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

Monthly Archives: May 2017

Getting Ready For An FHA Mortgage Loan

Getting ready for an FHA mortgage loan doesn’t just mean checking your credit report and FICO scores, saving up money for a down payment, and reducing your debt-to-income ratio. It also means making important choices about your home and mortgage needs. Some of these choices may need to be made early in the preparation stage, others may come later depending on the type of home you decide to buy. Are you ready for an FHA mortgage loan?

Type Of Home

Believe it or not, the nature of the property you buy with your FHA mortgage loan could affect the type of home loan you apply for. A typical suburban home isn’t the same as a mobile home or a condo. The loans for a condo or manufactured home have different considerations depending on age, location, and other factors. An FHA condo loan requires the condo to be on the FHA approved list, a mobile home must have been constructed on or after June 15, 1976 and be affixed to a permanent foundation.

Condo loans, mobile home loans, new constructions loans and other options are available. Some participating lenders may not offer some types of mortgages (manufactured homes, modular homes, or other options depending on the housing market) so it’s good to discuss such options with a lender before deciding which financial institution to work with.

As you can see from those brief examples, the type of home you choose is an important factor in the FHA mortgage loan process.

Condition Of The Home

Some homes may be older, some may be newer. Some might be in pristine condition while others could require fixes or corrections in order to qualify for an FHA loan. If you are interested in buying a fixer-upper home, there is a different FHA loan option that allows you to buy a home (the FHA 203K rehab loan) with issues requiring fixes that a standard “forward mortgage” might not permit. Knowing whether you want a fixer upper or a new home will be an important detail to discuss with a loan officer.

As with the type of home, some participating lenders may not offer certain types of loans depending on circumstances, the housing market, etc. A fixer upper loan may be what you seek, but make sure your chosen lender offers a rehab loan option as early in the application process as possible.

Location Of The Home

Some borrowers find a property they are seriously considering, but FHA loan rules have specific requirements about homes located near airports, high pressure gas pipelines, special flood zones, and other unique locations.

Make sure you consider the location of the property and ask about such issues before choosing a home to buy with an FHA mortgage. Some areas that are known to be subject to natural disasters may require additional insurance. Others may not qualify due to the nature of a flood zone or other potential issue.

Not all homes in flood zones are automatically rejected for an FHA mortgage loan, but you’ll need to be as informed as possible about such issues going forward so you can make the best decision possible about your new house.

Mortgage Rate Trends: Pushing Higher

Mortgage Loan Rate TrendsSince our last report, mortgage rate trends have been in the “higher” category. That’s due at least in part, according to our sources, to local political drama which has sent investors moving for safer havens.

Those moves often reflect badly on rates, and those hoping for a chance to squeeze more recovery out of current trends likely weren’t counting on breaking news about possible impeachment proceedings over FBI director James Comey and questions of Russian involvement in U.S. politics to influence mortgage rates. But they have, however indirectly.

At the time of this writing, 30-year fixed rate conventional mortgage rate numbers have taken an upward turn to 4.0%, best execution. That’s out of a previous range of rates, with 4.0% being the bottom end of the range. FHA mortgage loan rates have also moved out of a range of rates and squarely into 3.75% territory, best execution.

FHA rates previously occupied a range with 3.5% at the bottom end, but as upward mortgage rate pressure continues, it may be worth considering that FHA best execution rates are still in a sub-four percent zone, though how long that continues remains to be seen.

Best execution rates assume ideal conditions including a well-qualified borrower and a participating lender willing to offer those rates. The mortgage rate numbers listed here are not available to all borrowers or from all lenders. Your FICO scores and other financial qualifications will play a large part in determining your access to rates like these.

Some industry professionals still feel there may be room for improvement in the short term, but others feel that the current potential for volatility makes locking a safer bet. Floating, or holding off on a mortgage rate commitment with the lender in hopes that rates may move lower, is never without risk. Right now, those risks are elevated due to the uncertainty in Washington and other factors.

Discuss your lock/float concerns with your loan officer before committing to a float strategy-it never hurts to get some sound advice from a professional and you’ll make the most informed choice possible.

An FHA Mortgage Post-Bankruptcy?

Is a mortgage loan possible after bankruptcy? When it comes to FHA home loans the answer is yes, as long as the borrower meets FHA loan standards and sits out a mandatory waiting period (which may vary depending on the bankruptcy, state law, and lender standards).

One reader asked a question this week about bankruptcy and FHA loans:

“My credit rating is 677 as of 5/18/2017. My income is established by a job that Ive held for over 15 years. My bankruptcy was completed in July of 2011. Can I qualify for an FHA mortgage?”

There are many issues at work in situations like these including whether or not the borrower has established a satisfactory pattern of credit activity following the bankruptcy action.

