FHA Clarifies Policy for Late Payments and $1,000 ‘Derogatory Credit’ Rule

In September, the FHA’s brand-new Single Family Housing Policy Handbook went into effect. This handbook replaces a number of previously issued policy letters and guides. It is meant to clarify the rules and requirements pertaining to FHA loans and the borrowers who use them.

The new handbook offers guidelines for the “downgrading” of borrowers who have $1,000 or more in disputed derogatory credit accounts. Borrowers who fit this description must have their loan application files manually underwritten by the mortgage lender’s underwriter. The underwriter must then find enough justification to approve the FHA loan, in spite of the derogatory credit issue.

In other words, borrowers who trigger this red flag will have more hoops to jump through — and a higher likelihood of loan denial.

Related: Can I get shot down during underwriting?

To get a clearer picture of these rules, we dug into the handbook itself. The portions relating to late payments and the $1,000 derogatory credit rule can be found in section II-A-4, entitled “Underwriting the Borrower Using the TOTAL Mortgage Scorecard.”

The $1,000 Rule for Late Payments and Derogatory Credit

According to the new handbook, mortgage lenders must “downgrade and manually underwrite” any FHA-insured mortgage loan that received an “Accept” recommendation if the borrower has $1,000 or more collectively in disputed derogatory credit accounts.

The handbook offers a specific definition of “derogatory accounts,” and it includes late payments that occurred within the last two years. The official definition: “Disputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.”

Borrowers who fall into one or more of these categories cannot be automatically approved the the FHA automated underwriting system. Instead, the underwriter must manually review the file to see if the borrower is reasonably qualified in all other areas.

In cases where there are multiple borrowers named in the application (such as two spouses purchasing a home together), the $1,000 limit is applied collectively.

Some exceptions: Disputed medical accounts and derogatory credit resulting from unauthorized use (like identity theft or card theft) do not count toward the $1,000 limit mentioned above. The mortgagee / lender can exclude such accounts if they provide proper documentation.

Related: How to dispute items in your credit report

Manual Underwriting Doesn’t Necessarily Mean You’ll Be Denied

Being “downgraded” to manual underwriting doesn’t necessarily mean the loan will be denied. There are exceptions and workarounds for many of these FHA rules and requirements. It simply means that the lender’s underwriter or underwriting department must manually review the file to determine whether or not the borrower is qualified in other regards.

The new FHA handbook offers the following guidelines for a manually underwritten loan:

“The underwriter must review each Mortgage as a separate and unique transaction, recognizing that there may be multiple factors that demonstrate a Borrower’s ability and willingness to make timely Mortgage Payments … The underwriter must evaluate the totality of the Borrower’s circumstances and the impact of layering risks on the probability that a Borrower will be able to repay the mortgage…”

There are some key phrases included in the above quote, and scattered elsewhere throughout the new handbook. Here are some recurring themes we’ve encountered:

  • “Multiple factors” — FHA encourages underwriters to consider multiple factors relating to the borrower’s ability to repay the loan. So a single derogatory issue won’t necessarily derail the loan.
  • “Totality” — FHA encourages underwriters to look at the big picture — or the “totality” — of the borrower’s situation. If a borrower is well qualified in all other areas, they could still be approved for an FHA loan, even if they have more than $1,000 in late payments or other disputed derogatory credit.
  • “Probability” — If documentation and financial analysis show a strong probability that the borrower will be able to repay the mortgage loan, exceptions can be made.

To be clear, being downgraded to manual underwriting could certainly slow the process down. And it might increase the chance of rejection. But it’s not an automatic death sentence for the loan. Underwriters tend to make decisions based on the big picture.

Learn more: If you would like to learn more about this aspect of FHA underwriting, refer to HUD Handbook 4000.1, the Single Family Housing Policy Handbook. You can find this handbook online at Allregs.com. A PDF version of the document is available at HUD.gov.

Today’s FHA Loan Rates Sink to Lowest Level Since May 2015

This week, the average rate for a 30-year fixed FHA loan sank to 3.89%.* That’s the lowest it has been since the week ending on May 22, 2015. Thirty-year mortgage rates have been hovering around 4% for most of this year, partly due to the Federal Reserve’s monetary policies.

Twice a month, the Home Buying Institute conducts an informal email survey of 25 mortgage lenders across the U.S., focusing on those that are “HUD-approved” to offer FHA loans. Among other things, the survey identifies and monitors mortgage-rate trends for home loans insured by the Federal Housing Administration. HBI has been conducting this survey, and reporting the results, since 2013.

