Posts Tagged “FHA home loan”

FHA Mortgages offered through HUD are Government insured against default and therefore, because of the government cushion given to Lenders who make FHA loans, very attractive interest rates are available. Furthermore, just like for Veterans (VA Loans), FHA carries a special feature that’s not available for Borrowers who have loans backed by Fannie Mae or Freddie Mac (Conventional). This special feature is known as a STREAMLINE REFINANCE.

A Streamline refinance is called that because unlike the rigorous, almost intrusive underwriting process Borrowers are subjected to when they purchase a home, a Streamline refinance is much more streamlined. . . truly no income or asset verification , and no credit underwriting except for a close look at the payment history on the FHA mortgage being refinanced.

As recent as February 2011, HUD (which oversees FHA) announced a less stringent underwriting requirement for Streamlines to the point where even borrowers who are presently unemployed or working part time can be approved.
The thinking here is to foster the probability that the FHA insured mortgage will continue to be paid on time by the Borrower, and to do whatever possible to make that happen. Naturally, if a mortgage is being paid on time already, and the monthly payment was lowered, easing the burden on that Borrower will only enhance the chances of continued timeliness.

So what are the ‘Essential Requirements’ ?

(1) A Clean 12-month Payment History on the FHA Mortgage Being refinanced

Borrowers who’ve experienced a rocky road in keeping their payments on time thus far, are still likely to have problems despite a lowering of their payment. Such borrowers often find a way, sadly, to take their newfound savings and funnel it to something not financially wholesome. Bad habits die hard.
A clean mortgage history however is indicative that future payments will be made on time, especially if the payments are lowered.

(2) 210-Day Waiting Period/Cooling-off period between refinances

If the FHA mortgage being paid off is a new one, 6 mortgage payments must have been made before that mortgage is eligible for payoff via a FHA Streamline. Furthermore, 210 days must have passed since the most recent refinance.

(3) Job and Income – Not Verified

Although Lenders who make FHA loans may have an overlay to the true HUD guidelines, an FHA streamline can be done without any verification of the Borrower’s employment or income. The other factors must be in place, but even an unemployed Borrower can be eligible to lower their payments.

(4) Minimum Credit Score Requirement – Void

FHA by rule doesn’t look at FICO scores and never has. It’s Lenders who make FHA loans who impose such minimum standards. However a true Streamline doesn’t look at a Borrower’s credit score. Only the mortgage payment history on the loan being paid off is considered.

(5) Benefit To Borrower

The concept of ‘Net Tangible Benefit’ (NTB) was recently introduced by HUD to govern FHA Streamline Refinances. The essential component of the NTB is to make sure the Borrower’s monthly P&I + MI amounts are being reduced by at least 5%. Lowering the overall monthly obligation because the property taxes were reassessed is therefore not an acceptable purpose or reason. Having said this, refinancing a Borrower who is in an FHA Adjustable Rate Mortgage, into a Fixed rate FHA loan is always an acceptable ‘TNB’.

(6) Limit To Increase in Loan Amount

The loan amount cannot be raised beyond the present principal balance to cover closing costs. The new Loan balance is limited by the math formula of Present Loan Balance + Upfront Mortgage Insurance Premium). The standard lender fees, escrow/title fees, impounds of tax/insurance etc must be either paid by Borrower using cash at the closing or absorbed by lender credit.

(7) Appraisal is Not Required
Upside down homes are still eligible for FHA Streamlines because a new Appraisal is not required. HUD has already become committed to insuring the loan, so a change in value in either direction does not affect the eligibility of the borrower to lower their payments.

(8) New Mortgage Insurance offset by Old Mortgage Insurance Already Paid In
All FHA loans carry mortgage insurance both as a one-time upfront amount funded at closing and then an ongoing monthly amount based on the loan amount.
However within the first 36 months since obtaining the FHA loan that’s being paid off/refinanced, the borrower can secure a refund for a portion of the amount paid. The longer the loan has been held, the lower the amount of the refund. The chart below actually indicates the approx. amounts .
For example, refinancing in month# 20 would mean an approx. 45% refund of the original Upfront Mortgage Insurance amount paid. This refund amount isn’t given back as cash, but instead applied as a credit towards the overall cost of getting a new Upfront Mortgage insurance. See below for a useful Chart on FHA Mortgage Insurance refunds applicable for Streamlines

FHA streamline MI refund

FHA Mortgage Insurance refund chart

Remember that once a Borrower has paid on their FHA mortgage for 5 years (i.e. 60 months) the Mortgage Insurance can be removed.

