FHA insured mortgages have received a stigma in past years for creating a challenging transaction. Sellers seem to prefer conventional financing, even subprime financing, over an offer with an approved FHA buyer.
The Federal Housing Administration was established in the 1930s following the Great Depression. These innovative low down payment loans were intended to help more people become home owners with intentions of creating more stability in neighborhoods. FHA insured mortgages are woven into American history.
Here are some reasons you,as a Seller, should consider an offer with FHA financing.
- Preapproved FHA buyers are full documentation loans. These buyers have been scrutinized and have provided income and asset documentation in order to have a true preapproval.
- FHA mortgages are not going to “disappear
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Hi Rhonda,
Thanks for another meaningful and informative post!! 🙂
Thanks, Joe. I’m planning on following up with some additional articles thanks to Ardell’s recent post where a lot of good FHA questions developed.
Rhonda, I think that would be great. To me (and I believe most people), figuring out all the nit-picky financing rules are the most difficult part to a R/E transaction. I’m sure anything you can help us with would be very useful.
Nice post Rhonda,
Is isn’t it true that FHA loans can also be manually underwritten (as apposed to straight Desktop underwriting? What would the advantages be for manual underwriting?
Are you hearing anything further on the FHA reform bills before congress?
Hi Greg,
Yes that is true. I was saving that point for my future posts on why FHA is great for buyers. 😉
The advantage to manual underwrite is that a human underwriter has the opportunity to make a common sense decision over a computer calculating risk. For our human underwriter to overwrite an automated decision, the loan must make sense, there needs to be compensating factors that justify not sticking with the computer.
I’m not aware of any recent news…except that as of Nov. 1, down payment assistance programs, such as Nehemiah, will no longer be allowed by HUD. Here’s a press release from Nehemiah: http://www.nehemiahcorp.org/pr/pr_100107.cfm
Rhonda,
Great Resource Post!
I would just like to add that FHA has changed the condition requirements as you have stated and that there are still items that are included in the appraisal.
Most lenders and appraisers can inform the consumer of what those items are and in turn make the process easier and faster.
Thanks, Apella. Here’s a link to the Mortgagee Letter which addresses changes to FHA Repair and Inspection Requirements:
http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=MLET&s1=05-$%5Bno%5D&op1=AND&SECT1=TXTHLB&SECT5=MLET&u=./hudclips.cgi&p=1&r=3&f=G
Cosmetic items will not be required by the appraiser to be repaired. Items that pose a risk to health or safety, will still be called.
Rhonda,
I believe it’s posts like these represent the best of the blogosphere. To say the lending industry is changing daily…..is an understatement. Here’s a forum where professional and consumer alike can learn and stay on top of these changes and discuss them. Thank you!
Wow, Greg. I’m speachless (or should I say, unable to type!) coming from you. Thank you very much. I’m working on my next FHA post. 🙂
Hi Rhonda,
Thanks for the succinct, timely post. Here’s an idea for a future FHA post: How about a couple of case studies, like….
Borrower John/Jane works as a w-2 employee with only 1 year on the job, former work experience was not related to his/her current job. A couple of late payments explained with a credit letter, no cash reserves….. and so forth. I think it might be helpful for Realtors to get into the mind of an FHA-approved underwriter.
For as many years as some Realtors can recall, borrowers haven’t had to do much explaining. I’d hate to see Realtors “complain” about lenders “taking so much time” to approve loans when they’re comparing the subprime drunken party days (when all that was required was a New Century loan originator walking through the underwriting department with a baseball bat,) with the job an FHA underwriter must do.
Jillayne, unless there’s some way to “connect” J/J’s job with more experience (time spent in school obtaining training would work)…they don’t sound like a great FHA candidate. Especially with the late payments unless there’s a strong reason such as medical. FHA guidelines do not require reservse, it’s possible the AUS findings might. This person could have been a New Century candidate. Or someone in need of Mom and Dad co-signing.
