In 2015, FHA Underwriting Process Mostly Unaffected by Rule Changes

Much has been written about the new mortgage rules that came onto the scene over the last couple of years. The Qualified Mortgage (QM) rule, for example, has generated thousands of headlines in the last year alone.

Many of our readers have asked how these industry changes will affect the FHA mortgage underwriting process in 2015. As it turns out, the new lending guidelines have had very little impact on the way FHA loans are underwritten.

Here’s why: The QM rule is designed to prevent risky lending practices that were never permitted under FHA underwriting standards. So it hasn’t really changed the underwriting process for these government-backed loans.

In December 2013, the Department of Housing and Urban Development (HUD) published a press release to clarify its stance on all of this. According to the release, HUD’s definition states that a QM mortgage loan must…

  • require periodic payments without risky features,
  • have loan terms no longer than 30 years,
  • limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (with exceptions for Title II Manufactured Housing and other special programs), and
  • be insured or guaranteed by FHA or HUD.

These stipulations apply to all single-family residential home loans that “HUD insures, guarantees or administers,” according to the corresponding entry in the Federal Register.

These requirements will not significantly alter the FHA underwriting process in 2015, because Federal Housing Administration loans have traditionally fallen within this mold.

As HUD explained in their December 2013, news release:

“Currently, HUD does not insure, guarantee or administer mortgages with risky features such as loans with excessively long terms (greater than 30 years), interest-only payments, or negative-amortization payments where the principal amount increases.”

Additionally, FHA underwriting guidelines already required mortgage lenders to assess the borrower’s ability to repay the debt. So there wasn’t much to change in 2014 or 2015.

Underwriting Process and Guidelines at a Glance

The FHA underwriting process is outlined in HUD Handbook 4155.1, Chapter 1, Section A. According to the handbook, the underwriter’s main responsibility is to “determine the borrower’s ability and willingness to repay a mortgage debt to limit the probability of default … and examine the property offered as security to determine if it is sufficient collateral.”

So the primary purpose of underwriting is to ensure that the borrower has the financial capacity to make the monthly mortgage payments. This is done by analyzing tax records, bank statements, pay stubs, and other financial documents.

Above all, the FHA underwriter must “make a reasonable and good-faith determination of the mortgagor’s [i.e., borrower’s] repayment ability at the time of consummation.” Verifying repayment ability is also the central theme of the QM rule.

Qualifying for a Loan

Generally speaking, borrowers must have:

  • A down payment of at least 3.5% of the purchase price or appraised value
  • A credit score of around 600 or higher (not set in stone)
  • A total debt-to-income ratio no higher than 43% (also not set in stone)
  • Verifiable income that is sufficient to repay the debt

Once the borrower’s file has been thoroughly reviewed, the underwriter will either approve it or reject it. He or she may also issue a “conditional approval” and give a list of conditions that have to be resolved before the loan can close. When the FHA underwriter is satisfied that both the borrower and the property meet the lender’s and HUD’s guidelines, the borrower is considered “clear to close.”

Read: HUD explains 7 steps in FHA process

This is how the FHA underwriting process has worked for years, and it will remain this way in 2015 despite the new mortgage rules mentioned earlier. To learn more about this process, refer to Chapter 1 of HUD Handbook 4155.1, or visit our educational website at FHAhandbook.com.

Disclaimer: This article provides a quick overview of the FHA underwriting process in 2015. Mortgage underwriting is a complex and in-depth process that varies from one borrower to the next, due to the many different components involved. This article is not meant to be a comprehensive guide to FHA underwriting guidelines or requirements. The Department of Housing and Urban Development establishes all guidelines for this program. Visit www.HUD.gov to learn more.

FHA Annual Mortgage Insurance Premiums (MIP) for 2015

At a glance: The FHA annual mortgage insurance premium for 2015 is being reduced. This change takes effect on January 26, 2015. The new annual MIP for most FHA borrowers will be 0.85% of the base loan amount. This change only applies to 30-year mortgages; 15-year loans are unaffected.