The mandatory waiting period (under FHA standards, not lender standards or state law) has been satisfied, but the lender will be required to run a new credit check for the loan.

If the borrower has established reliable credit patterns since the time the bankruptcy was discharged, chances of loan approval are better. FICO scores are not the only requirement for FHA mortgage loan approval.

Borrowers should understand that they will have their debt-to-income ratio examined, their credit activity, and a variety of of factors reviewed to insure the loan is a good risk for the lender.

Lender standards, which vary, will also be a factor. Some issues may be more important to address with one lender but not another. State law may have a say in what is possible, especially in Community Property states where there are rules that affect borrowers in legal marriages differently thanks to how the state recognizes the financial commitments made by a legally married couple.

In short, the answer to this reader question depends on some variables not addressed in the reader’s question, and it’s always a good idea to discuss your situation with a loan officer to see what might be possible.

FHA Appraisal Problems: A Reader Question

We’ve gotten a variety of questions in our comments section this week about issues connected to the FHA appraisal process. Here’s the latest:

“I have an FHA loan. It started raining on the day of the appraisal and we noticed a leak in the basement. The sellers agreed to fix the drainage issue that was causing it. During the walk-through we noticed that instead of busting out concrete and installing drainage pipes that they patched it up with more concrete. As ugly as it was I was okay with it as long as it kept the basement dry.”

“Fast Forward to the first rainy day after closing on the home and I have an all out flood in my basement! My realtor said that there is nothing that can be done because they made an ‘attempt’ to fix it. That sounds like a racket to me but what do I know. Is my realtor right? Or is there a way to get the sellers to come back and do it right? If so, then where do I begin?”

“There are other agreed upon repairs that the didnt fix either but this is the one that wouldve made me cut my losses. Its not just a simple matter of digging and installing pipe or I would do it myself. There is thick concrete all along the backside of house that will need to be jackhammered.”

There are many unanswered questions here including what was recommended by the appraiser in terms of corrections, etc. Another unanswered question is whether or not the buyer paid for a home inspection, which is a far more complete review of the property than an FHA appraisal.

In any case, the questions here are really of the legal variety. We cannot and do not give legal advice on this blog aside from “Get a lawyer.” Anything on this matter beyond what is quoted in the FHA loan rule book, HUD 4000.1, is generally outside the scope of this blog.

When there are legal questions about any home loan transaction, the laws of your state will apply, and those laws differ greatly depending on the state and other factors.

In cases like these, depending on severity and other variables, getting a consultation with a lawyer with real estate law expertise or related experience is likely a very good first step rather than a last resort.

FHA Loan Questions: Credit Score

Do FHA loan rules require more than one credit score for a borrower to qualify for a mortgage loan? That’s what one reader wants to know this week:

“Can you tell me if FHA can lend if someone only has one score? It’s a 621 score. This home buyer had a short sale four years ago and did not rebuild credit as she decided not to get any credit cards. She has a debit card and that is it. Please advise if one score would be accepted?”

FHA loan rules for credit score requirements are found in HUD 4000.1, the FHA single-family home loan rule book. HUD 4000.1 has instructions to the lender for credit score requirements which include the following about what is called the Minimum Decision Credit Score:

“The Minimum Decision Credit Score (MDCS) refers to the credit score reported on the Borrowers credit report when all reported scores are the same. Where three differing scores are reported, the middle score is the MDCS. Where two differing scores are reported, the MDCS is the lowest score. Where only one score is reported, that score is the MDCS. An MDCS is determined for each Borrower.”

So according to this read of HUD 4000.1, the general answer to the reader question is yes. Technically speaking, FHA loan rules do permit the lender to process an FHA loan application using the one available credit score. But what about when there is more than one borrower?

“Where the Mortgage involves multiple Borrowers, the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers.”

“Where the Mortgage involves multiple Borrowers and one or more of the Borrowers do not have a credit score (non-traditional or insufficient credit), the Mortgagee must select the lowest MDCS of the Borrower(s) with credit score(s).”

It’s important to point out that lender standards, state law, and other variables may also apply. Borrowers will need to speak to individual lenders to see what other standards may apply-HUD 4000.1 limits itself to statements of FHA policy and does not include the policies of lenders, state law, etc.

FHA Loan Appraisal Questions: Well Water Guidelines

A reader asked us an FHA loan appraisal question this week about a recent post we did on water quality issues. “We have been requiring a safe water test to verify the water standards are meet per the guidelines but we now have an Loan Officer arguing that it is not required unless the appraiser notes an issue. Is a water test really not required have I been reading the guidelines wrong since 2015?”

