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FHA VA Loans What Agents Need To Know


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FHA VA Loans What Agents Need To Know

  1. 1. These courses are approved for Credit by the California Department of Real Estate.However, this approval does not constitute an endorsement of the views or opinionswhich are expressed by the course sponsor, instructor, authors, or lecturers. This materialis for educational purposes only. In no way should any statements or summaries be usedas a substitute for legal or tax advice. It is your responsibility to know and understandDRE rules and regulations concerning licensing and educational requirements. We will bepleased to help answer your questions, but the DRE is the final authority - contact them at916-227-0931 or visit the DRE’s website at
  2. 2. Menu2
  3. 3. History of the Program The National Housing Act of 1934 created the Federal Housing Administration, which was established during the Great Depression when the rates of foreclosures and defaults rose sharply. Foreclosures Defaults3
  4. 4. History of the Program This program allowed lower income Americans the ability to afford homes while at the same time being a self supporting government backed loan that allowed banks to lend without the worry of major default4
  5. 5. Help people realize the “American FHA Mission Revitalize Communities Stabilize andDream” of homeownershipPromote Economic Growth Reduce Defaults/Preserve Neighborhoods
  6. 6. FHA GoalsEducate Consumers to make informed choices Enable individuals to: Simplify the home buying process: Own homes Remove regulatory barriers Build equity in their homes Embrace innovative financing: Provide homeownership and home Down Payment Assistance retention opportunities to under Silent seconds deserved, such as: First time homebuyers Minorities Elderly
  7. 7. FHA Myths  Too complicated  Too much paperwork  Too expensive for seller  Higher rates  Mortgage insurance cannot be removed  Takes too long to close  Doesn’t benefit the buyer  Doesn’t benefit the seller  You have to have money to close  Conventional is always a better loan  Buyer can’t understand the loan  Government gets involved7
  8. 8. Conventional vs. FHA Loans Conventional FHATwo months reserves No reserve requirementMinimum 3% down with heavy 3.5% Down PaymentRestrictions on FICO , ratios, reservesHeavy restrictions on Gifts Gift funds allowed, encouragedNo non-occupant Co-borrowers Non-occupant co-borrowers allowed (kiddie condo)Have Higher qualifying standardsTiered pricing based on FICO Pricing tiered less severely than Conventional Up to $5k medical collections can be unpaidCollections are AUS driven If AUS does not allowARMS with caps of 5%/2%/5% ARMS with caps of 1%/5%ARMS qualify at 2% above note rate ARMS qualify at note rate8
  9. 9. Conventional vs. FHA Loans Conventional FHAPrivate MI required (over 80% LTV) Government insuredMust have DU/LP approval Loan can be manually approved4 years out of Chapter 7 2 years after Chapter 72 yrs. after payoff on Chapter 13 1 yr. of on-time payments after Chapter 137 yrs. after Foreclosure (3 yrs with 3 yrs. After ForeclosureExtenuating circumstances)Minimum 2 yrs after a short sale Possible to purchase one day After a short sale* 9
  10. 10. FHA Flexible Credit Guidelines Minimum FICO score is 640* Minimum time after a Chapter 7 Bankruptcy is 2 years (12 Mos minimum with extenuating circumstances-see below) Minimum time period after a Chapter 13 bankruptcy is one year from creditor settlement date with proof of on time payments for that year On Short Sale, it is possible to purchase a home one day after closing* If little credit history is available, alternative credit can be used. Payments on items such a car insurance, Utility bills or Cell phones can be used to create the credit required Minimum time period after a foreclosure is 3 years, unless extenuating circumstances: Death of wage earner Serious Illness Consumer Credit Counseling –must have paid payments on time for 12 mo. *In some exceptional cases, a score lower than 640 may be acceptable10
  11. 11. Down Payment Sources• Borrower must make a 3.5% cash investment*• Borrower’s documented liquid assets (IRA’s or 401K)• Gift from Relative• Gift from Charitable organization, union, public agency, employer or public entity• Secured Loan
  12. 12. Gift Funds Acceptable Donors (Donor must show evidence of funds): Relative Close friend w/clear interest in borrower Borrower’s employer or labor union Charitable or Non-Profit organization12