On January 8, the Department of Housing and Urban Development (HUD) announced they would reduce the annual mortgage insurance premium (MIP) that borrowers have to pay when using an FHA loan. This reversal follows a series of MIP increases made over the last few years.

This change only affects the annual premium for FHA-insured home loans. The upfront MIP was not changed for 2015. Additionally, these reductions only apply to 30-year mortgages (or, technically, anything “greater than 15 years”). This rate reduction does not apply to 15-year mortgage loans.

Bottom line: For 30-year mortgages with the standard minimum down payment of 3.5%, the FHA annual MIP rate was reduced from 1.35% of the loan balance to 0.85% of the balance.

Annual FHA Mortgage Insurance Premiums for 2015

The table below shows how the annual FHA mortgage insurance premiums are being reduced. The amounts shown in the “New MIP” column will apply to loans with case numbers assigned on or after January 26, 2015.

FHA Loans Greater Than 15 Years

Base Loan Amt. LTV Previous MIP New MIP
≤$625,500 ≤95.00% 130 bps (1.30%) 80 bps (0.80%)
≤$625,500 >95.00% 135 bps (1.35%) 85 bps (0.85%)
>$625,500 ≤95.00% 150 bps (1.50%) 100 bps (1.00%)
>$625,500 >95.00% 155 bps (1.55%) 105 bps (1.05%)

FHA Loans Less Than or Equal to 15 Years

Base Loan Amt. LTV MIP
≤$625,500 ≤90.00% 45 bps (0.45%)
≤$625,500 >90.00% 70 bps (0.70%)
>$625,500 ≤78.00% 45 bps (0.45%)
>$625,500 78.01% – 90.00% 70 bps (0.70%)
>$625,500 >90.00% 95 bps (0.95%)

Again, these changes only affect the FHA annual mortgage insurance premiums for 2015, and only for loans greater than 15 years in length. The upfront premium (which borrowers are also required to pay) will remain at its current level of 1.75% of the base loan amount. Additionally, the MIP rates for 15-year loans will remain unchanged as shown in the table above.

These new rates were announced in HUD Mortgagee Letter 2015-01, published on January 9.

How to Read The MIP Tables

To make these numbers more accessible, we have split them into two tables. The first table shown above applies to FHA loans greater than 15 years in length (i.e., a standard 30-year mortgage). The second table applies to the 15-year home loan. So the first step in determining your annual FHA mortgage insurance premium is to find the appropriate table based on the length of your repayment term.

Next, you would need to find the relevant loan size. Most FHA borrowers will fall into the ≤$625,500 category, because the maximum FHA loan limit for a single-family home is $625,500.

Lastly, you would find the appropriate table row based on your LTV, or loan-to-value ratio. Most FHA borrowers fall into the ≥95.00% LTV category, because they choose the minimum 3.5% down payment. (This relatively low down payment is the primary advantage of using the FHA program in the first place.) Borrowers who put down 3.5% end up with an LTV of 96.5%, which puts them in the ≥95% category.

Example: For a 30-year FHA loan with a down payment of 3.5%, the new annual mortgage insurance premium would be 0.85% (after the change takes effect on January 26, 2015).

According to HUD, the lower annual MIP rates are expected to save more than two million homeowners an average of $900 annually. Additionally, the reduced premiums could spur 250,000 new home buyers to purchase their first house over the next three years.

Added Insurance: The Price You Pay for a Higher LTV

FHA isn’t the only type of home loan that requires extra insurance. Generally speaking, any time the loan-to-value ratio exceeds 80%, some form of mortgage insurance will be required. This insurance protects the lender — not the borrower.

In the case of FHA loans, the premium is paid to the government via the Federal Housing Administration. That’s partly how they fund their mortgage insurance program.Without these premiums, there would be no FHA program and therefore fewer loan options for borrowers.

With a conventional home loan, the mortgage insurance premium is paid to a third-party insurer in the private sector (though it usually gets “rolled” into the borrower’s monthly payment).