Getting the lowest rate means paying points

Today’s FHA Rates: Lowest Since May 2015

In May 2015, the average 30-year FHA mortgage rate fell to 3.86%, which was three basis points (0.03%) lower than where we are today. The lowest point of the year came in January, when the 30-year average dropped to 3.81%.

Low borrowing costs continue to lure home buyers into the market. The Mortgage Bankers Association (MBA) recently reported a surge in mortgage loan applications. The uptick in volume was mostly the result of home buyers applying for purchase mortgages (as opposed to refinancing homeowners). In all, loan application volume rose by nearly 14% for the week ended on September 18, compared to a week earlier.

According to Mike Fratantoni, MBA’s chief economist, low mortgage rates for FHA and conventional home loans had a lot to do with the surge. “[R]ate declines toward the end of the week likely drove applications from both prospective homebuyers and borrowers looking to refinance,” he said.

FHA loans are popular among home buyers, primarily due to the low down payment of 3.5%. This makes them a popular option for first-time buyers in particular, especially those who have limited funds saved up for a down payment. The news surrounding today’s low FHA rates will likely bring more buyers into the market over the coming weeks, as the U.S. housing market continues to gain ground.

Federal Reserve: Steady as She Goes, for Now

In related news, the Fed recently announced it would prolong its current monetary policy for the time being, and revisit the matter later this year.

Following their September 16 – 17 meeting, Federal Reserve officials said they plan to keep the federal funds rate near zero percent for the foreseeable future. While this doesn’t impact mortgage rates directly, it does have an undeniable indirect effect on lending costs.

The short version is that mortgage rates tend to rise in tandem, more or less, with other types of interest. So by increasing the federal funds rate (which banks use when transferring balances among themselves), the Fed could prompt a corresponding increase in mortgage lending rates.

The question is, when might that happen? And this is a question housing analysts and economists have been asking for many months, due to the tight-lipped nature of the Federal Reserve.

Here’s what we know at this point…

A federal funds rate increase is likely to occur sometime later this year. When it comes, it will probably be announced at one of the regularly scheduled Federal Open Market Committee (FOMC) meetings. There are only two of these meetings left in 2015 — one on October 27 – 28, and the last on December 15 – 16. Barring any unforeseen financial calamities, the Fed will likely announce a rate hike after one of those meetings.

Janet Yellen, chairwoman of the Federal Reserve, recently told an audience at the University of Massachusetts: “Achieving these [favorable economic] conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”

* The FHA mortgage rates reported in this article are based on a small sampling of lenders across the U.S. They also take into account discount points paid at closing, and other factors that vary from one borrower to the next. Not all borrowers will qualify for today’s lowest FHA rates. Lender’s assign interest charges based on a variety of factors, such as credit scores, points paid at closing, etc.

New FHA Rules for Bad Credit and High Debt Ratios (2015 Update)

The Department of Housing and Urban Development (HUD) has published a new handbook for FHA loans. Most sections of the Single Family Housing Policy Handbook, as it’s know, took effect earlier this week. So it is now the law of the land.

We’ve been plugging our way through this 867-page document, keeping an eye out for major changes to the FHA program. So far, it seems that most of the big changes are administrative in nature (filing and reporting procedures, paperwork, etc.). In other words, they apply mostly to mortgage lenders — not borrowers.

But the new handbook does offer some additional clarification borrowers may find helpful. FHA credit scores and debt-to-income ratios are one example. Here are the latest rules for these two important criteria, as of September 2015.

FHA Rules for Low Credit Scores & High Debt Ratios

The new handbook explains how mortgage underwriters should handle borrowers who have a combination of (A) relatively low credit scores, and (B) relatively high debt ratios.

In short, when a borrower’s credit score falls below a certain threshold — and his or her debt-to-income ratio is above a certain level — the lender must manually underwrite the mortgage loan. Not only does this delay the process. It also increases the chance for snags, additional paperwork hurdles, and even a loan rejection.

The handbook can be a bit confusing. Here’s the simplified version. HUD has a “soft” rule regarding debt-to-income ratios. They state that says a borrower’s mortgage-payment-to-income ratio should be no higher than 31%, and that the borrower’s total debt should use no more than 43% of his/her income. This is often referred to as the 31/43 rule for FHA debt-to-income ratios.

Additionally, HUD has certain rules regarding credit scores for borrowers who use FHA loans. Borrowers with scores below 500 are generally not eligible for the program. Borrowers with scores between 500 and 579 could still be eligible, but they’ll likely face additional scrutiny during the underwriting process (not to mention a larger down payment).