Depending on the employment and credit details. I would probably advise J/J to work on their credit over the next year while they gain 2 years work history. I would also advise they work on saving up for the 3% down payment requirement (unless Mom and Dad can gift the down payment). I actually enjoy working with clients who need to develop a plan. Getting people on the right track by educating them on credit and budgeting is very rewarding. If J/J can do so over 1 year, they probably will develop good habits so they will be responsible homeowners.
I will do a follow up post. 🙂
Hi Rhonda,
Thank you! I believe a couple of case studies like this may be helpful for Realtors who have never had a borrower turned down for a loan, or sent back to renterville for a couple of years to accumulate credit conditions worthy of even an FHA loan.
Jillayne,
Actually buyers can use alternative credit with FHA. Recent late payments and a lack of 2 years of employment (if we’re not able to connect school or previous employment together) is what would impact the scenario above.
Rhonda,
I wanted to respond to your comment here. The potential new guidelines of the HR 1852 bill, (the new FHA guidelines) will likely be ratified into law in the first quarter of 2008. There’s a lot of political pressure for lawmakers to do that.
On another note, I’ve got a client, that’s worked for 7 months at a company, and had 2×6 month job gaps in the past 2 years and received an automated approval. My underwriting findings state I do not need to write any letters of explanation for job gaps *over* 6 months long. They also had 2 consumer credit lates within the last 12 months, and I still got an approval. So, they’re now getting an FHA loan. Fun stuff!
Rhonda, you’ll want to read over HR 1852 to get a grasp of what more changes are coming down the pike. Again, 40 year term loans, Zero Downpayments, 530-730K loan amounts (yes, FHA limits may double).
Again, fun stuff!
David, I have read HR 1852. I’m waiting to see when, if and what it will be once it’s ratified.
Jillayne’s example was vague. Obviously it was not based off of a complete 1003. The point I’m trying to make (and I believe Jillayne as well) is that FHA is not the answer to the subprime melt down. Some will qualify some won’t. HUD does not want FHA to be the new subprime mortgage.
Our on staff underwriters would probably want a letter explaining the employment gaps and reasons why the there were late payments regardless of whether or not the findings called for it. It would be her call and I would respect it. We take being a HUD approved FHA lender quite seriously.
Rhonda,
Thanks for your response. I agree with most of what you said, however remember that the FHA loan, if approved through Fannie Mae’s DO/DU Underwriting System, wouldn’t require additional conditions beyond the conditions stated.
In other words, if the findings state they do not require letters of explanation for job gaps, or credit lates, then no Underwriter needs to ask for those explanations because ZFHA is the endorser, and the Underwriter is not endorsing it. It’s not like it was a “refer” that was overturned to an “approve” according to the FHA Seller’s Guidelines.
In other words, stick to the findings. : )
Thanks!
David, I don’t see anything wrong with asking a borrower to write a letter explaining why they have 2 6 month gaps of employment within the last 24 months nor do I see a problem with asking a borrower to write a letter explaining why they have 2 recent credit lates (probably tied to the employment).
I question our on site underwriter when I feel it’s need to. If she wants a letter to CYA, I have no problem requesting one.
I’ll stick to how we do business…you can stick to yours.
BTW are you a sponsored broker or are you a Direct Endorsed Mortgagee?
Rhonda,
Thanks for the reply. This is great conversation!
I’d quite agree with you in that there’s nothing ‘wrong’ in asking for those letters of explanation. I don’t really understand why its a question of right/wrong, I didn’t know it was an issue of morals…I just simply like fewer conditions. And, since automated underwriting inevitably ends up with fewer conditions, well, why get more conditions than needed?
As far as your last question, I am actually just a plain jane loan originator….I’m the dirt that holds up the totem pole! You do ask a good question; ultimately I want to build a bank that will exemplify the standard on what is and what is not good and proper lending practices, but for now, I’m just a 26 year old loan originator, and have only been in business 2 years. I’ve probably only been in business a tenth of how long you have, so I’m always trying to learn.
Have a wonderful day, and I have enjoyed the logical wrestling, that’s how we grow, eh?
