FHA
FHA stands for the Federal Housing Administration. FHA is a part of the Department of Housing and Urban Development, a federal agency dedicated to providing decent, safe and affordable housing. An FHA insured mortgage is a type of mortgage financing. With this type of financing, the Federal Government insures lenders against loss if the borrower were to default on the loan. This insurance allows the lender to decrease the risk and thereby provide lower down payments, relax certain credit requirements and make more loans to potential homebuyers.
FHA is not a lending institution. They do not provide the direct funds for mortgages. All funds are approved and disbursed directly from a FHA approved mortgage lender.
FHA funds housing counseling agencies. FHA has approved counseling agencies who offer free counseling to homebuyers. They can assist with poor or no credit issues.
FHA does not warrant the condition of a property. FHA insures the lender against loss. A licensed FHA appraiser goes out and appraises the property for value only. He is not a home inspector. FHA recommends a “home inspection” but it is not a requirement.
FHA has more lenient credit requirements. FHA understands that many borrowers have experienced some type of credit problems. This allows buyers with less than perfect credit to own homes.
FHA does not set the interest rate. The interest rate and points are set by the lender.
FHA does not have a specific first time homebuyer program. All FHA programs are available to individuals seeking FHA lending with low down payments, less stringent credit qualifications and you do not need to be a first time homebuyer.
FHA’s qualifying ratios are 31% (income to proposed total monthly debt) and 43% (income to PITI and
Reoccurring debts). With computerized underwriting through the lender, the ratios may be increase up to 50% total debt ratio. Any total debt to income ratio over 45.00% needs an exception with compensating factors.
FHA has no restriction on the number of borrowers. They do not permit co-signers. All income and debts will be used for qualifying ratios. If a borrower wants to add an individual who will not be using his income, assets or credit, that individual cannot go on the mortgage or deed. Only those individuals who are credit worthy can be on the deed, mortgage and note.
There is NO requirement to be a United States citizen. The borrower must possess a Social Security number and have a verifiable 2 year work/income history was well as lawful residency.
Gifts are acceptable. All monies for the purchase can be gift. The donor needs to have an established relationship with the borrower. An acceptable gift the letter must be signed by the donor and borrower. Gift transfer must be done before closing and documented by providing the front and back of the donor’s cashed back. Borrower must show receipt of the funds being deposited into borrower’s account. Gifts are not permitted to be given at the closing.
Retirement assets are acceptable for reserves but only 60% of the account will be used.
Rental income may be used to qualify. FHA permits up to 85% of the rental income to qualify. The other 15% is used for vacancy/repairs and is subtracted from the rent. $500-15% = $425.00
Bankruptcy (2 yrs.) and Foreclosure (3 yrs.) must have a waiting period with the re-establishment of GOOD credit (no lateness on any accounts). There are circumstances where exceptions can be made.
FHA imposed mortgage insurance on all loans. The “up-front mortgage insurance” (UPMIP) is 1.75% of the base mortgage amount. This is permitted to be financed or it can be paid in cash at closing. There is also a monthly renewal premium (MIP).
55% for LTV greater than 95%
50% for LTV 95% or less
The MIP continues until the loan balance reaches 78% of the original sales price or appraised value (which ever one is lower). FHA does not permit a new appraisal to delete to MIP.
FHA loans are assumable, depending on the credit worthiness of the new buyer. The FHA MIP is not refundable on any assumptions.
FHA permits the seller to contribute up to 6% of the sales price towards the closing costs and prepaids. Seller contribution in access of the allowable closing costs and prepaids will reduce the seller contribution and/or increase the buyer’s cash contribution towards down payment.
Buyer must have contributed at least 3.5% of funds into the purchase!
FHA offers 30 and 15 year fixed rates as well as 3/1 and 5/1 year Adjustable Rate Mortgages (Arms’). Borrower qualifies at 1% over the start rate if less than 5% down payment on Arms’. With 5% or more down, then qualify at start rate.