Likewise, borrowers who have credit scores above 580 (a good thing), but debt-to-income ratios above the 31/43 threshold explained above (a bad thing), must undergo manual underwriting.

Compensating Factors to the Rescue

Borrowers with low credit scores and/or high debt ratios often cannot receive an “auto approval” through the FHA’s automated underwriting system. Instead, the mortgage lender’s underwriter must manually review the file in order to identify “compensating factors” that make up for the low credit score and/or the higher-than-allowed debt ratios. When borrowers are weak in one area, they have to be extra strong in another.

Confused? Here’s a tabular perspective that might help. The following table was adapted from HUD’s Single Family Housing Policy Handbook, parts of which took effect on September 14, 2015.

Credit Score * Maximum Qualifying Ratios Acceptable Compensating Factors
500-579 or No Credit Score 31/43 Not applicable. Borrowers with Minimum Decision Credit Scores below 580, or with no credit score may not exceed 31/43 ratios. (Energy Efficient Homes may have stretch ratios of 33/45.)
580 and above 31/43 No compensating factors required. (Energy Efficient Homes may have stretch ratios of 33/45.)
580 and above 37/47 One of the following: verified and documented cash Reserves; minimal increase in housing payment; or residual income.
580 and above 40/40 No discretionary debt.
580 and above 40/50 Two of the following: verified and documented cash Reserves; minimal increase in housing payment; significant additional income not reflected in Effective Income; and/or residual income.

* In this context, the credit score used by lenders is the “Minimum Decision Credit Score” defined by HUD. Here’s the official definition from HUD Handbook 4155.1:

“A ‘decision credit score’ is determined for each applicant according to the following rule: when three scores are available (one from each repository [TransUnion, Experian, and Equifax]), the median or middle value is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.”

The bottom line: HUD has a lot of rules regarding FHA loans and the borrowers who apply for them. But many of these rules have exceptions as well. Credit scores and debt ratios are a good example. Borrowers with credit scores between 500 and 579 could theoretically be approved for an FHA loan, but they might face additional scrutiny. Similarly, borrowers with debt ratios above the 31/43 rule might still qualify for an FHA loan if they have the compensating factors mentioned above.

Reminder: New FHA Handbook for 2015, 2016 Takes Effect This Month

Heads up FHA lenders and borrowers. There’s a new FHA handbook that takes effect later this month. The new handbook is more than 800 pages long and covers almost every aspect of the FHA mortgage-insurance program. It also replaces several other guides and policy letters, which will be phased out when the new book takes effect on September 14, 2015.

Most of the information in the new handbook pertains to mortgage lenders, in particular. It explains paperwork procedures, underwriting guidelines and the like. But borrowers seeking an FHA loan can also learn a lot from the new handbook. For instance, Chapter 2, Section A deals with “allowable mortgage parameters” such as loan-to-value limits, down payments, mortgage insurance and the like. These are all relevant topics for home buyers and borrowers.

New FHA Handbook: “Single Family Housing Policy”

Officially, the new policy guide is called the Single Family Housing Policy Handbook. The “single-family” part means that most of it applies to single-family home loans in particular, as opposed to multi-family lending. It is also commonly referred to as the “SF Handbook,” or HUD Handbook 4000.1.

Here are some frequently asked questions relating to the new guide.

When does the new handbook take effect?

Most sections of the new FHA handbook are effective for home loans with case numbers assigned on or after September 14, 2015. A few sections, namely those that apply to the FHA 203(k) program, don’t take effect until March 14, 2016.

Can mortgage lenders start using it early, if they’re ready?

No. According to HUD, approved mortgagees (lenders) must continue using current FHA handbooks and policies until the new Single Family Housing Policy Handbook becomes effective. See implementation dates above.

The book was previously published online, on HUD’s website and also at Allregs.com, to help mortgage lenders prepare. But according to HUD, all existing guidelines will remain in effect “until the effective dates of the various sections and subsections, as noted in the online SF Handbook.”

How will HUD / FHA make changes to the new handbook, going forward?

HUD will regularly update the new FHA handbook over time, as they have done with other policy guides in the past. The change process, and the manner in which they communicate changes to lenders, will also be similar to what has been done in the past. In most cases, handbook changes will be preceded by some form of announcement, such as the “Mortgagee Letters” HUD has used in the past. The handbook itself will be marked with color-coded notations whenever an update or addition is made.

Will some of the HUD Mortgagee Letters be superseded by this handbook?

