine what may be required in your state or at that specific financial institution as state law and lender standards may apply in addition to FHA loan rules.
A reader got in touch this week about a question related to down payment assistance for FHA mortgages. “I’m buying a home for 175,000. I’ve been cleared to close. Ive been approved for $30,000 down payment assistance which has covered all my down/closing fees.”
“A day before closing the FHA is saying I still need to pay 3.5% of the purchase. Is it still required? I thought with FHA at least $1000 earnest money was enough. I had $30,000 already approved.”
Answering this question is difficult for two reasons-we don’t know the specifics of the gift funds, and whether those funds were actually considered down payment assistance or contributions toward closing costs.
There is a big difference between down payment assistance funds, and funds contributed to closing costs. FHA loan rules in HUD 4000.1 state that money paid for closing costs cannot be counted toward or consider part of a borrower’s minimum required investment (the down payment).
So if the gift funds provided to the borrower went towards closing costs, they would not be considered “down payment assistance”.
Contributions toward the closing costs of an FHA mortgage are capped at six percent. Anything above this is considered an “inducement to purchase” and the actual amount of the FHA loan must be reduced dollar-for-dollar for any amount above the six percent limit.
Contributions towards a borrower’s FHA loan down payment require strict verification by the lender, and there are specific rules governing the source, disposition, and use of gift funds intended as money down. All such gifts must come from an approved source, and must be a genuine gift with no expectation of repayment.
FHA loan rules have standards for earnest money, closing costs, and down payments. But lender standards, state law, and other rules may also apply in addition to FHA loan requirements.
Borrowers will need to discuss the specifics of these requirements with the lender to see what may be applicable. Borrowers should know the specifics of any contributions toward closing costs, whether or not those funds are applied to the cash requirements to close or if the money is considered a bona fide down payment assistance gift.
A reader asked us an appraisal question in our comments section recently about unfinished basements. “We were conditionally approved for FHA. There were two items in to be completed in the FHA appraisal before closing. Finish flooring in bedroom (completed).”
“The room was being completely redone And, 2. Finish bathroom in basement. This is an unfinished basement with framing and partial drywall. The rough bathroom has the toilet and sink installed. My question is: Does a basement need to be finished for FHA approval? From what I have read, the basement is not calculated as living space.”
While it is true that FHA loan rules in HUD 4000.1 mention not counting the basement as part of the Gross Living Area, FHA appraisal rules are not the only ones which may apply. If the FHA appraiser has listed a condition such as an unfinished bathroom as being in need of corrections, those corrections are a condition of loan approval.
That is true regardless of the source of the rules that dictate the corrections whether those rules are FHA loan standards, State or local building code, etc. Just because the FHA does not specifically mention an issue in the appraisal standards does not mean other regulations won’t apply.
Having said that, does HUD 4000.1 have rules in this area? One part of the FHA requirements found in HUD 4000.1 includes a section on “converted spaces”. It states:
“The Appraiser must treat room additions and garage conversions as part of the GLA of the dwelling, provided that the addition or conversion space…is accessible from the interior of the main dwelling in a functional manner; has a permanent and sufficient heat source… and was built in keeping with the design, appeal, and quality of construction of the main dwelling.”
“The Appraiser must analyze and report differences in functional utility when selecting comparable properties of similar total GLA that do not include converted living space. If the Appraiser chooses to include converted living spaces as GLA, the Appraiser must include an explanation detailing the composition of the GLA reported for the comparable sales, functional utility of the subject and comparable properties, and market reaction.”
So we can see that while these rules do not specifically address the reader question, there are a few grey areas which may apply. Building code in the reader’s local area may require bathrooms to be finished, or there may be other issues at work that were not mentioned in the reader question.
The Department of Housing and Urban Development announced an agreement in a fair housing case involving a group of mortgage lenders operating in California. According to a press release on HUD.gov, ” The U.S. Department of Housing and Urban Development (HUD) today announced an agreement with a group of California mortgage lenders to resolve allegations they discriminated against a mortgage applicant based on his national origin.”
The press release states that allegations of Fair Housing Act violations were brought against “American Financial Network of Brea, California; Benchmark Communities of Fresno; Brigantino Enterprise of Hollister; and an employee of Benchmark Communities failed to prequalify him to purchase a home in Hollister because he is Hispanic”.
Federal Fair Housing laws prohibit “discrimination in rental, sales or home lending transactions based on a persons national origin, race, color, religion, sex, familial status or disability”. The complaint against the companies named in the press release was brought when the applicant experienced what he believed to be discriminatory behavior toward him.
Where a person comes from should not impact their ability to purchase a home, said Bryan Greene, HUDs General Deputy Assistant Secretary for Fair Housing and Equal Opportunity, who was quoted in the press release. Greene adds, Todays action reflects our nations promise of fair housing and equal access to credit for every qualified individual, regardless of their national origin.
According to the HUD official site, “…the applicant filed a fair housing complaint alleging that he was unfairly denied an opportunity to prequalify for a mortgage loan, precluding him from purchasing a home because he is Hispanic.”
American Financial Network is required under terms of the agreement with HUD to pay the victim $5,000. Additionally, Benchmark Communities must provide “annual fair housing training for its employees who interact with prospective homebuyers”. The other company named in the complaint, American Financial Network, must provide “annual fair housing training to current and new employees as they are hired”.
Borrowers who feel their Fair Housing Act rights have been violated should report their concerns as soon as possible to the HUD Office of Fair Housing and Equal Opportunity by phone at (800) 669-9777 (voice) or (800) 927-9275 (TTY). Complaints may also be filed online at www.hud.gov/fairhousing.
Based on some of our reader questions lately, there seems to be some confusion over the rules for FHA loans where the borrower is interested in applying for an additional FHA mortgage. What are the rules in HUD 4000.1 on this issue?
There are two general areas of confusion related to those rules. Some borrowers have purchased a primary residence with non FHA loans and want to know if the FHA loan rules governing additional mortgages apply to them.
According to a literal interpretation of the requirements in HUD 4000.1, borrowers who have a non-FHA mortgage are free to apply for an FHA mortgage without worrying about being in violation of the rules. FHA loans have rules for additional mortgages apply which specifically to those who already have an existing FHA loan.
However, a borrower interested in another mortgage should know that regardless of circumstances, the lender is required to evaluate the applicant’s debt-to-income ratio to determine if the new loan is possible. So while those with non-FHA mortgages may be technically free to apply for FHA loans, the debt to income ratio question is one that will play a large part in the decision to approve or deny the loan application.
Additionally, for all forward FHA mortgages under the FHA Single Family mortgage loan program, occupancy of the newly purchased property is a requirement. You cannot purchase a new home under the Single Family mortgage loan program unless you intend to occupy it as your primary residence.
For borrowers with existing FHA mortgages, HUD 4000.1 instructs the lender:
“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.”
Exceptions for the above include provisions for those experiencing an increase in family size, job relocation, vacating a jointly-owned property, and situations where the applicant is a non-occupying co-borrower on another property. Borrowers should discuss their needs with a participating lender to see what may be possible under such circumstances.