3/1 ARM
Adjust annually after the initial 36 months
Max 1% increase/decrease per adjustment up or down
Max 5% lifetime cap
Min floor cap is the margin of 1.75%
5/1 ARM
Adjusts annually after the initial 60 months
Max 2% increase/decrease per adjustment up or down
Max 6% lifetime cap
Min floor cap is the margin of 1.75%
FHA Maximum Mortgage Limit for the country 5 country area:
(Bucks, Chester, Delaware, Montgomery and Philadelphia Counties)
Temp Loan Limits:
1 unit 2 units 3 units 4 units
(high balance) $420,000 $537,650 $649,900 $807,700
(conforming) $417,000 $533,850 $645,300 $801,950
FHA permits secondary financing but only from a family member.
There are NO prepayment penalties on any FHA loan.
The late charge for a FHA loan is 4%.
Although no reserves are required on a 1 to 2 family property, 3 months reserves are required on a 3 to 4 family property.
Property resold within the last 12 months:
- Only owners of record can sell properties that will be financed using FHA insured mortgages.
- Any resale of a property may NOT OCCUR 90 OR FEWER DAYS FROM THE LAST SALE to be eligible for FHA financing.
- For a resale that occurs between 91 days and 180 days where the new sale price exceeds the previous sales price by 100% or more, FHA will require additional documentation validating the property value. I, e: a new appraisal and/or documented proof of any improvements to the property. The cost of the new second appraisal has to be paid by the lender or seller (not by the buyer).
- Exceptions to the 90 day restriction are properties acquired by an employer or relocation agency in connection with the relocation of an employee. HUD owned properties and new construction are also exempt.
FHA now permits “AS IS” appraisals for existing properties. This is only true when the minor property deficiencies do not affect the safety of the occupants or the security and soundness of the property. It is the lender’s responsibility to determine if these minor deficiencies are acceptable.
Examples are:
Missing handrails
Cracked or damaged exit doors that are otherwise operable
Cracked window glass
Defective paint surfaces in homes constructed post 1978
Minor plumbing leaks
Defective floor finish or covering
Evidence of previous (non-active) Wood Destroying Insect/Organism damage where there is no evidence of unrepaired structural damage Rotten or worn out counter tops
Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post 1978
Poor workmanship
Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
Crawl space with debris and trash
Lack of an all weather driveway service
Required repairs are:
Inadequate access/egress from bedrooms to exterior of home
Leaking or worn out roofs
Evidence of structural problems
Defective paint surfaces in homes constructed pre-1978
Defective exterior paint surfaces pre-1978 where the finish is unprotected
FHA no longer mandates inspection for the following:
Wood destroying Insect/Organisms
Unless evidence of active infestation
Required by state or local jurisdiction
If customary to area or at lender’s discretion
Well (individual water system)
Unless required by state or local jurisdiction
If knowledge that the well may be contaminated
Unless water system relies on a purifications systems due to contaminants
Septic
If mandated by state or local jurisdiction
Flat or unobservable roof
Example of FHA financing:
Sales price $200,000
Down payment – 7,000
Base mortgage amount $193,000
Up front MIP is 1.75% $ 3,377.50
(round down to even $) – .50
Up front financed MIP $ 3,377.00
Base mortgage amount $193,000
Up front financed MIP ÷ 3,777
Total amount financed $196,377
Monthly MIP calculation:
Base mtg amount $193,000
.55% of base = 1,061.50
Divide by 12 = $ 88.46
FHA will not insure any borrower where the property is obtained or to be used as an investment. Borrowers may own a house with FHA financing in place that will not be sold but they must relocating, have an increase in family size, divorcing or be a cosigner on an existing mortgage where they did not occupy the property.
NEW CHANGES JANUARY 1, 2009:
Down payment is 3.50% effective January 1, 2009. Borrower’s cash investment must be 3.50% of the sales price
Max cash out refinance is limited to 85% of the value.
FHA has done away with certain “seller funded” down payment assisted programs such as the AmeriDream and Genesis programs.
Max CLTV with secondary financing is limited to 100% except government subordinated liens (soft second) which are not limited to 100% CLTV.