To avoid this added cost, the LTV ratio for any single loan must be kept at or below 80%. This can be accomplished by making a down payment of 20% or higher, or by combining two loans so that neither of them has an LTV higher than 80% (the so-called “piggyback” strategy).

Learn more: This article provides a basic overview of FHA annual mortgage insurance premium (MIP) rates for 2015. The MIP premiums for this program are set by the Department of Housing and Urban Development. To learn more about FHA loans and mortgage insurance, you can refer to the official HUD website at www.HUD.gov. To learn more about the reduced rates for 2015, do a Google search for “Mortgagee Letter 2015-01.” Additionally, lenders and borrowers can call the FHA Resource Center at 1-800-225-5342.

2015 FHA Loan Limits for California – All 58 Counties

In December 2014, the Department of Housing and Urban Development (HUD) announced the 2015 FHA loan limits for California and the rest of the country. There were no major changes. For the most part, last year’s FHA lending limits will simply carry over to this year. Depending on where you live, this may be good or bad news due to average home prices.

High-cost areas: In counties with a relatively high median home price, the maximum loan size will remain the same as last year. The FHA mortgage limit for these high-cost areas is $625,500. This includes San Francisco, Los Angeles, and several cities within Orange County.

Lower-cost areas: According to HUD, the 2015 “standard loan limit for areas where housing costs are relatively low will also remain unchanged at $271,050.” Twelve California counties fall into this “lower-cost” category, including Del Norte, Kern and Imperial counties.

California FHA Loan Limits by County, 2015

The table below shows the 2015 FHA loan limits for California counties.

Notes: The “1-family” column applies to standard, single-family homes. The “2-family” column applies to duplex-style properties that can accommodate two separate residents, and so on. FHA lending limits are assigned by county, which means all cities and towns within a particular county have the same caps.

County 1-Family 2-Family 3-Family 4-Family
ALAMEDA $625,500 $800,775 $967,950 $1,202,925
ALPINE $463,450 $593,300 $717,150 $891,250
AMADOR $332,350 $425,450 $514,300 $639,150
BUTTE $293,250 $375,400 $453,750 $563,950
CALAVERAS $373,750 $478,450 $578,350 $718,750
COLUSA $271,050 $347,000 $419,425 $521,250
CONTRA COSTA $625,500 $800,775 $967,950 $1,202,925
DEL NORTE $271,050 $347,000 $419,425 $521,250
EL DORADO $474,950 $608,000 $734,950 $913,350
FRESNO $281,750 $360,700 $436,000 $541,800
GLENN $271,050 $347,000 $419,425 $521,250
HUMBOLDT $327,750 $419,550 $507,150 $630,300
IMPERIAL $271,050 $347,000 $419,425 $521,250
INYO $369,150 $472,550 $571,250 $709,900
KERN $271,050 $347,000 $419,425 $521,250
KINGS $271,050 $347,000 $419,425 $521,250
LAKE $271,050 $347,000 $419,425 $521,250
LASSEN $271,050 $347,000 $419,425 $521,250
LOS ANGELES $625,500 $800,775 $967,950 $1,202,925
MADERA $271,050 $347,000 $419,425 $521,250
MARIN $625,500 $800,775 $967,950 $1,202,925
MARIPOSA $322,000 $412,200 $498,250 $619,250
MENDOCINO $373,750 $478,450 $578,350 $718,750
MERCED $271,050 $347,000 $419,425 $521,250
MODOC $271,050 $347,000 $419,425 $521,250
MONO $529,000 $677,200 $818,600 $1,017,300
MONTEREY $502,550 $643,350 $777,650 $966,450
NAPA $615,250 $787,650 $952,050 $1,183,200
NEVADA $477,250 $610,950 $738,500 $917,800
ORANGE $625,500 $800,775 $967,950 $1,202,925
PLACER $474,950 $608,000 $734,950 $913,350
PLUMAS $336,950 $431,350 $521,400 $648,000
RIVERSIDE $355,350 $454,900 $549,850 $683,350
SACRAMENTO $474,950 $608,000 $734,950 $913,350
SAN BENITO $625,500 $800,775 $967,950 $1,202,925
San Bernardino $355,350 $454,900 $549,850 $683,350
SAN DIEGO $562,350 $719,900 $870,200 $1,081,450
SAN FRANCISCO $625,500 $800,775 $967,950 $1,202,925
SAN JOAQUIN $304,750 $390,100 $471,550 $586,050
SAN LUIS OBISPO $561,200 $718,450 $868,400 $1,079,250
SAN MATEO $625,500 $800,775 $967,950 $1,202,925
SANTA BARBARA $625,500 $800,775 $967,950 $1,202,925
SANTA CLARA $625,500 $800,775 $967,950 $1,202,925
SANTA CRUZ $625,500 $800,775 $967,950 $1,202,925
SHASTA $273,700 $350,350 $423,500 $526,350
SIERRA $304,750 $390,100 $471,550 $586,050
SISKIYOU $271,050 $347,000 $419,425 $521,250
SOLANO $400,200 $512,300 $619,300 $769,600
SONOMA $520,950 $666,900 $806,150 $1,001,850
STANISLAUS $276,000 $353,300 $427,100 $530,750

