5 of the Most-Asked FHA Credit Questions in Today’s Lending Environment

It has been a tough couple of years for most folks in this country, as reflected in the day-to-day questions that I field from potential customers and agents. I thought I would put down a few of those questions along with the answers for review and discussion.

1.How long after a Chapter 7 bankruptcy before I can purchase a home?
The general answer is two years. The borrower must have re-established good credit or chosen not to incur new credit obligations. Under extenuating circumstances, a borrower may be approved earlier, but only if more than 12 months have elapsed since the bankruptcy release.

2.How long after a foreclosure before I can purchase a new home?
A borrower is generally not eligible for a new FHA-insured mortgage if, during the preceding three years, his/her previous principal residence or other real property was foreclosed or a deed-in-lieu of foreclosure was executed.

3.How long after a short sale can I purchase a home?
A borrower in default on his/her mortgage at the time of the short sale (or pre-foreclosure sale) is not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. A borrower is not eligible for a new FHA-insured mortgage from the date that FHA paid the claim.

Exception: The lender may grant an exception to the three-year requirement if the foreclosure or short sale was the result of documented extenuating circumstances beyond the borrower’s control (e.g., a serious illness or death of a wage earner) and the borrower has re-established good credit since the foreclosure.

4.Can I have a co-borrower(s) that will not occupy the property?
When there are two or more borrowers, but one or more will not occupy the property as a principal residence, maximum financing is available for borrowers related by blood, marriage, or law, such as spouses, parents, children, siblings, stepchildren, aunts-uncles, and nieces-nephews, or unrelated individuals who can document evidence of a family-type, longstanding, and substantial relationship not arising out of the loan transaction. If co-borrowers do not meet any of the aforementioned relationship criteria, then a 75% LTV is required.

5.How much can a seller pay toward my closing cost?
The seller may pay up to 6 percent of the sales price.

Note that the guidelines presented above should be taken into account when underwriting the borrower’s complete credit package. If you would like to review any of the above guidelines firsthand, visit the FHA website and review the online version of the HUD Mortgage Credit Manual 4155.1.

How About An Adjustable Rate Mortgage?

A few days ago, I wrote about the assumability feature for FHA loans. Another program feature that has not been discussed much over the past few years is the adjustable rate mortgage. With rates near all-time lows, it may not make sense for most borrowers to choose an ARM. However, if you plan on staying in your home for a short time or you need the lower rate to assist you in qualifying, then an ARM may be an option.

The subprime-loan debacle gave ARM products a bad name — primarily those that featured the “crazy first year adjustment.” The first-year cap on most subprime adjustable loans was as high as 5-6%. FHA loans, on the other hand, have a more reasonable annual maximum adjustment (the cap) of 1-2%.

FHA offers a standard 1-year ARM and four “hybrid” ARM products. Hybrid ARMs offer an initial interest rate that is constant for the first three, five, seven, or 10 years. After the initial period, the interest rate will adjust annually. Below are the different interest rate cap structures for the various ARM products:

• The 1-year ARM and 3-year hybrid ARM have annual caps of one percentage point, and life-of-the-loan caps of five percentage points. (Example: If your initial interest rate were 4.00%, the highest possible interest rate would be 9.00%)

• The 5-, 7-, and 10-year hybrid ARMs have annual caps of two percentage points, and life-of-the-loan caps of six percentage points.

Acceptable index options on FHA-insured ARM loan transactions are 1) the Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); or 2) the 1-year London Interbank Offered Rate (LIBOR).

As rates continue to move off their historical lows, we must diligently review all loan possibilities, including ARMs, as viable financial avenues for our customers.

What is the maximum sales concession for a FHA loan?

Over the weekend, I received a purchase contract with a sales concession of $3,900 or 9.75%. The purchase price is $40,000, with estimated repairs of $125,000. Sales concessions are calculated on the purchase price. In this case, 6% of $40,000 is a maximum of $2,400; the remainder of the funds would be considered an inducement to purchase, thereby reducing the amount of the mortgage dollar-for-dollar of the excess amount. Don’t get confused and calculate a sales concession on a 203(k) off of the acquisition price (purchase price plus the repair escrow) instead of the purchase price.