Yes, a number of Mortgagee Letters will be superseded when HUD Handbook 4000.1 takes effect. Here’s a list of letters (by ML number and name) that will be replaced:

  • 2014-08: Guidance on Nonprofits Assisting Government Entities in Providing Secondary Financing in Conjunction with FHA-Insured Mortgages
  • 2013-44: HUD Single Family Real Estate Owned (REO) Properties: Clarification on Comparables used for Appraisals
  • 2013-14: Minimum Cash Investment and Secondary Financing Requirements – Acceptable Documentation for Funds Provided by Federal, State, or Local Governments, their Agencies or Instrumentalities
  • 2011-38: Secondary Financing Eligibility Requirements for IRC Section 115 Nonprofits
  • 2011-19: Financing of Transaction Costs for Real Estate Owned (REO) Properties Purchased Under FHA $100 Down Sales Incentive
  • 2002-01: Nonprofit Participation in Single Family FHA Activities – New Requirements and Restrictions
  • 2001-30: Nonprofit Organization and Government Entity Participation in Single Family FHA Activities
  • 2000-27: Appraising and Financing HUD Real Estate Owned (REO) Properties with FHA-Insured Financing – Single Family Loan Production
  • 1996-52: Single Family Loan Production – Nonprofit Agencies as Mortgagors
  • 1995-56: Single Family Property Disposition Insured Sales with Repair Escrow
  • 1994-02: Secondary Financing Provided by Nonprofit Agencies

Learn more and get updates:
The new FHA handbook for 2015 – 2016 is currently available in PDF form on the HUD.gov website. There’s also a collapsible / expandable version available on Allregs.com. In addition, we are currently working on a “clean HTML” version to improve access readability. Our HTML version will be available before the first implementation date of September 14, 2015. If you’d like to know when it comes online, sign up for our newsletter at the top of this page.

FHA Loans for People With Bad Credit: A New Initiative by HUD

The Department of Housing and Urban Development (HUD) announced this week that they are rethinking the way they evaluate mortgage lenders and borrowers, where risk is concerned. Their initiative could make it easier for people with bad credit to qualify for FHA loans later in 2015, and into 2016 as well.

HUD is the government department that oversees the Federal Housing Administration (FHA). It is HUD that establishes all rules and guidelines for this popular mortgage-insurance program, including credit guidelines. An FHA loan is different a regular or “conventional” mortgage because it gets insured by the federal government. This insurance shields lenders from losses that result when a borrower stops repaying a loan.

A New Way to Evaluate Lenders and Borrowers

On August 10, 2015, the Federal Housing Administration explained it was planning to use a new process for evaluating the FHA lending practices of HUD-approved mortgage lenders. In short, they want to learn more about the borrowers who are being served by these loans and the long-term risks they bring.

The FHA’s new “Supplemental Performance Metric,” as it is know, will give the agency more insight into lender and borrower performance while encouraging lenders to serve eligible but underserved home buyers and mortgage shoppers.

This follows other HUD initiatives (like the “Blueprint for Access” announced last year) that are designed to increase access to FHA financing for borrowers with credit problems in the past. These are important advancements because they could affect a large segment of the populace.

FHA Loans for People With Low Credit Scores?

People with credit problems in the past often have a harder time qualifying for FHA loans. But HUD is hoping to change that to some extent — specifically for borrowers who have reestablished a pattern of responsible credit usage.

Credit scores are just one part of the decision-making process used by mortgage lenders. But they’re an important part. In fact, a bad credit score by itself could potentially derail a person’s chances for getting an FHA loan.

According to the HUD announcement issued earlier this week:

“The new supplemental performance metric will help FHA lenders see the impact of their business at all ends of the credit spectrum in line with FHA’s willingness to insure loans to eligible borrowers with lower credit scores.”

The phrase HUD keeps repeating, now and in the past, is “eligible but underserved borrowers.” This refers to reasonably qualified borrowers who have recovered from past credit problems. Overly strict lending rules often exclude such people from the housing market. HUD hopes to increase lending to this group and thereby extend homeownership to a larger pool of Americans.

Of course, this doesn’t mean that just anyone can qualify for an FHA loan. Borrowers with bad credit histories who have regained their financial footing may benefit from this gradual easing of standards. But those with more recent and/or more severe credit issues (like delinquencies, defaults, and excessive debt) will probably still have a hard time getting approved.

Bad credit FHA loans are just the latest in a series of easing trends within the mortgage industry. On the conventional side of the market, we’ve also seen an increase in the number of low-down-payment mortgage options. For instance, an increasing number of lenders are offering 3% down payments to well-qualified borrowers.

The bottom line here is that borrowers should not assume they’re unqualified for an FHA loan due to past credit problems. Talk to a HUD-approved lender to find out where you stand. Better yet, talk two a few of them.