The “we” in this case would seem to be a participating FHA lender. Is the loan officer mentioned in the question correct? We turned to the relevant passages in HUD 4000.1 to reaffirm what the FHA loan rule book says about water quality.

“The Mortgagee must confirm that a connection is made to a public or Community Water System whenever feasible and available at a reasonable cost. If connection costs to the public or community system are not reasonable, the existing onsite systems are acceptable, provided they are functioning properly and meet the requirements of the local health department.”

The last line in this quote is key-the local health department’s standards would be the deciding factor. Does the local health authority require a water test? If not, how does the lender determine the quality of the water in accordance with what’s quoted above?

HUD 4000.1 also adds that there are more requirements for wells and other non-utility water sources.

“When an Individual Water Supply System is present, the Mortgagee must ensure that the water quality meets the requirements of the health authority with jurisdiction. If there are no local (or state) water quality standards, then water quality must meet the standards set by the EPA, as presented in the National Primary Drinking Water regulations in 40 CFR 141 and 142.”

This blog is not written by an FHA representative, nor is it affiliated with the FHA in any way, so the following comments are our opinions alone and do not represent FHA official policy. However, reading the passage above does seem to imply that there is a burden of proof on the lender to make sure the water supply meets certain standards.

That interpretation would seem to indicate that the loan officer’s belief (mentioned in the reader’s question above) is not true. For further clarification of FHA loan appraisal rules in HUD 4000.1 on this issue, it may be best to call the FHA directly (1-800 CALL FHA) and speak to a representative of the agency who may be able to assist further.

FHA Appraisal Questions: Defective Conditions

A reader asks a question about FHA appraisal issues: “Bought a house that was supposedly totally renovated about a 1.5 months ago. Finding out about major issues and violations in the house. There were a lot of concealed things hidden…found they had unlicensed contractors.”

“Didn’t have the money to do a regular home inspection. People were saying FHA does their own home inspection to make sure house is safe…problems with windows plumbing illegal hookup with water main electrical box etc. Have to make a payment to mortgage plus fighting with seller to get licensed contractors…please tell me why didn’t FHA see these issues.”

FHA appraisals must never be confused with a home inspection. The FHA and HUD warn borrowers of this in a document found on the FHA/HUD official site titled, For Your Protection, Get A Home Inspection which states in part:

“An appraisal is different from a home inspection and does not replace a home inspection. Appraisals estimate the value of the property for lenders. An appraisal is required to ensure the property is marketable. Home inspections evaluate the condition of the home for buyer.

Borrowers who do not pay for the optional home inspection cannot make a truly informed purchase, and it is strongly recommended that borrowers do not rely on the appraisal since FHA and HUD make it clear on their official site that the FHA appraisal is a tool intended for the lender and NOT the borrower.

The FHA appraisal is NOT a seal of approval on a home, it is not a guarantee that a home is defect-free. It is designed to insure that a home meets minimum standards.

Borrowers who have issues with a home after loan closing may need to consult legal counsel to help them determine what course of action or legal remedies may be available to them.

It is crucial that borrowers understand the difference between a home inspection (which is intended as a very complete top-to-bottom review of a property) and an FHA appraisal which is a tool for the lender to determine fair market value of the property and to insure it meets minimum standards.

FHA appraisals and the FHA appraisal fee are a standard part of the FHA loan process. The home inspection is an optional part of this process, but in reality no borrower should ever consider the inspection as anything but a means to make a properly informed decision on whether or not to buy the property.

FHA Loan Application Data: What You Should Know

The FHA single family loan program rule book, HUD 4000.1, has a variety of rules and instructions to the lender on how FHA loan application information is to be handled and processed. You might not think those rules affect you as an applicant, but some of the rules do pertain to how the lender must collect the borrower’s information and the approved sources of that information.

Your credit scores and other data must be given to the lender from approved sources. Did you know that HUD 4000.1 does not permit the borrower to handle or transmit certain kinds of information to the lender? Your loan officer is responsible for making sure she gets the information from the proper sourcing.

According to HUD 4000.1:

“Mortgagees must not accept or use documents relating to the employment, income, assets, or credit of Borrowers that have been handled by, or transmitted from or through the equipment of unknown parties, or Interested Parties. Mortgagees may not accept or use any third party verifications that have been handled by, or transmitted from or through any Interested Party, or the Borrower.”

The “mortgagee” is the lender, who is also bound by the following in HUD 4000.1 with respect to electronic information sent as part of a loan application:

“The Mortgagee must authenticate all documents received electronically by examining the source identifiers (e.g., the fax banner header or the senders email address) or contacting the source of the document by telephone to verify the documents validity. The Mortgagee must document the name and telephone number of the individual with whom the Mortgagee verified the validity of the document.”

