FHA Relic of the Past

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  • 1. FHA Relic of the Past or Tool of the Future?
  • 2. Why learn FHA?
    • Reason # 1: Close more loans. Many borrowers who don’t qualify for any subprime or Alt-A product can be approved and closed, instead of being a crumpled up credit report at the bottom of a garbage can. Security Atlantic’s manual underwriting uses common sense to make a decision, not a matrix.
  • 3. Why Learn FHA?
    • Reason # 2: Make more money. Many borrowers who close in a subprime product could have closed as an FHA loan with a lower interest rate and a higher YSP (we usually offer between four and five points YSP, depending on market conditions).
  • 4. Why Learn FHA?
    • Reason # 3: Survive Market Changes. As subprime and Alt-A LTVs drop and minimum credit score requirements increase, FHA will re-emerge as the loan of choice for the “non-creampuff” borrower. Whenever an environment changes radically, failure to adapt results in a failure to survive.
  • 5. FHA Basics
    • Owner Occupied Only Second homes and investment properties are not permitted under any circumstances. Owner-Occupied transactions have typically accounted for over 80% of all originations. As the allowable LTVs for NOO properties return to normal, mortgages on primary residences will again dominate pipelines.
  • 6. FHA Basics
    • Full Doc Only Income documentation: VOE + YTD paystub. Self-employed borrowers: 2 years tax returns and YTD P&L (bank statements cannot be used to verify income) Asset documentation: VOD + one month statement, or two months statements (no VOD only option available)
  • 7. FHA Basics
    • Full Doc Only FHA isn’t in high demand when 100% SISA financing is available for borrowers with little or no credit. However, now that the industry is beginning to return to normal, stated documentation is beginning to require higher scores, more tradelines, and larger downpayments. When stated documentation is no longer an option, FHA is often the best alternative.
  • 8. Maximum LTVs
    • For those of you who are used to using a program matrix, we have prepared a simple grid detailing the maximum LTVs available, grouped by credit score and property type:
  • 9. Max LTV Matrix 97 97 97 97 701-800 97 97 97 97 601-700 97 97 97 97 501-600 97 97 97 97 400-500 4 unit 3 unit 2 unit 1 unit Score Purchases and Rate/Term Refinances
  • 10. FHA Max LTVs
    • If you don’t prefer a matrix, here is the max LTV for purchases and rate/term refinances:
    • 1-4 Units, all scores:
    • 97%
  • 11. FHA Max LTVs
    • Max LTVs for FHA cash-out refinances:
    • 1-2 Units 95%*
    • *must own property for at least one year with no lates, or limited to 85%
    • 3-4 Units
    • 85%
  • 12. Minimum Credit Scores
    • No Minimum Credit Score Our credit decision is based on an actual analysis of the borrower’s credit. Many borrowers with scores in the 400s have been approved, and many with scores in the 600s have been denied.
  • 13. Minimum Tradelines
    • No Credit OK, No Credit Score OK. No credit is better than bad credit. Use of alt-trades is permitted. If there are no alt-trades available, the loan can still be approved in most circumstances.
  • 14. Credit Analysis
    • Common Sense Unlike subprime and Alt-A, there is no matrix, no max mortgage lates, no maximum dollar amount of collections, no “box” to fit into . FHA handles every borrower with damaged credit differently, depending on the circumstances surrounding the credit history. Common sense prevails.
  • 15. Bankruptcy Guidelines
    • Chapter 7 Bankruptcy Must be discharged two years. Exceptions for periods between 12 and 24 months are available, but only if the BK was “out of the control” of the borrower (a difficult exception to qualify for).
  • 16. Bankruptcy Guidelines
    • Chapter 13 Bankruptcy A borrower can currently be in a Chapter 13 repayment plan and still be approved for an FHA loan. The repayment plan must be at least 12 months old, and all credit (especially the mortgage) must have been paid with no lates since the inception of the plan. Additionally, there must be no lates on the plan itself, and the trustee must give written permission for the transaction and a payoff.
  • 17. Seller Contributions
    • Maximum Seller Contribution
    • 6%
    • All LTVs, 1-4 Units
  • 18. Minimum Investment
    • Minimum Investment Requirement
    • 3%
    • All LTVs, 1-4 Units
  • 19. Minimum Investment
    • The borrower must contribute at least 3% of their own funds. The borrower’s own funds are defined as either savings, gift or grant. There is no requirement for any borrower savings; the entire 3% requirement can be a gift or grant.
  • 20. Gifts
    • No Donor’s Ability Unlike conventional loans, there is no requirement to evidence the “donor’s ability” to give the gift. The donor does not need to provide a bank statement showing adequate funds for the gift, only proof that the gift check was drawn on their account.
  • 21. Gifts
    • Gift Documentation The simplest gift to document is a gift directly into the settlement agent’s escrow account. If done this way, and if the gift is large enough, no bank statements are required from the borrower: (1) FHA Gift Letter (available on our website) (2) Copy of bank check payable to escrow account (3) Evidence bank check was drawn on donor’s account (withdrawal slip, interim printout, letter, etc.) (4) Escrow Letter from settlement agent confirming receipt of the gift check into escrow account
  • 22. Ratios
    • Standard Income Ratios
    • 31/43*
    • *These ratios can be exceeded with a compensating factor. In some cases, much higher.
  • 23. Ratios
    • Compensating Factors Some examples of compensating factors are: - 3 months PITI reserves - 10% down payment - housing payment increasing by less than 10% Once again, if the loan makes sense, the loan can be approved.
  • 24. FHA Appraisals
    • Appraiser must be on the FHA Approved List.
    • Repair requirements are the same as a conventional appraisal.
    • No appraisal reviews, drive-bys, AVMs, BPOs, or any other additional appraisal items.*
    • *unless property has transferred in the last six months with a large increase in sales price.
  • 25. Streamline Refinances
    • Once a borrower has an FHA loan, they can be refinanced into another lower-rate FHA with very little documentation:
    • - no employment, income or asset documentation - no credit report, just a mortgage history - no appraisal option
  • 26. Mortgage Limits
    • FHA mortgage limits vary by county. Most of NJ’s limits are listed below. All other county limits can be found on our website ( www.fhaok.com ).
    697,696 561,411 464,449 362,790 Bergen, Hudson, Essex, Union, Passaic, Morris, Somerset, Hunterdon, Monmouth, Ocean, Middlesex, Sussex, Cape May 4 3 2 1 NUMBER OF UNITS COUNTIES
  • 27. Recap: Why FHA?
    • Close more loans.
  • 28. Recap: Why FHA?
    • Make more money.
  • 29. Recap: Why FHA?
    • Survive market changes.