David,
Which type of mortgage broker do you work for w/regards to FHA? How are you able to provide FHA financing?
I’m trying to prove my point. We are a Direct Endorsed HUD lender with a live human underwriter at our office. We take this responsibility and privlidge seriously and do not want to lose our status.
With AUS systems, it’s garbage in/garbage out. You can get approvals all day long…can you fund them? Or are you scrambling at the 12th hour?
I enjoy a good debate. I don’t appreciate when it’s insinuated that we are not underwriting our loans correctly. I have been a Loan Originator for 7.5 years and I managed a title and escrow branch for 5 or more years, I was in that industry for 14 years.
My company, Mortgage Master, has been an FHA approved lender for over 30 years.
I think we just might know what we’re doing. 😉
Rhonda,
I read over your comments, good info! I’m sure Mortgage Master is quite professional and competitive.
How do we provide FHA financing? Well, we broker it out to either National City or M&T Bank, or maybe Wells, and occasionally Plaza or Countrywide. It really depends. I do like the variety, but I definitely realise the help of having an FHA underwriter inhouse! Me? I simply go online to FHA Connection and read the guidelines myself so I sometimes can ‘question’ underwriters (as you recently put it) accurately and logically. Imagine that, an LO who actually reads the guidelines! Go figure eh? But, if I need an answer, I email April VanEkstrom at Nat City or Sue Cruzan at M&T, they’re really kind and helpful and informative for FHA loans.
Regarding garbage in/garbage out, you’re quite right about funding the loans over getting the approvals. That’s why you want to have all income/asset documentation upfront before assigning the DO/DU casefile ID # over to whichever bank you’re using.
Regarding any insinuation mentioned above, I don’t really have any right to have an opinion on whether your company underwrites accordingly. I wouldn’t appreciate such an insinuation either, so we’re in good company!
And, I’m sure you know what you’re doing. That’s evidenced by your informative posts, and knowledgeable comments.
David, that explains a big difference between our companies. As a correspondent lender and Direct Endorsed HUD lender, we are ultimately responsible for the loans we originate. We process, underwrite, draw loan documents and fund from our credit line on site at our office. The loans are sold to the lender after closing.
If we originate a loan that fails, odds are, it’s back in our credit line. We take the risk and therefore are compensated with better pricing.
If a typical mortgage broker makes a bad loan, the lender will consider ceasing doing business with the broker.
There is a significant difference. Jillayne covered some of the differences between Mortgage Brokers and Correspondent Lenders in this post:
http://www.raincityguide.com/2007/07/05/banker-broker-consumer-lender-or-credit-union-part-2/
BTW, you bet I take working at Mortgage Master personally. It’s owned by my family. John Porter and Marilyn Porter are my bro and sis in-laws. 🙂
Under the duplex, triplex, and fourplex. That is referring to the entire building or a single unit in the building?
I’m not sure I’m understanding you, Jeff. Here’s an example, one of my past clients bought a duplex (building with two legal units) and was able to do so with FHA financing because he lives in one of the units and rents the other one. He did this with minimum down (3%) and has a conforming rate. FHA doesn’t have non-owner occupied rates.
So if someone wanted to buy a four-plex and live in one unit, rent out the other three. Assuming they qualify, they could do so using FHA for financing, 3% down and FHA “owner occupied” rates.
Doesn’t FHA allow for private investors/second homes under their loan assumption Streamline Refinance with No Appraisal guidelines?
Thank you,
David,
Here’s a chart you may find helpful: http://www.fha.gov/sf/svc/faqasmchart.pdf
It depends on when the mortgage was originated. Sellers allowing their FHA mortgage to be assumed should be careful to make sure they have been released of any liability.
I’m stepping away from the blog…we’re having our first neighborhood block watch at my house in a half hour. 🙂 I have a few things needing my attention.
Thanks!
That totally cleared up my question.
Jeff, no problem. 🙂 Just to confirm, someone could buy a 4-plex and have an FHA base loan amount of $577,500 with “owner occupied” FHA rates as long as they are actually living in one of the units.