The sad part of this story is that a loan officer suggested the $3,900 when the loan was at their shop and was being reviewed as a standard FHA mortgage, a 203(b). The realtor never questioned the loan officer’s FHA knowledge and thus wrote the contract for the excess amount. I think we can all see the numerous lessons to be learned here without my further commentary.

One last item: The maximum sales concession for FHA is still 6%, not 3%. That day may come, but the change has not yet been implemented. Don’t be confused by Fannie/Freddie conventional products, which were lowered to a maximum 3% for loans with a LTV greater than 90%. HUD only asks for comments on changing sales concessions in 2010. Buyers must always have their own 3.5% downpayment. (There are various acceptable means to meet this requirement: own funds; gifts; borrowing against an asset; etc.) When writing contracts, don’t forget that sales concessions are a great means to assist borrowers in paying for all or a portion of their closing cost.

10 Most Mandatory FHA 203k Repairs For 2010

As part of my education and marketing campaigns I tell borrowers all the items that they can include in a FHA 203(k) loan. Today, I thought I would take a minute to look back at this year and list the mandatory items that I have seen most often. 

1.  HVAC systems - some units were outdated but many were taken or stolen

2.  Bathroom remodels – many were stripped to the studs, past homeowners started projects and ran out of time and/or funds

3.  Busted pipes – homes were vacated by owners and not weatherized

4.  Drywall replacement – replaced wall sections that had to be pulled out to reach plumbing or electrical issues as well as giant holes left by angry homeowners

5.  Interior doors – either destroyed by homeowners or taken and sold

6.  Structural issues with foundations and basements

7.  Hot water heaters – some units were outdated, many are missing

8.  Electrical Panels – amazing how many panels are sub-par

9.  Floor covering replacement – most replacement is because the flooring is missing not substandard

10.  Mold remediation – water and heat do not mix

I think it is obvious to those of us in the industry that many of today’s 203(k) loans are originated for use with foreclosed or distressed properties, with that said, keep in mind a home does not need mandatory repairs to use a “k”. In 2010, I have closed loans for newer homes that were in need of assistance in catching up on deferred maintenance while other borrowers wanted a kitchen or bathroom remodel as part of their new home purchase. I guess the moral of the story for both home buyers and their agents “don’t let a home that needs repair or updates keep you from seeing your vision of the property once it becomes your home”.

First Time Home Buyer Tax Credit Still Available For Some Veterans

In the fall of this year, all eyes were on our industry and the last push to close loans under the First-Time Homebuyer Tax Credit (extension deadline: September 30, 2010). Like many of you, I took a deep breath after my last closing and moved forward.

However, I let the provision for veterans and other federal employees fall by the wayside, and only last night while searching the Internet for mortgage data did I have my moment of clarity and realize that I had dropped the ball in marketing to my veteran clients. When Congress took action in November 2009 to extend the date for the First-Time Homebuyer Credit to April 2010, they also added additional language for our country’s military veterans and other federal employees. The guideline reads as follows:

Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit. Thus, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract is entered into by that date, the taxpayer has until June 30, 2011, to close on the purchase. Members of the uniformed services, members of the Foreign Service and employees of the intelligence community are eligible for this special rule. It applies to any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

More First-Time Homebuyer Tax Credit information can be obtained from the IRS website. Remember this is a tax credit and can be used on any loan program that best represents the veteran’s needs, including VA, FHA (including the 203k), USDA and conventional.

Originating More Energy Efficient Mortgages In 2011

Under the FHA Energy Efficient Mortgage (EEM) Program, a borrower can finance into the mortgage 100 percent of the cost of eligible energy-efficient improvements, subject to certain dollar limitations. To be eligible for inclusion into the mortgage, the energy-efficient improvements must be cost-effective — i.e., the total cost of the improvements (including maintenance costs) must be less than the total present value of the energy saved over the useful life of the improvements. The cost of any improvement to the property that will increase the property’s energy efficiency and that is determined to be cost-effective is eligible for financing into the mortgage.