  13. 13. Mortgage InsuranceGovernment InsuredSince the Government insures the loan, in a declining market there is less effect onappraisals being chopped than conventional loan insured by a private MI company.FHA only insures mortgages. Up Front MI (UFMIP) Monthly MI To reduce the cost of monthly MI, an upfront cost of 1.0% of the loan amount is added to the The monthly Mi amount to be paid is calculated by cost of the loan. This cost is usually financed* taking the base loan amount and multiplying it by Example: Purchase price is $200,000 .0090 $200k x (.965)=$193,000 (base loan amt.) $193,000 x (.00115)/12 - $184.96 per month.* $193,000 x (1.01) = $194,930 This is the final loan amount, including financed, up front MI. *UFMIP changed to 1.0% and monthly MI.115% 4-18-2011 13
  14. 14. Additional ConcernsProperty must be owner occupied only! No 2nd homes or investment propertiesBorrower must be a legal resident and must have a valid SS# (T.I.N acceptable)Except for certain circumstances, only one FHA Loan is allowed per familyTitle can be held in inter vivos trust Available products-203(b) & 234 (c) 30 year Fixed 15 year Fixed 1,3,5,7 and 10 year ARM’s 3-2-1 Buydown 2-1 Buydown Loan Limit – In San Diego County – $546,250 14
  15. 15. Additional Concerns Can only have one FHA loan at any time with the following exceptions: Relocation Increase in family size Vacating a jointly owned property Non-occupying co-borrower15
  16. 16. Condominiums 234 (c) Subdivision must be FHA approved Spot approval no longer available Do NOT trust MLS data-verify approval with a reputable Loan Officer16
  17. 17. Underwriting • 4155.1 – Mortgage Credit Analysis • 4155.2 – Lender’s Guide • 4060 –Mortgage Approval Handbook • National Reference Guide • 245 CFR – Parts 200-499 (Code of Federal Regulations) • Mortgagee Letters17
  18. 18. Investor Overlays Underwriting • HVCC • Not Credit Score dependent • Derogs in last 12 months, with poor credit • Cash saved at home • Commissions from Sale- Family member or Realtor/borrower • Secondary Financing18
  19. 19. Essential Qualities of an FHA Borrower: Underwriting A demonstrated ability to repay their debts and obligations Documentation of income to meet the debts and obligations The ability to close the transaction Sound and acceptable assets19
  20. 20. Underwriting Criteria: FHA’s four C’s • Character (credit) • Capacity (income) • Capital (reserves) • Collateral (value)20
  21. 21. Qualifying Notes 2 Years employment/se lf employment Must be stable Must continue for at least 3 years (Alien Visa) Other verified21
  22. 22. Guidelines for Converting Principal Residence to Rental Implemented to avoid “Buy and Bail”: Both current and new Borrower can document 75% payments will be LTV or lower in Current counted against the Transaction must clearly Principal Residence borrower’s debt ratios, illustrate purchase is NOT and; for investment purposes Relocation – employer Downsizing or upgrading Location22
  23. 23. Non-Purchasing Spouse Credit obligations of the spouse must be included and will be factored in with borrowers credit obligations (debt ratio) and used to determine the financial capabilities of the borrower. Non-Purchasing spouse disclaims23
  24. 24. Appraisal Valuation Conditions These Valuation Conditions and protocol help the appraiser evaluate the standards required by the General Acceptability Criteria. The criteria are described below. It is helpful & facilitates the process if the following items are addressed prior to the appraiser viewing the property.24
  25. 25. Manufactured HousingMust have HUD ID tag (s) Can only have been moved from factory to subject home site once;Must have been manufactured or factory to dealership lot to home site>June 15, 1976 once (cannot be moved from one home site to another)Must be taxed asreal property Must have engineer’s certification that permanent foundation meets FHA guidelines Can purchase land and home with one loan
  26. 26. Refinancing Streamline Refi without an appraisal: Maximum loan amount based on : 1. Current principal balance. This is a change that is effective November 1, 2009, and makes it much harder to accomplish a streamlined refinance with costs built in. A very significant recent change.26
  27. 27. Refinancing Streamline Refi No credit required Can be with or without an appraisal Restrictions on loan amounts Refund partial old MIP and finance new MIP 95% Cash out Refi, reduced to 85% after 4-1-09 Must own house >12 months Cash out for any purpose Co-borrower can be added for qualifying (must occupy) Limited to 1-2 unit properties, including Manufactured27