Hey,
Don’t forget Skagit County with FHA loan limit’s of $283,983 for a SFH and $319,855, $388,609, $448,395 for duplexes, triplexes and fourplexes respectively. Great affordability here, larger lot sizes in general, and a little more laid back lifestyle!
Thanks!
Thanks, Nate. People can use the link in the post above to determine what the loan limits are for their county. 🙂
Rhonda,
Can an FHA borrower rent out there with home after some time period, if market is slow or down, and have to move for job or just want too? If so can they get a second FHA loan in new location?
Bob R, I’m blaming my head-cold. I don’t quite understand your the first part of your question. Can you please clarify?
You can only have one FHA loan at a time. Exceptions are possible you have a special circumstance, such as a job transfer a significant distance (like 50 miles) from your current home with FHA financing.
Please let me know if I did not answer your question.
Rhonda,
Yes you did. Thank you The kids live the Phoenix area and need to move, rather than selling at a loss they are going to rent out the house and move to other end of town. The drive to work and back is over an hour long. I was thinking they might be able to buy an REO with a 203K but after reading, changes to FHA Repair and Inspection Requirements, a 203b would work, if seller will work with the FHA loan. From my past experience fat chance, but maybe, the kind market they are in right now. I think it is a good time to buy. I am having a problem with this SHB 1843 thing. I have only been in this state 15 months and am thinking I will sell and leave in the spring.
I would bet more sellers will accept an FHA loan if they understand all the improvements made to the loan since 2006.
The key with the kids will be the reason why they need to move and the distance of the move. It will be up to the underwriter whether or not they’ll “sign off” on it.
Well Rhonda you are doing the right thing buy talking about it. Thank you.
Are you aware of any FHA guidlines that prohibit reselling a property with in time limits ?
I have an agreement and am due to settle at the end of the month. I have been approved for an FHA loan. I received a call from the mortgage broker saying FHA underwrtier has questioned, the time, the property has been held by the current owner. This was a foreclosure currently owned by the forclosing bank.
Dave, FHA does have certain restrictions with the time the property has been held by the current owner to avoid flipping. If the property’s last sale was 90 days or less from the date of the purchase and sale agreement, the home may not be elligible for FHA financing. FHA makes exceptions for inherited properties and properties owned by Federal Agencies (such as HUD homes).
Rhonda,
great information..
with FHA loan, at what point Mortgage Insurance will go away?
also, if FHA loan amount > $417k, does it qualify as Jumbo and will than increase the rate or MI?
Thanks
Mark, with FHA insured mortgages, the mortgage insurance remains for a minimum of 5 years and 78% loan to value.
The loan limit and FHA jumbo limits will vary depending on what county your property is located in.
For King, Pierce and Snohomish Counties (WA), loans between $362,950 and $567,500 are considered FHA Jumbo. There is a slight increase to rate (depending on pricing which changes daily) and currently there is no change to mortgage insurance. However, this will change. FHA will be going to “risk based” pricing with mortgage insurance starting in July. This will be a benefit to those with better credit scores and cost those with lower scores a bit more.
FHA is still a screaming deal! 😉
Thanks Rhonda.
I’m located in Solano County (CA) and house price of $460,000 with FHA loan approved of $423,000. Just wanted to check if my FHA loan is qualified as Jumbo and if it make sense to keep it under $417,000 to reduce any rates or mortgage insurance. Based on last message, if I’ve excellent credit score than should I wait till July in order to get better rate.
Mark, I’m not sure that I would delay…you may be trading the upfront mi savings for a higher interest rate on your mortgage. The difference, based on the loan amount of $423,000, between the upfront mi with FHA’s risk based pricing is approx. $1058. In addition, the upfront mi is financed into the mortgage so your payment. Using an interest rate of 6%, the difference in payment is $6.35 per month (again, using $423k for the loan amount).