The maximum amount of the portion of the EEM for energy is the lesser of 5% of:

• the value of the property, or
• 115% of the median area price of a single-family dwelling, or
• 150% of the conforming Freddie Mac limit (formula changed June 10, 2009-Mortgagee Letter 2009-8)

The FHA maximum loan limit for the area may be exceeded by the cost of the energy-efficient improvements. However, the entire mortgage cannot exceed 110 percent of the value of the property. The cost of the energy improvements and the estimate of the energy savings must be determined via a physical inspection of the property by a home energy rating system (HERS) or energy consultant. For a 203(k) loan, the entire cost of the HERS or energy consultant can be included in the mortgage.

Insulation and infiltration with adequate R-values or infiltration barriers in the form of:

• Insulation in ceilings, roofs, or attic floors that are over conditioned spaces, exterior walls, under floors that cover unheated areas, around slabs, around heating and cooling ducts and pipes in areas that are not conditioned, around the sill area and hot water heaters.
• Caulking and weather-stripping around window and door areas and at the sill areas.
• Special fireplace devices or features, such as combustion-air and flue dampers, and a fire door.
• Sealing of the sole plate and penetrations of the exterior shell.
• Dampers for exhaust fans.

Windows

• Double or triple-paned
• Storm windows
• Storm or insulated doors

Heating and cooling — new efficient systems may include:

• A high-efficiency oil or gas furnace with an Annual Fuel Utilization Efficiency (AFUE) rating of 80% or higher
• A high-efficiency heat pump with a Seasonal Energy Efficiency Ratio (SEER) measure of 9.0 or greater
• A Heating Seasonal Performer Factor (HSPF) of 7.0 or greater
• A central air conditioner with a SEER rating of 9.0 or greater

Heating and cooling system modifications may include:

• A flame retention oil burner
• Vent dampers for oil and gas furnaces
• Pilotless ignition for gas furnaces
• A secondary condensing heat exchanger for gas and oil furnaces

An EEM can be used with both the Streamline and a Standard 203(k) loan. One interesting combination is to use the Streamline (k) with an EEM. If your repairs will exceed the $35,000 limitation, the energy-efficient improvements can be pulled out of the 203(k) calculation (use your energy audit to identify the energy improvements). Once the 203(k) repair escrow is calculated, the energy improvements can be added back onto the loan, exceeding the $35,000 threshold if needed.

In 2011, we must be more diligent than ever about exploring different products and means by which to get deals closed. An EEM with a 203(k) or a FHA 203(b) mortgage should be in everyone’s financing playbook.

Are FHA Loans Assumable?

If asked, how many real estate professionals could tell you that FHA 203(b) and 203(k) loans can be assumed by an owner-occupied creditworthy buyer? I bet that if a survey was taken today within the real estate community, you would be surprised to learn how many have no idea about this assumability feature. Over the past few months, our company has closed hundreds of FHA loans at 4% or better. As we stand today, those buyers have a selling niche that has not been seen in years: the assumable mortgage at a rate lower than the current market rate.

Did you know that at one time all FHA loans were non-qualifying assumptions? Pay the difference between the loan balance and the purchase price, and you were the proud owner of a new home. In the winter of 1989, FHA changed the ruling to allow only creditworthy assumptions for all loans closed after December 13 of that year.

I started in this business in the spring of 1985. Within weeks mortgage rates dropped below double digits, rose back above 10% in April/May, then returned to single digits in June, never looking back. Twenty-five years to catch what may be a market bottom in rates, and if the bottom is near, the current rate on an FHA loan becomes attractive as a future sales enhancement. It is not the sole reason to choose an FHA loan over another product, but now is the time to add it to your book of knowledge or in some cases dust off an old page that will set you apart from your peers.