Visit FHAhandbook.com to Learn About the Program

Home buyers have a lot of questions about the FHA program. I know this because we’ve been fielding their questions for more than 10 years, through the Home Buying Institute and other channels. To help clarify this program, we’ve created an unofficial guide to FHA loans. Our 60-page ebook explains the HUD mortgage insurance program in plain English, and it’s free to download. You can learn more or download a copy of the handbook by visiting FHAhandbook.com.

Update: FHA Loan-to-Value (LTV) Limits for 2015 – 2016, Still at 96.5%

The Department of Housing and Urban Development (HUD) recently published a new handbook pertaining to FHA home loans. HUD’s Single Family Housing Policy Handbook 4000.1 will become effective on September 14, 2015. So the guidelines it contains will apply to all FHA purchase loans through fall of 2015 and into 2016.

Among other things, the new handbook clarifies the loan-to-value (LTV) ratio limits for FHA loans in 2015 and beyond. Generally speaking, purchase loans are limited to a maximum LTV of 96.5%, for a down payment of 3.5%. This is the same as the current limit, though HUD has provided some additional guidance that borrowers may find useful.

FHA Loan-to-Value (LTV) Limits for 2015 – 2016

Let’s start with a definition. The loan-to-value ratio, or LTV, is used to show the ratio of a loan to the value of an asset being purchased. In this case, the asset is a home. So it’s the size of the mortgage in relation to the value of the home being purchased.

Most mortgage products have loan-to-value limits associated with them, and that includes the FHA loan program. This program is managed by HUD, which also establishes the LTV guidelines (and other criteria) for borrowers. Here’s what you need to know about FHA loan-to-value limits in 2015 and 2016.

Note: The information below applies to loans with case numbers assigned on or after September 14, 2015. But the 96.5% limit is also the current policy. (It will simply be carried over when the new handbook becomes effective in September.)

When it comes to FHA loans, the maximum LTV percentage is determined by the borrower’s credit score, the mortgage insurance program being used, and the type of transaction (i.e., purchase, refinance, or new construction).

According to HUD Handbook 4000.1, mortgage lenders must review the borrower’s credit reports and scores to determine the minimum decision credit score (with the exception of streamline refinance loans).

  • If the borrower’s minimum decision credit score is at or above 580, the borrower is eligible for maximum financing. For purchase loans, that means the FHA loan-to-value ratio can be up to 96.5%.
  • If the score is between 500 and 579, the borrower is limited to a maximum LTV of 90%. This means the borrower must make a down payment of at least 10%.

So the maximum LTV ratio for purchase loans is 96.5% of the appraised home value or purchase price, whichever is less. Refinance and new construction loans have different limits associated with them, as explained below.

New Construction: Residential properties that have been under construction or existing for less than one year are limited to an FHA loan-to-value ratio of 90%; unless the property (A) meets the pre-approval requirements outlined in the handbook, or (B) has a HUD-accepted ten-year protection plan in place.

Refinancing: In most mortgage refinance scenarios, the maximum LTV is 85% of the home’s adjusted value.

Additionally, special lending circumstances such as corporate transfers and tenant/landlord transactions have LTV limits of 85%. Refer to HUD Handbook 4000.1 for more information on these and other special circumstances.

Lower Down Payments Available These Days

The loan-to-value limit for FHA loans is essentially the inverse of the down payment requirement. For example, most borrowers who use this program are limited to an LTV of 96.5%. This means the loan cannot exceed 96.5% of the home’s value. Inversely, it also means home buyers must make a down payment of at least 3.5% of the purchase price or appraised value, whichever is less.

In the wake of the housing crisis, FHA was pretty much the only option for borrowers who wanted to keep their down payments below 5%. In those years, many mortgage lenders decreased their LTV limits (thus increasing their down-payment requirements) as a protective measure against financial losses.

Over the last couple of years, however, more and more lenders have begun offering down payments below 5%. So FHA is not necessarily the only game in town, when it comes to sub-5% mortgage loans. You can learn more about this trend here.

Disclaimers: This story contains FHA loan-to-value (LTV) limits for 2015 and 2016. The information above was adapted from official guidelines set forth by the Department of Housing and Urban Development. To learn more about LTV ratio limits and guidelines, you may refer to HUD Handbook 4000.1, the Single Family Housing Policy Handbook.

FHA Mortgage Rates Climb to Highest Point Since March 12, 2015

FHA mortgage rates continued their upward climb this week, reaching their highest point since the week of March 12, 2015.