FHA Changes for 2011
Mortgage Insurance Premium:
Currently the Up Front MIP is 1% of the base mortgage amount.
FICO Scores:
620 score requires 3.5% down payment
Current industry standards require 620 minimum score.
Seller Concessions:
6% seller assistance with minimum 3.5% down payment.
Increased enforcement on FHA lenders:
Enhanced monitoring of lender performance and compliance with FHA guidelines and standards
Ability to terminate the lenders ability to underwrite FHA loans
Lenders to assume liability for all loans that they originate & underwrite
ML 2003-07: Probibition of Property Flipping (5/22/03)
TO: ALL APPROVED MORTGAGEES
ALL FHA ROSTER APPRAISERS
ATTENTION: Single – Family Servicing Managers
On May 1, 2003, the Department of Housing and Urban Development published a final rule in The Federal Register amending the mortgage insurance regulations to prevent the practice of flipping on properties that will be financed with the Federal Housing Administration (FHA) insured mortgages. Property flipping is a practice whereby a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser. These changes to existing credit policies, in effect for all mortgage loan applications signed on or after June 2, 2003, will eliminate the most egregious examples of predatory flips of properties within the FHA mortgage insurance programs and, thus, preclude home purchasers using FHA financing from becoming victims of predatory flipping activity.
This Mortgagee Letter provides a synopsis of the final rule, as well as specific guidance to assist lenders in complying with these new requirements. We urge mortgage lenders and appraisers to review the entire published final rule as well.
Highlights of Final Rule
The final rule requires that: a) only owners of record can sell properties that will be financed using FHA insured mortgages; b) any resale of a property may not occur 90 or less days from the last sale to be eligible for FHA financing; and c) that for resales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by 100 percent or more, FHA will require additional documentation validating the property’s value. In addition, the rule provides flexibility for FHA to examine and require additional evidence of appraised value when properties are resold within 12 months.
Sale by owner of Record
To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. This requirement applies to all FHA purchase money mortgages regardless of the time between resales.
The mortgage lender must obtain documentation verifying that the seller is the owner of record and submit this to HUD as part of the insurance endorsement binder; it is to be placed behind the appraisal on the left side of the case binder. This documentation may include, but is not limited to, a property history report, a copy of the recorded deed from the seller, or other documentation such as a copy of a property tax bill, title commitment or binder, demonstrating the seller’s ownership of the property and the date it was acquired.
Resales Occurring 90 Days or Less Following Acquisition
If a property is resold 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage insured by FHA. FHA defines the seller’s date of acquisition as the date of settlement on the seller’s purchase of that property. The resale date is the date of execution of the sales contract by the buyer that will result in a mortgage to be insured by FHA.
Ten Compensating Factors
FHA Guide
Compensating Factors
Types of compensating factors
Listed below are the only FHA – approved compensating factors that can be used to justify approval of mortgage loans with ratios exceeding 31/43.
Any compensating factor used to justify mortgage approval must be supported by documentation
- The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 10 – 12 months.
- The borrower is making a down payment of 10% or more towards the purchase of the property. This should not normally come from gift funds.
- The borrower has demonstrated an ability to accumulate savings and a conservative attitude towards the use of credit.
- Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.
- The borrower receives documented compensation or income not reflected in effective income but directly affecting the ability to pay the mortgage. This can include food stamps and similar public benefits.
- There is a minimal increase in borrower’s housing expenses – 10% or less
- The borrower has substantial documented cash reserves (3+ months’ PITI) after closing. Not all assets can be counted towards these reserves. Potential issues may include gifts, borrowed funds, retirement funds, property equity and refinance proceeds
- The borrower has substantial non-taxable income – provided that no adjustment (grossing up) was made earlier in the ratio computation.
- The borrower has a potential for increased earnings, as indicated by job training or education in the borrower’s profession. Income that is not expected to be received for at least three years can qualify as an FHA compensating factor. Of course it cannot be considered regular income.