Remember, these are the FHA loan limits for California. The amounts shown above specifically apply to mortgage loans that are insured by the Federal Housing Administration. There are separate lending limits for conforming conventional products (that are not insured by the federal government).

Some Counties More ‘FHA Friendly’ Than Others

For the most part, these are the same California FHA loan limits as last year. They were simply “rolled over” to 2015 with no major changes. Home prices, on the other hand, rose considerably in some California cities over the last year. As a result, a higher percentage of homes will exceed the maximum loan size for FHA.

For instance, the median home value in Orange County as of January 2015 was $626,000 (source: Zillow Home Value Index). The 2015 FHA loan limit for this county is slightly lower at $625,500, for the single-family category.

This means that more than half of all single-family properties are priced above the FHA mortgage cap, at least within the O.C. So many home buyers in this market will be shopping above the Federal Housing Administration’s lending limits. This is true for many cities and counties in California.

In other parts of the state, however, median and average house values are well within HUD’s guidelines for maximum loan size. For example, the median home price in Kern is $167,700. The 2015 FHA limit for Kern County, California is $271,050, more than $100,000 higher than the median house value.

So it would be fairly easy to find a home within FHA lending limits in this area — especially when compared to those higher-priced markets where the median is at or above the limit.

What’s the Best Type of Mortgage for You?

When choosing a type of mortgage loan, home buyers need to consider more than just the lending limits. There are other pros and cons that must be weighed as well.

For instance, the FHA program offers a down payment as low as 3.5% of the purchase price or the appraised value (whichever is less). This appeals to California home buyers who have limited cash saved up for a down payment. The downside to this financing method is that it requires two types of mortgage insurance, which can increase the monthly payments and the total amount paid over the long run.

We have several guides to help you compare these pros and cons. Start with this guide that explains the different types of mortgage financing.

Disclaimer: This 2015 California FHA loan limits shown above were exported from the “Mortgage Limits” database tool on the Department of Housing and Urban Development website. Their information is deemed reliable but not guaranteed. This information has been provided for educational purposes only. For the most current and accurate information available regarding loan amounts, visit HUD.gov.

HUD: Current FHA Loan Limits Will Carry Over Into 2015

The Department of Housing and Urban Development (HUD) announced today that the FHA loan limits for the current year will carry over into 2015 as well. They will not be lowered, as they were last year, but will instead remain at current levels through December 2015.

HUD made the announcement earlier today in the form of a press release and policy letter sent to lenders.

According to the news release issued today:

“FHA’s calculation for maximum loan limits in high-cost metropolitan areas of the country will remain the same as the 2014 level of $625,500. The current standard loan limit for areas where housing costs are relatively low will also remain unchanged at $271,050.”