The average rate for a 30-year fixed mortgage was 3.85% this week, according to survey data released by Freddie Mac. The average for a 30-year FHA-insured home loan was slightly lower at 3.82%, according to a 15-lender survey conducted by the Home Buying Institute this week.

FHA mortgage rates have been hovering below 4% all year, and many economists expect them to remain in this low range for the foreseeable future. But the recent uptick is worth watching, especially for people who are in the market for a mortgage loan. And change may be coming in the fall.

FHA Mortgage Rates Still Low, Thanks to Fed

Low lending costs are being preserved, in part, by the Federal Reserve’s policies regarding the federal funds rate. In its last meeting, the Federal Open Market Committee (FOMC) said it would continue to keep the inter-bank lending rate near zero for the time being. This is one of several factors holding FHA mortgage rates in the sub-4% range.

According to the minutes from the FOMC’s last meeting in April:

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”

The committee is keeping an eye on employment and inflation data, as indicators of when they might increase rates. When the national economy reaches “maximum employment and 2 percent inflation,” Fed officials will likely alter their current policy and raise the federal funds rate. This could affect long-term borrowing costs as well, including 30-year mortgage loans.

But for now, the FOMC is content to steer along its present course. This accounts for the relative stability we have seen in recent months, where FHA mortgage rates are concerned.

More Home Buyers Went With FHA in Q1 2015

More home buyers used FHA loans in the first quarter of 2015, when compared to the same period last year. According to RealtyTrac’s “Residential Loan Origination Report” for Q1 2015, released earlier today, FHA loan originations (for home purchases) increased by 5% from a year ago. This is partly due to a rise in loan originations across the board, and partly a testament to FHA’s continued popularity among home buyers seeking a more flexible mortgage product.

Related: Wells Fargo making fewer FHA loans

First-time home buyers, in particular, are attracted to this program due to the 3.5% down payment option, which is lower than the average down payment for a conventional / non-FHA home loan. In order to qualify for the 3.5% minimum investment, borrowers must have a credit score of 580 or higher (among other things).

The million-dollar question: How long will FHA mortgage rates remain below 4%? Will they rise significantly sometime in 2015? That depends in part on what the Fed does. Some analysts, including the Chief Economist for Freddie Mac, expect the Fed to begin increasing rates in September 2015. If that happens, home buyers could face increased borrowing costs in the fall of this year, compared to what we are seeing right now.

Disclaimer: This story contains third-party data and commentary that are deemed reliable but not guaranteed. The publishers of this website make no claims or guarantees about future mortgage rates or other economic conditions.

Wells Fargo Making Fewer FHA Loans; Other Lenders Stepping In

Wells Fargo, the nation’s largest mortgage lender by volume, appears to be making fewer FHA loans these days. But borrowers who are interested in the program shouldn’t worry. There are still plenty of lenders offering this government-backed mortgage option.

Wells Fargo Made Fewer FHA Loans Last Year

According to a study conducted by Inside Mortgage Finance, an industry publication, Wells Fargo generated nearly $20 billion in FHA loans in 2013. That gave it 9.4% of total market share within the FHA-insured niche category — more than any other lender. But in 2014, Wells Fargo only originated $5.1 billion in FHA loans, a sharp decline over the previous year.

Quicken Loans moved up to the top spot last year, generating $6.68 billion in FHA loans and capturing 6.3% of market share. Wells Fargo dropped to second in terms of market share.

Overall, it appears that the nation’s largest mortgage lenders are scaling back on FHA-insured home loans, when viewed against their total lending volumes. This is partly the result of lawsuits made by the federal government against lenders for mistakes made during the housing crisis. Whatever the reason, it’s clear that large lenders such as Wells Fargo are making fewer FHA loans these days.

Other Lenders Filling the Void

While the big banks appear to be stepping back from these loans, their popularity among home buyers is still high. First-time home buyers, in particular, are drawn to the FHA program due to the comparatively low down payment of 3.5%. As a result of ongoing consumer demand, other mortgage companies are still embracing the government-backed mortgage program and offering it as a featured product to borrowers.

The Wall Street Journal recently mentioned loanDepot LLC and Guild Mortgage Co. as two of these non-bank lenders who are stepping in to fill the void. The loanDepot website claims that FHA loans enable “many homeowners who wouldn’t qualify for conventional financing to purchase or refinance a home.” Guild Mortgage Company touts the program’s “flexible guidelines and lower credit requirements.”

While it’s true that this program offers certain advantages for borrowers, it has drawbacks as well. Borrowers must weigh the pros and cons of this, or any other mortgage product, before making a decision. So let’s talk about those pros and cons.