Charles Vamadeva,

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Someone asked me the other day if a Reverse Mortgage could be done on a property that had recently been acquired by the Seller (less than 90 days ago) Unfortunately for Reverse Mortgages (also known as HECM , i..e Home Equity Conversion Mortgage ) HUD doesn’t allow property flips.

Below is an additional FHA related flip rule :
If a property is being financed with the standard FHA loan (203b) and the resale occurs between 91 and 180 days where the new sales price exceeds the previous sale price by 100% or more, FHA will require additional documentation to validate the new value of the property. This often involves at least a 2nd appraisal, but also possible proof of repairs and remodeling work to the property.

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Often an FHA loan application hang in the balance because the Borrower has marginal credit or income history. Often the debt to income ratio is out of line and an FHA Underwriter may be forced to look for other factors in approving the loan.
This is when compensating factors become critical and can tip the loan in the applicant’s favor.

What are some common compensating factors?

The borrower has proven he/she can make a housing payment equal to or greater than the proposed new PITI mortgage payment by means of a rent verification obtained by the Lender. This gives the Underwriter some measure of assurance that default is unlikely, as long as the rent has been paid in a timely manner. 12 mos Canceled checks would be the ultimate proof of this, and a private-landlord’s rent verification may not cut it.

The borrower makes a large downpayment, at least more than the standard 3.5% down required.

The borrower has demonstrated a conservative attitude towards the use of credit. This can be evidenced by low relative credit card balances compared to credit limits, or a an absence of multiple credit accounts.

The borrower receives compensation or income that’s not being used by the Underwriter for qualifying income for one reason or another . . eg. child support income that’s not fully documented, or cash /tip income that can’t be used in qualifying.

The borrower has healthy cash reserves after closing figures are accounted for. This may mean a well-funded retirement account, checking or savings balances, etc etc or cash surrender value of a Life insurance policy for example.

The borrower has potential for pay increase as proven by specific job training or education in his/her profession. An example would be an LVN (Licensed Vocational Nurse) about to become an RN (Registered Nurse).

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Client called today with a not-so-unusual scenario. They had been declined by a Bank on this . .
They lost their home in foreclosure 5/29/2008, filed Bankruptcy in 10/2008 and the BK was discharged 6/4/2009.
In their Bankruptcy filing their attorney had listed the balance of the foreclosed-on mortgage. The bank denied their loan stating that the filing of the BK to include the mortgage made it to where 3 yrs had to expire from the BK discharge date.
Can they qualify for FHA financing now ?
The answer is:
The bank is wrong.
The three year time-clock to satisfy the ‘seasoning since foreclosure’ requirement of FHA, begins from the date of the Trustee sale (or in Judicial Foreclosure states such as Oklahoma, from the Court ordered sale date) -Well this client is past that 3 yr period (5/29/08).
The fact that the BK included the deficiency balance of the foreclosure (which would have prevented the Lender from trying to collect on it) doesn’t negate the 3 yr seasoning.
The BK is 2 yrs old (from Discharge date) and therefore they are eligible for FHA financing. :)

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When someone has entered the U.S and chosen to reside here, they are considered a “Resident Alien”.
However there are two labels for folks that have come to stay.

(i) “Permanent Resident Alien” – A non-resident alien is a lawful permanent resident of the U.S. at any time if they have been given the privilege, according to the immigration laws, of residing permanently as an immigrant. This status usually exists if the Bureau of Citizenship and Immigration Services has issued a green card. In actuality, there are no differences in terms of Lending guidelines , between Permanent Resident Aliens and U.S.-born Citizens.

(ii) “Non-Permanent Resident Alien” – typically these are people that arrived on a J-1 or F-1 Visa. They may be students, or be working under I.N.S authorization. If they are working with an Employer Sponsored Visa, they have no limit on their US residency.
However if they’re working with a Non-Employer-Sponsored Visa they have to show at least 1 yr history of U.S. residency.

So here are the rules when applying for FHA financing:

The non-permanent resident alien
(i) must be applying for a loan to purchase a principal residence
(ii) must show an Employment Authorization Document (EAD) from BCIS (US Bureau of Citizenship & Immigration Services)
(iii) must possess a valid Social Security Number (SSN)/card- plz note a Taxpayer ID# (TIN) will NOT be allowed.
(iv) must show an Authorization For Temporary residency – if this is about to expire within 12 months and there has been no prior history of renewals, then the FHA Underwriter must determine the likelihood of renewal based on information from the BCIS
(v) must show 2yrs Federal Income tax returns for proof of income

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