At the end of each year, the Federal Housing Administration (FHA) revises the national loan limit assigned to FHA-insured home loans. They create their limits by using a percentage of the national conforming loan amount, which is established by the Federal Housing Finance Agency and applied through Fannie Mae and Freddie Mac. FHA typically sets their “floor” at 65% of the conforming limit.

In areas with higher median home prices, loans are allowed to exceed the floor. These counties are appropriately labeled as “high-cost areas.” In these housing markets, borrowers can obtain FHA loan financing in amounts up to 150% of the conforming limit.

2015 FHA Loan Limits Range from $271,050 – $625,500

According to current HUD guidelines, the minimum FHA loan limit “floor” for a one-unit residential property is $271,050 (65% of conforming). The maximum “ceiling” for high-cost areas is $625,500, equal to 150% of conforming.

FHA loan limits 2015

This policy change (or lack thereof) was implemented with the publication of HUD Mortgagee Letter 2014-25, on December 5, 2014. The limits stated above will apply to FHA-insured home loans with case numbers assigned on or after January 1, 2015. This policy will remain in place through the end of next year, at which time the caps could be recalculated upward or downward.

The loan limits for FHA’s reverse mortgage product, known as the Home Equity Conversion Mortgage (HECM), will also remain unchanged in 2015.

To learn more about this loan program, read our recent update on HUD requirements.

Status Quo the Name of the Game?

Loan limits are not the only feature staying the same for 2015. HUD also plans to maintain their current requirements for down payments through 2015. Current credit score and debt ratio guidelines also appear to be carrying over to next year. Additionally, there have been no forthcoming changes announced for the mortgage insurance premiums assigned to all FHA loans.

This “status quo” is noteworthy, because HUD has made numerous changes to their loan program over the last few years. Most of the changes were designed to shore up the agency’s capital reserve fund and prevent future losses resulting from bad loans.

One thing is certain: First-time home buyers with limited funds will continue to flock to the FHA loan program, with its relatively small 3.5% down-payment requirement.

Coming Soon: FHA Single-Family Housing Policy Handbook 4000.1

In an effort to clarify its rules and policies, HUD has created a new handbook for mortgage lenders and borrowers. It explains the minimum guidelines and criteria for FHA loans.

The new handbook — the “Single Family Housing Policy Handbook 4000.1” — is currently available in draft form on the HUD.gov website. It will eventually replace HUD Handbook 4155.1, which has long been the go-to source for program guidelines.

The 2015 FHA loan limits will soon be added to the Single Family Housing Policy Handbook.

FHA Seller Concession and Contribution Limits for 2015: Still at Six Percent

Summary: This article explains the 2015 limits for FHA seller concessions or contributions toward a buyer’s closing costs. It was updated and fact-checked at the time of publication, using HUD Handbook 4155.1, Chapter 2, Section A.

FHA loans are one of the most popular financing programs among home buyers today. They are especially popular among first-time buyers who have limited funds for a down payment and closing costs. Borrowers who use this program can enjoy the benefit of a low down payment, as little as 3.5% of the sale price.

Another benefit is that sellers are allowed to make contributions toward the buyer’s closing costs. Put simply, the seller involved in the transaction is allowed to chip in to help the home buyers pay some, or all, of their loan-related closing costs. In real estate lingo, this contribution is referred to as a “concession.”

But there are limits to how much the homeowner can contribute toward the borrower’s costs. In 2015, seller concessions will be limited to 6% of the sale price. This means the homeowner / seller can pay up to 6% toward the home buyer’s closing costs. Usually, this money comes from the proceeds of the sale. It’s important to note that this concession may not be applied to the down payment.

For more on this subject, let’s refer to the official source.

FHA Seller Concession Limits for 2015: Still at 6%

Seller contribution limits are established and enforced by the Department of Housing and Urban Development (HUD). It is HUD that manages the Federal Housing Administration’s mortgage insurance program.