Benefits and Drawbacks of FHA Program

Lenders frequently tout the benefits of FHA loans. Borrowers who use this program can put down as little as 3.5% of the purchase price or appraisal amount, whichever is less. Conventional loans (those that are not insured by the government) typically require larger down payments. Lenders are a bit more lenient with their qualification guidelines as well, when offering FHA loans.

But there are disadvantages as well. The biggest drawback is the fact that FHA borrowers have to pay two types of mortgage insurance when using this program (upfront and annual). This inflates the monthly payment as well as the total cost incurred over time.

Read: 2015 insurance premiums for FHA loans

Borrowers who can’t afford a 20% down payment usually end up paying some form of mortgage insurance, regardless of whether they use an FHA or a conventional home loan. So the cost of the FHA insurance doesn’t necessarily steer people away from this program. For many borrowers, the smaller down payment makes up for the added cost of the mortgage insurance premium. As with any other loan product, one must weigh the pluses and minuses.

Disclaimer: This story contains data relating to Wells Fargo FHA loans and lending practices. This information was obtained from third-party sources that are deemed reliable but not guaranteed.

HUD Issues FHA Flipping Rules for 2015 (Hint: It Usually Doesn’t Fly)

Last month, the Department of Housing and Urban Development (HUD) issued new rules for FHA loans and house flipping. The new guidelines are part of the agency’s brand-new Single Family Housing Policy Handbook, which will take effect in June 2015.

In most cases, borrowers cannot use FHA loans to purchase a home that is being “flipped.” But there are a few exceptions to this general rule. Here’s the latest on HUD’s flipping guidelines for 2015.

Guidelines for Property Flipping With an FHA Loan

Let’s start with a definition. In the new handbook, HUD defines house flipping as “the purchase and subsequent resale of a property in a short period of time.”

That’s basically a textbook definition of flipping. But HUD seems to have an even darker view of this practice. They go on to state that flipped properties are often “resold for a considerable profit with an artificially inflated value, often abetted by a Mortgagee’s [i.e., lender’s] collusion with an Appraiser.”

Notice their choice of words here. Abetted. Collusion. These words are typically used to describe some kind of criminal act or enterprise. So now we know how HUD feels about property flipping! This mindset helps explain some of the restrictions they have for FHA loans and flipping, and why they want to keep their borrowers away from flipped properties.

Without further introduction, here are their 2015 guidelines for would-be flippers:

Time Restriction on Title Transfer: 90-Day Rule

In order for a home to be eligible for FHA financing, a certain amount of time must pass between (A) the date on which the seller acquired the title and (B) the sales contract execution date that will result in the FHA-backed mortgage loan. In other words, they will look at the length of time the investor or flipper holds the title, before transferring it to a buyer using an FHA loan.

In this context, the initial date of acquisition is when the investor or flipper acquired legal ownership of that home. That’s the first important date. The second important date occurs when the sales contract is signed and executed by “all parties intending to finance the property with an FHA-insured mortgage.”

The time between these two dates will determine whether or not an FHA loan can be used to purchase the flipped property. And this is where the all-important 90-day rule comes into play.

Generally speaking, a home that is resold 90 days or less after the first date of acquisition is not eligible for FHA mortgage financing.

Second Home Appraisal Required in Some Cases

In some flipping or quick-turnover scenarios, HUD will require a second appraisal on the home. Here again, the length of time between purchase and resale determines the course.

If the resale of a home occurs somewhere between 91 and 180 days after the seller acquired the property (and the resale price is 100% or more above the initial price paid), the lender must obtain a second home appraisal to determine the current market value.

According to the newly released handbook, if the second home appraisal shows a value that’s more than 5% higher than the first appraisal, the lesser of the two values will be used for FHA loan purposes.

Special Circumstances: Exceptions to the ‘No-Flip’ Rule

As with most FHA loan guidelines, there are a few exceptions to these flipping rules. For instance, the time restrictions mentioned above may not apply when:

  • The home is being purchased by an employer or relocation agency to relocate an employee.
  • The home is being resold by HUD, as part of its REO program for selling foreclosures.
  • The home is being sold by a government agency, a HUD-approved nonprofit agency, a state or federally-chartered financial institution, or a Government-Sponsored Enterprises (GSE) like Fannie Mae.
  • The home being sold was acquired through an inheritance.
  • The property falls within a Presidentially Declared Major Disaster Areas (PDMDA), and has been issued a notice of exception from HUD.

The exceptions listed above aren’t true house-flipping scenarios. They are unique circumstances. That means the 90-day rule for FHA purchases applies to nearly all home flipping situations.