- The home is being purchased as a result of relocation of the primary wage – earner. The secondary wage – earner has an established history of employment and is expected to return to work. Reasonable prospects must exist for securing employment in a similar occupation in the new area. The underwriter must document the availability of such possible employment.
As an example, a property acquired by the seller is not eligible for a mortgage to be insured for toe buyer unless the seller has owned that property for at least 90 days. The seller must also be the owner of record.
Resales Occurring Between 91 and 180 Days Following Acquisition
If the resale date is between 91 and 180 days following acquisition by the seller, the lender is required to obtain a second appraisal made by another appraiser if the resale price is 100 percent or more over the price paid by the seller when the property was acquired.
As an example, if a property is resold for $ 80,000 within six months of the seller’s acquisition of that property for $ 40,000, the mortgage lender must obtain a second independent appraisal supporting the $ 80,000 sales price. The mortgage lender may also provide documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value but must still obtain the second appraisal. The cost of the second appraisal may not be charged to the homebuyer.
FHA also reserves the right to revise the resale percentage level at which this second appraisal is required by publishing a notice in the Federal Register.
Resales Occurring Between 91 Days and 12 Months Following acquisition
If the resale date is more than 90 days after the date of acquisition by the seller but before the end of the twelfth month following the date of acquisition, FHA reserves the right to require additional documentation from the lender to support the resale value if the resale price is 5 percent or greater than the lowest sales price of the property during the preceding 12 months. At FHA’s discretion, such documentation may include, but is not limited to, an appraisal from another appraiser.
FHA will announce its determination to require the additional appraisal and other value documentarion, such as an automated valuation method (AVM), through a Federal Register issuance. This requirement may be established either nationwide or on a regional basis, at FHA’s discretion.
Exceptions to 90 – day Restriction
The final rule exempts properties acquired by an employer or relocation agency in connection with the relocation of an employee from the time restriction on resales. Resales by HUD under its Real Estate Owned (REC) program are not subject to the time restrictions. However, any subsequent resale of such a property must meet the 90 – day threshold in order for the mortgage to be eligible as security for FHA insurance. The Homeownership Centers (ITOCs) do not have the authority to waive the regulatory requirements set forth in the final rule.
The restrictions established by the final rule are not intended to apply when a builder is selling a newly built home or is building a home for a homebuyer wishing to use FHA – insured financing. HUD will more fully address this issue through issuance of the Federal Register notice provided for in $ 203.3a(b) (4) (iv) of the final rule.
Date of Property Acquisition Determined by the Appraiser
In addition, mortgage lenders may rely on information provided by the appraiser in compliance with the updated Standard Rule 1-5 of the Uniform Standards of Professional Appraisal Practice (USPAP). This rule requires appraisers to analyze any prior sales of the subject property tnat occurred within specific time periods, now set for the previous three years for one – to four family residential properties.
As a result, the information contained on the Uniform Residential Appraisal Report (URAR) describing the date, price and data for Prior Sales for the subject property and the comparables is to include all transactions that occurred within three years of the date of the appraisal. Appraisers are responsible for considering and analyzing any prior sales of the property being appraised and the comparables that occurred within three years of the date of the appraisal.
Therefore, provided that the URAR completed by the appraiser shows the most recent sale of the property to have occurred at least one year earlier, no additional documentation is required from the mortgage lender. The mortgage lender remains accountable for verifying that the seller is the owner of record and may rely on information developed by the appraiser for this purpose if provided. However, if the lender obtains conflicting information before loan settlement, it must resolve the discrepancy and document the file accordingly.
| Summary of Property Flipping Regulations In Effect June 2, 2003 | ||
| Prior Sale Occurred | 0-90 days | 91-180 days |
| Eligibility for FHA Financing | Not Eligible | Eligible provided: |
| Exceptions include relocation agencies and resales by employees and sales by HUD of Real Estate Owned. | Resale price to FHA mortgagors is less than 100% greater than previous sale or | |
| The HOCs cannot grant exceptions. | If 100% or more greater than previous sale, second appraisal supports value. |