  28. 28. Options for the distressed FHA Homeowner Loss Mitigation/Foreclosure Prevention Tools: • Forbearance • Loan Modification • Partial Claim • Short Sale-FHA PFS • Deed in Lieu28
  29. 29. 2 Types of 203(k) Loans Streamlined Standard Most common Known as Rehabilitation/Renovation Mortgage. Less Common – Much more comprehensive Intended to facilitate uncomplicated construction project improvements $5k minimum for repairs, but allows Allows up to $35,000 to be used after closing for for all but one foot of the foundation repairs, which can be part of to be torn down. the improved value (no minimum threshold) Requires a consultant No General Contractor or drawings required Maximum mortgage is lesser of: Does not allow for structural improvements and 1.Maximum FHA limit, or; must use licensed and bonded Sub-contractors* 2.As-Is Value plus cost of rehab, or: *Subs must take ½ draw, finish the job, then get the other 1/2. 3.110% of “after improved” appraised value Controlling the elements of the 203(k) process leads to a successful closing.29
  30. 30. 203(k) Streamline Examples of eligible work under 203(k) streamline: Repair/Replace: 1.Roofs, gutters, downspouts 2.Heating, ventilation 3.Plumbing, electrical systems30 4.Flooring
  31. 31. 203(k) Streamline Examples of ineligible work under 203(k) streamline: 1. Pool & equipment 2. Structural improvements requiring drawings, a general contractor or layered work 3. Relocation of a load bearing wall 4. New construction For more information 5. Room additions on the 203(k) program 6. Repair of structural damage visit:http://www.hud. 7. Work not deemed easily gov./offices/hsg/sfh/2 completed in 6 months 03k/203k--df.cfm 8. Additional living units (if allowed by zoning)31
  32. 32. 203 (k) Setting Expectations • Underwriting Renovation Loans is a two part process:  Expect conditions from both the credit underwriter and the Renovation Lending Dept. And not necessarily at the same time. This product is not for everyone.32
  33. 33. 203 (k) Setting Expectations • Prepare ALL parties involved:  Inform Realtors that you are applying for renovation financing  Be aware of the close of escrow date  Inform contractors of the 10% holdback of draws  Manage your borrowers (buyers)  Allow for longer closing33
  34. 34. VA LoansAlso known as “Government”, but quite a bit different than FHA 100% financing with no monthly MI to $700,000Funding Fee (per Circular 26-11-12, as of October 1, 2011,with less than 5% down payment): 1.40% - Active or first time use 1.65% - Active Reserve or Guard Duty 2.80% - Subsequent Use (until October 1, 2012) Appraisal must be performed by VA approved appraiser
  35. 35. VA Loans What Fees can the Veteran NOT pay? The following list provides examples of items that cannot be charged to the veteran as "itemized fees and charges." 1. Lenders appraisals (reviews) 12. Notary fees 2. Lenders inspections, except in construction loan 13. Commitment fees or marketing fees of any cases secondary purchaser of the mortgage and 3. Loan closing or settlement fees preparation and recording of assignment of mortgage to such purchaser 4. Document preparation fees 14. Trustees fees or charges 5. Preparing loan papers or conveyance fees 15. Loan application or processing fees 6. Attorneys services other than for title work 16. Fees for preparation of truth in lending disclosure 7. Photographs statement 8. Interest rate lock-in fees 17. Fees charged by loan brokers, finders or other 9. Postage and other mailing charges, stationery, third parties whether affiliated with the lender or telephone calls, and other overhead not 10.Amortization schedules, pass books, and 18. Tax service fees membership or entrance fees 19. The veteran cannot pay for appraisals requested 11.Escrow fees or charges a.k.a. Loan closing or by parties other than the veteran or lender. settlement fees35
  36. 36. Where to Get More Information 3 ways to get the facts: 1. ONLINE   FHA’s online resource center, open 24/7 2. E-MAIL  3. PHONE  (800) CALLFHA – (800) 255-5342  TDD: (877) TDD2HUD – (877) 833-2483  Open Monday-Friday, 8am to 8pm ET36
  37. 37. Where to Get More Information Other Important Phone Numbers: • HUD Approved Counseling Agencies  (800) 569-4287 • Loss Mitigation  (888) 297-868537
  38. 38. Where to Get More Information Other Websites with information: • HUD Home Page  or, • HUD Knowledge Base  • Real Estate Broker/Agent Page  • HUD Contractor Page  • HUD Forms, Handbooks, Mortgagee Letters, etc.  http://www.hudclips.org38