Learn more: The specific guidelines included in this story were adapted from the policy handbook mentioned earlier. If you would like to learn more about the rules and requirements for FHA-insured mortgage loans and flipped homes, refer to Handbook 4000.1, the “Single Family Housing Policy Handbook.” This reference can be found on the official HUD website located at HUD.gov. It is available in PDF format for easy download.

Rules for Getting FHA Down-Payment Gifts from Family

FHA home loans are popular among home buyers for various reasons. The 3.5% down payment option is one of the most powerful lures. Eligible borrowers who use this government-backed lending program can put down as little as 3.5% of the purchase price or appraised value, whichever is less.

The relatively low down payment is a commonly known feature. But there’s another benefit many home buyers don’t realize. The Department of Housing and Urban Development (HUD) allows for the entire down payment to be a gift from a family member or other approved donor. This means the home buyer could obtain an FHA loan with no initial investment whatsoever.

In contrast, most conventional home loans require borrowers to use at least a portion of their own money for the down payment. They allow gifts from family members in some cases, but only for a certain percentage of the down payment. (The exact percentage varies from one lender to the next.)

With FHA, the Entire Down Payment Can Be a Gift

FHA down payment gifts from family are a major benefit for cash-strapped borrowers. It is partly what makes these loans so appealing to borrowers with limited funds.

Malcolm Hollensteiner, director of retail lending for TD Bank, recently explained these pros and cons to the Washington Post, in an article published on April 10, 2015.

According to Mr. Hollensteiner:

“If all of your down payment funds are a gift, then an FHA loan is your best choice. Because for a conventional loan, you need to have your own money for at least some of the down payment.”

FHAhandbook.com, an educational website for home buyers and mortgage shoppers, echoed this sentiment:

“With an FHA-insured home loan, the entire down payment can be gifted from a family member … most conventional [non-FHA] loans do not allow 100% gifting for the down-payment funds. This is another key benefit of the FHA program, one that appeals to first-time buyers in particular.”

So it seems that home buyers who plan to rely heavily on gifted funds would do well to consider the Federal Housing Administration’s loan program.

Other Acceptable Sources, Aside from Family

FHA allows down payment gifts from family members. But the gifted money doesn’t have to come from a relative. There are other acceptable sources as well. To get the skinny on this, you have to dig into the handbook. The official HUD handbook, that is.

FHA down payment gift rules and requirements can be found in Chapter 5, Section B of HUD Handbook 4155.1. This handbook can be found online, and it’s worth reading for anyone who is considering an FHA-insured mortgage loan.

Chapter 5 of this handbook provides a list of approved sources for down-payment funds. According to that chapter, an “outright gift of the cash investment is acceptable if the donor is” one of the following:

  • The borrower’s relative / family member
  • The borrower’s employer or labor union
  • A close friend who has a “clearly defined and documented interest” in the borrower
  • An approved charity organization
  • A public entity or government agency that offers assistance to (A) first-time home buyers or (B) families with low to moderate income

To learn more about FHA down payment gifts from family and other approved sources, refer to the official source mentioned above.

Gift Letters Are Required in All Cases

Think you can accept a down payment gift and be done with it? Not so fast. HUD also requires lenders to obtain gift letters from the donor, in all cases where third-party funds are being donated. But it doesn’t have to be anything fancy. It just has to state that the donor is truly gifting the money and does not expect to be repaid.

In other words, the gift letter must make it clear that the donor is not loaning money to the borrower, but giving it to them freely.

At a minimum, the gift letter must include (A) the name, address and phone number of the donor; (B) the dollar amount being donated; and (C) a statement that no repayment is required.

Note: Dozens of sample gift letters can be found online, with a quick Google search.

Some Lenders Require Bank Statements for Verification

In addition to the gift letter mentioned above, mortgage lenders usually request bank statements from the family member or donor who is providing the FHA down payment gift.

This requirement is also spelled out in the aforementioned HUD handbook. It states that the “lender must document the transfer of gift funds from the donor to the borrower.” This documentation is typically done with bank statements from the donor, though a cancelled check may suffice in some cases.

The bottom line here is that borrowers who use the FHA loan program do not have to cover the down payment expense out of their own pockets. The Department of Housing and Urban Development allows for 100% of the down payment to be a gift, as long as three conditions are met.

  1. The gift must come from a family member or other approved source.
  2. The donor must provide a gift letter that states no repayment is expected.
  3. The transfer of gift funds from donor to borrower must be documented in some way.

Learn more: Borrowers interested in the FHA loan program can learn more about this topic from HUD Handbook 4155.1, which is available at HUD.gov.