There are also requirements listed for how a lender must obtain information via the Internet (as opposed to being sent a digital file from another party):

“The Mortgagee must authenticate documents obtained from an Internet website and examine portions of printouts downloaded from the Internet including the Uniform Resource Locator (URL) address, as well as the date and time the documents were printed. The Mortgagee must visit the URL or the main website listed in the URL if the page is password protected to verify the website exists and print out evidence documenting the Mortgagees visit to the URL and website.”

The lender is required to insure that any documentation that comes via the Internet contains, “the same information as would be found in an original hard copy of the document”.

Speak to your loan officer to learn more about how these rules may affect your loan application if you have any questions.

FHA Appraisal Questions: Peeling Paint, Electrical Outlets

We frequently get FHA appraisal questions in our comments sections. Here’s one of the latest:

“Im trying to purchase a home and I have an FHA loan. The only thing Im concerned about is the peeling paint outside and that some of the outlets arent grounded. How would this affect my FHA loan approval?”

FHA appraisal rules are found in HUD 4000.1. The instructions to the FHA appraiser don’t cover all possible contingencies for defective conditions, required corrections, etc. but do have something to say about peeling paint. The age of the paint may determine the extent of the corrections/repairs in this area. According to HUD 4000.1, for homes or improvements on or before 1978:

“The Appraiser must note the condition and location of all defective paint and require repair in compliance with 24 CFR 200.810(c) and any applicable EPA requirements. The Appraiser must observe all interior and exterior surfaces, including common areas, stairs, deck, porch, railings, windows and doors, for defective paint (cracking, scaling, chipping, peeling, or loose). Exterior surfaces include those surfaces on fences, detached garages, storage sheds, and other outbuildings and appurtenant Structures.”

Lead-based paint issues are not considered cosmetic problems. In general homes or improvements to those homes that date on or before 1978 are assumed to contain lead paint and must be dealt with accordingly. Such conditions are not necessarily a barrier to loan approval. The appraiser may recommend corrections which must be accomplished as per the appraiser’s write-up as a condition of loan approval.

The electrical system issue is one that depends partly on state/local building code and partly on FHA guidance. That guidance to the appraiser is as follows:

“The Appraiser must observe the physical condition of the plumbing, heating and electrical systems. The Appraiser must operate the applicable systems and observe their performance. If the systems appear to be damaged or do not appear to function properly, the Appraiser must condition the appraisal for repair or further inspection.”

Conditions that are not acceptable under state/local building code will not be acceptable to the appraiser. FHA loan rules do not include comprehensive lists of building code requirements so the borrower would need to consult with the local authority, but to answer the reader question if corrections in this area are required by the appraiser those fixes would not interfere with loan approval if they are done to the specifications of the appraisal and state/local code.

FHA Loan Rules For Bankruptcy: Chapter 7 and Chapter 13

We’ve had a number of reader questions in our comments section recently asking about scenarios for loan approval that involve bankruptcy and related issues. Can a borrower get a new FHA loan following a bankruptcy? Under what conditions?

FHA loan rules in HUD 4000.1 address this issue with separate entries for Chapter 7 and Chapter 13. According to the FHA loan rule book, Chapter 7 requires the lender to observe the following:

“A Chapter 7 bankruptcy (liquidation) does not disqualify a Borrower from obtaining an FHA-insured Mortgage if, at the time of case number assignment, at least two years have elapsed since the date of the bankruptcy discharge. During this time, the Borrower must have:

– re-established good credit; or
– chosen not to incur new credit obligations.”

HUD 4000.1 also mentions that a waiting period less than two years may be possible depending on circumstances. “An elapsed period of less than two years, but not less than 12 months, may be acceptable, if the Borrower can show that the bankruptcy was caused by extenuating circumstances beyond the Borrowers control and has since exhibited a documented ability to manage their financial affairs in a responsible manner.”

So in the case of Chapter 7, the borrower’s credit activity is just as important as the reasons for the original Chapter 7 filing in the first place.

For Chapter 13, there are more complex issues at stake including whether or not the court will permit the borrower to enter into a new financial obligation. From HUD 4000.1:

“A Chapter 13 bankruptcy does not disqualify a Borrower from obtaining an FHA- insured Mortgage, if at the time of case number assignment at least 12 months of the pay-out period under the bankruptcy has elapsed. The Mortgagee must determine that during this time, the Borrowers payment performance has been satisfactory and all required payments have been made on time; and the Borrower has received written permission from bankruptcy court to enter into the mortgage transaction.”

Court permission is an area the FHA cannot address beyond what is mentioned above, so borrowers dealing with a Chapter 13 will need to discuss the matter with their participating lender to see what has typically happened in the past in such circumstances, any applicable state law, etc.