Future FHA Changes

There are so many changes going on in the mortgage industry that it is no wonder we all seem a little confused, including underwriters.

FHA just recently relaxed the limits on origination fees and waived the 90 day property flipping rule for a period of one year. You can view the new property flipping guidelines here. Updates

What concerns me the most are the changes David Stevens, FHA Commissioner, is thinking about for the future.

• Raising the minimum down payment,
• establishing a minimum credit score,
• increasing the cost of mortgage insurance, and
• decreasing the amount the seller can kick in.

Read this article put out by the Wall Street Journal.
FHA Future Changes

I have some very real concerns about these changes. The average American, even with a job and good credit, doesn't have that kind of money set aside for a down payment and closing costs.

That only leaves them with two options: a VA mortgage, or a USDA Rural Development mortgage.

A VA Loan has always been a great 100% LTV loan for our veterans. Even though it does not require a down payment, the other guidelines are pretty strict. I'm sure the foreclosure rate is very low. I hope they don't start changing this program because our veterans have earned this exception.

The USDA Rural Development loans are also 100% LTV. They have a Guarantee program that is similar to a VA "Guaranteed" loan and they have a Direct Mortgage program with payments that can be subsidized by the Government. Both of these great programs are available but the property must be located in a rural area. There is more information here: Rural Development Guidelines

So, soon the average American will only have two options, unless they are a Veteran, and those are: buy a home in a rural area, or Rent!

Non-Purchasing Spouse - FHA

The mortgage guidelines on a FHA loan regarding a non-purchasing spouse are ambiguous and difficult to understand. I get questions on this topic month after month.

There are many reasons why a spouse would/should be left off the mortgage application. One is bad credit. Another reason would be income. The primary borrower is determined by the largest income. If that person has poor credit the only way around it is to leave them off the application.

However, this could be a catch 22 if the other spouse does not have enough income to pay all the debt. Is the non-purchasing spouse's credit examined or used in the DTI calculation? The answer is no and yes.


Does the non-purchasing spouse go on the title? The answer is yes, no, maybe. Confusing??

The answers lie around the state the property is in and if it is a community property state. That helps a little but it is still confusing. Remember, confusing or not, right or wrong, you always follow what the underwriter or closing instructions determine.

You can take a look at the actual guideline wording at FHA Guidelines.

FHA Reserves, Required or Not??

Michelle and her husband are from Texas and had been approved for an FHA loan on a single family residence. Their lender had told them that they needed two months reserves in the bank at closing or the loan would not close. They were confused by this requirement and came to me for clarification.

Well, I was confused too! FHA does not have a requirement for reserves (unlike conventional loans). The only reserve requirements with FHA are if a buyer is purchasing a 3-4 family unit. If purchasing a 3-4 unit, the reserves required are three months.

The answer here was a no-brain-er and is actually available on the HUD website. There is however, a really big issue here. Can you see it? Bear with me, here is another example.

Another couple was approved for an FHA loan in March of 08 and the company they were working with said the couple had to pay their 2007 taxes before the lender would close the loan. Hello, 2007 taxes aren't due until April 2008. This couple asked if there was a law stating this. Well, NO! There is not even an underwriting guideline that calls for it.

What is going on here? Do you see the big issue yet?

I have a web site where I answer Mortgage questions from home buyers, sellers, real estate agents, loan officers, and yes, even underwriters. These underwriters and loan officers are from some well know companies. This isn't about my web site, ... I'm not even going to give you the URL. I only bring it up because that is why I see a big picture that others can not. I get questions every day from all over our country, India, and other countries in the middle east.

I see at least four major issues with this information so far but I'm only going to cover two.

First, Why don't Loan Officers and Underwriters know basic FHA underwriting guidelines? Simple, they have no experience or training on FHA! FHA loans are and always have been a terrific option for people that didn't quite fit into conventional guidelines. Best of all the interest rate is considerably lower compared to a sub-prime loan and as I write this today FHA rates are equal to par on a Fannie Mae. It doesn't get any better than that, right?

Well, FHA loans are fairly complicated to put together and they use to have stringent appraisal and inspection requirements. So, if a borrower didn't fit into Fannie or Freddie it was easier and quicker to slap them into a sub-prime. It was a slam dunk and so what if the rates were higher on a sub-prime, few consumers understood their options anyway. (that mentality is why I built my site in 2002)

Another reason companies didn't do FHA loans was because they had to be HUD approved which meant they had to have a minimum net worth and pass a costly Audit every year. So again, why bother when sub-prime was so easy and available.

Now, of course the sub-prime days are almost a thing of the past or at least not as "sub" as they use to be. The savior? ... FHA Loans of course, except that very few, including underwriters have any experience with them or understand the differences between FHA and Fannie. Thus, in the two examples above, underwriters and LOs are just making stuff up or worse case, running scared because of all the flack in the industry right now.

In defense of the underwriter (as in example two) I will say that they have the authority to require what ever they deem necessary to improve a portfolio. Many of the questions I have received from underwriters seem to reveal that it is really a case of inexperience and over caution.

The mortgage industry professionals are struggling to catch up/learn FHA guidelines. If you are a consumer you must be very careful to find someone that has been HUD approved for at least two years. And Do Check, seriously. Some companies are doing FHA loans and they are not HUD approved. They are under the disillusionment that HUD will allow a non-HUD approved broker, to broker, to another HUD approved broker! Sounds a little flaky, no?

How in the world did we ever get in this mess? We can throw some of the blame to the politicians and presidential candidates that are hyping it up for their own agenda. It is not as bad as they say but they are speaking so loudly that the rest of the world is now listening. Did you read what is going on in the UK's market today? Good grief.