Mortgage interest rates are trending higher due to inflation (mortgage backed securites/bonds react negatively to inflation). Rates could be much higher by the time FHA rolls out the new risk based mi pricing.
Hi Rhonda,
I recently came across your site, and love the wealth of information. I have an FHA-related question that I haven’t been able to find a satisfactory answer for.
As a seller of a home, working with a buyer who is going through an FHA-backed mortgage, I am covering a sizable amount of the FHA fees and costs. Seeing as these deduct from the profit take on the sale of my home, is there any sort of tax ramifications that I can use to my advantage (i.e. a write-off or percentage deduction)?
I have not spoken to my accountant about this yet, and fully intend to, but since I was here and you gave us this great place to ask questions, here it is 🙂
Thanks in advance, and good luck out there to all the buyers and sellers!
Ben, please check with your CPA or tax advisor… I’m so focused on the financing side (with our ever changing guidelines), there is no way that I can truly provide reliable current tax information.
Thanks so much for reading RCG and I’m glad you enjoy our blog.
as a potential seller of a home i got an offer from an FHA backed mortgage-buyer that is offering us $6000 less than our listing price and is also asking we cover up to $5,000 of closing costs, my question is the seller required to pay for closing costs for the buyer on a FHA mortgage? what is required to be paid? what type of costs?
please i will appreciate your prompt answer we must accept or counteroffer by 3 pm 7/31/08 central time if you can reply tomorrow morning it will be great. Thank you in advance.
Janet, if you would accept this same offer from a ‘conventional’ financed buyer, I’d accept it from an FHA buyer. Another way of looking at this is: this buyer is asking you to effectively drop your price $11,000 ($6000 off ask price, plus the $5000 closing costs).
Is $11,000 in the range of what you feel comfortable taking off your price? It seems fair, but I don’t know the price of your home (ie, if it is $50,000, perhaps $11,000 is too steep! If it is $500,000, $11.000 seems darned cheap to me 🙂 .
Rhonda, unless Janet’s house needs obvious work, such as a new roof, do you see any other reason for her not to take an FHA offer from a buyer? The required costs for a seller for an FHA transaction are very low, the $500 the buyer is asking for towards closing costs are not lender requirements.
Janet,
There is a small amount that is required to be paid by the seller, but not $5,000. Usually you WOULD pay the $5,000, as the offer would suggest the buyer may not have it. The appropriate counter…if you counter…would be full price with $5,000 toward closing costs. Don’t accept the price and not the costs, as that may be a “check-mate” counter where you back the buyer into a corner they can’t get out of.
Janet, it sounds like the buyer is asking you to pay for closing costs above what is “required” (or is actually “non-allowable costs for the buyer to pay”).
Leanne, these days, FHA loans seem easier to close than conventional. If I were a Seller I would accept an FHA approved buyer in a heart beat! I would also verify on HUD’s site that the lender is approved to FHA loans.
i am not sure i understand comment #46 from Ardell; you mean to counter offer at $181000 full price w/ $5000 toward closing cost. the sales price for my home is $181,000. the fha mortgage buyer is offering like i mentioned sales price of $175,000 plus for seller closing costs no to exceed $5000 and $350 service repair contract? what do you think? our target price was $176,000 we are going to counter offer with lowering the price & accepting the $350 and $1000 toward closing
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I’m a RE Investor that is limited by FHA because the rules have been that a buyer can not use a FHA loan with a roperty that hasn’t been owned by the Seller less than 90 days. As you can imagine, waiting 90 days incurs costs that make the transaction less desirable. But I would be happy to learn that this lending requirement has been waved? Ab.
sorry ayers, you are correct that you’ll need 90 days to pass since the last transaction before FHA will allow financing.
The only thing I find in doing loans is that sometimes mere guidelines isn’t enough. The underwriter also plays a role in interpreting the rules, I guess like in all other aspects of life. However, this guide is certainly a very good start for most folks!
CCP, not only does the underwriter play a role in interpretation of FHA guidelines, lenders/banks have their own underwriting “overlays” in addition to what HUD/FHA has.