I don't believe in bailing out our large lending companies and here is why. Back in this article I mentioned getting questions from India and other countries in Asia. Now I ask myself, why would a mortgage underwriter in India, who I can hardly understand due to "no speaking good English", be calling me on the telephone at 3:00am about a loan in Texas??

Go Figure!

FHA Gift Programs Make FHA Mortgages A Great Option

Gifts for both the down payment and the closing expenses may come from acceptable sources such as: family member, close friend, Borrower’s employer or labor union, a charitable institution, or a governmental agency or public entity that has a FHA accepted homeownership assistance program.

100% of the funds for down payment and all closing expenses may come from an acceptable gift or grant program. These funds must be completely documented to show that no repayment is expected and the gift donor will not place a lien on the subject property. Gifts may not be used to meet the Borrower’s mandatory 3 months PITI reserves requirement for 3 and 4 unit purchases.

Gifts can not be used to increase a borrower’s asset to show reserves after closing that would alter the DU or LP findings from a Refer or Ineligible status to an Approve Eligible or Accept status. The underwriter must review the findings to determine whether or not any gift amount is considered in the reserves reviewed by the system. The gift amount must be deducted from the total reserves shown on the findings and the loan must be re-run through the system to provide the true picture of the Borrower’s assets and obtain a clear approval.

An original gift letter is required. The letter must state there is no repayment required and that no gift donor is tied to the loan transaction.

The transfer of funds from the gift donor to the borrower is required. The Lender must document the transfer of gift funds from the donor’s account to the Borrower’s bank account by obtaining a copy of the canceled check or other satisfactory withdrawal document that shows the gift is leaving the donor’s account and is being deposited into the borrower’s account. If the gift amount is being received at the closing, a certified check from the donor and a copy of the withdrawal receipt from the donor’s bank account is required. The closing agent is to make copies of these documents and forward to the Lender in the closing package.

If the gift donor borrowed funds to provide the gift, the donor must provide acceptable documentation that the funds were not borrowed from a party to the transaction or the mortgage lender. Cash on hand from the donor is not acceptable.

You can find more information at FHA Mortgage Underwriters.

Good Luck

Can I Refinance FHA

FHA mortgages have always been very good loans for the homebuyer. In today’s market the FHA refinance programs offer maximum benefits to the homeowner that wants to lower payments or get out of an adjustable rate mortgage. FHA offers three types of refinance mortgage loans: Cash-Out, No Cash-Out, and Streamline Refinance.

Streamline refinances were designed to lower monthly payments on FHA mortgages only. They can be done with or without an appraisal, and with or without credit qualification. The streamline refinance does not allow for any cash back to the borrower.

Loan Type Conversion Allowed:

1. 30 yr fixed to 30 yr fixed: The new payment must be lower than the old payment.
2. 30 yr fixed to 15 yr fixed: New payment cannot be more than $50 higher. Note: 15 yr fixed to 30 yr fixed is not allowed.
3. Fixed Rate to ARM: Owner occupied homes only
4. ARM to Fixed Rate
5. ARM to ARM: Rate must be lower than current loan
6. 203K to 203B

Streamline Refinance “Without” An Appraisal:

The new loan amount cannot be more than the original loan amount, OR more than the current principle balance plus closing cost. ... Whichever is less. This only applies to owner occupied as non-owner occupied borrowers can only refinance the existing balance, and do not have the option of rolling in the closing costs.

The only credit verification required is a verification of mortgage payments. This can be done with 12 copies of cancelled checks, front and back. IF cancelled checks are available, no in-file report is required unless the underwriter prefers that method to verify mortgage payments.

Streamline Refinance “With” An Appraisal:

An FHA streamline refinance with an appraisal allows the borrower to finance in the closing costs, discount points, and prepaids provided it all fits within the loan to value limits. The new loan amount may be the current principle plus closing costs, discount points and prepaids, OR, the appraised value x 97.75% (97.65%, or 97.15%, high or low cost state). Whichever is less!
IF the smallest of these two values is greater than the original mortgage balance credit verification is required.

Streamline Refinance – “Credit Qualifying”:

The loan amount is calculated based on the previous formulas and qualifying requires full employment verification, credit report, and debt to income ratio compliance. Typically these loans are used when the new mortgage payment will be higher, deletion of a borrower on new mortgage, or in assumptions involving due-on-sale clauses.

FHA "No Cash Out" Refinance:

This regular no-cash-out loan may be used to refinance a FHA mortgage, a VA mortgage, or a conventional mortgage and requires the borrower to fully qualify. Second mortgages may be included in the new loan if they are older than one year, if not you must prove that the funds were used solely to repair or rehabilitate the home. If not, paying off or including these loans would be considered a cash-out refinance.

This loan can be used to buy out the equity of an ex-spouse provided it is documented in the divorce papers. It is still considered a no-cash-out because this equity is considered indebtedness.

IF the property was purchased less than a year ago and is not currently an FHA loan, the loan amount will be the appraised value plus closing cost, OR the original sales price plus closing cost. Whichever is less!

If the purchase was more than a year ago and not currently FHA, the loan amount would be calculated the same as a "streamline refinance with an appraisal".

FHA "Cash Out" Refinance:

This loan can be used to refinance a FHA loan, a VA loan, or Conventional loan. This loan has many advantages: Max loan to value is 75% for conventional loans but FHA loans allow 85% plus a portion of the closing costs.

The property must be owner occupied for at least 12 months and the borrower must fully qualify.