Here is a relevant quote from HUD Handbook 4155.1, Chapter 2, which deals with “Interested Third-Party Contributions”:

“The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.”

You’ll note that this passage does not mention down payments. While borrowers can obtain down-payment gifts from family members and other approved sources, they cannot use a seller concession or contribution for the down payment. This is an important distinction, as well as a common point of confusion among home buyers.

Misinformation Regarding a 3% Cap on Contributions

A few years ago, HUD proposed a reduction in the seller concession limits for FHA-insured home loans. Specifically, they proposed cutting the 6% cap in half, thereby limiting sellers to a maximum closing-cost contribution of 3% in most cases. This proposed change was intended to help restore the agency’s capital reserve fund, which was severely depleted during the housing crash.

In February of 2012, HUD added the following comments to the Federal Register:

“After careful consideration of the issues raised by the commenters, HUD has decided to make the following changes to … reduce the amount of seller concessions permitted as offsets to actual closing costs to 3 percent or $6,000, whichever is greater…”

This proposal met with much resistance from mortgage lenders, realtor groups, and other housing advocates. They argued it would put homeownership out of reach for many of the very people the FHA program was designed to help (those with limited funds for closing costs).

So here we are at the end of 2014, and nothing has really changed. The proposal was put aside. Sellers are still allowed to help buyers pay some of their closing costs. In 2015, the maximum limit for FHA seller concessions will remain at 6% of the appraised value or sale price, whichever is less.

Many well-intentioned bloggers and publishers mistook the aforementioned proposal for an actual policy change, which it was not. As a result, there are now many articles online that claim there is a 3% / $6,000 cap on contributions. This is misinformation.

HUD officials could still follow through on their original proposal sometime in the future, lowering the cap to 3%. But for now, and for at least the first few months of 2015, the contribution cap will remain at 6% of appraisal or sale price.

Not Always a Viable Strategy

Just because you’re allowed to ask for a seller concession on an FHA loan doesn’t necessarily mean it’s a good idea. In a buyers’ market, where homeowners are eager to snatch up any offer they can get, you could get away with this type of strategy. But in a sellers’ market, where there is limited supply and high demand, it can be risky to ask for a contribution toward closing costs — or any type of seller concession, for that matter.

It begs the question: What type of market are we in right now? It varies from one region to the next. Some local markets are still experiencing inventory surpluses and low demand, which means buyers have more negotiating leverage. Other markets, like most major cities in California, have limited supply and high demand (i.e., a sellers’ market).

Home buyers should research local real estate conditions, and shape their buying strategy and offers with those conditions in mind. This is where an experienced real estate agent can prove helpful. An agent can tell you whether or not it’s a good idea to ask for a seller concession toward closing costs, based on local market conditions, pricing, and other factors.

Recap of key points:

  • Currently, in 2014, the maximum allowable seller concession for an FHA loan is 6% of the sale price or the appraised value, whichever is less. We expect this cap to remain in place for the first part of 2015, and possibly for the entire year.
  • During the course of your research, you might see some mention of a 3% limit or cap on seller-paid closing costs for FHA. That’s because the Department of Housing and Urban Development twice proposed a reduction in the maximum contribution — once in 2010, and again in 2012. These proposals met with fierce resistance and were essentially put on hold.
  • If you refer to HUD Handbook 4155.1, the official “rule book” for borrower eligibility and criteria, you’ll see that they still allow seller concessions of up to 6% going into 2015.
  • These contributed funds can be applied to the buyer’s closing costs, but not the down payment.

Disclaimer: This article explains how sellers can help pay a home buyer’s closing costs with an FHA seller concession. This information was updated and fact-checked on October 27, 2014. The Department of Housing and Urban Development frequently makes changes to their mortgage-insurance program. As a result, there is a possibility that this article may become outdated as the months go on. We encourage you to visit the official HUD website for the latest information regarding 2015 seller contributions, and other aspects of FHA financing.

FHA Loans in 2015: Changes, Requirements, Rate Forecasts and More

It happens every year at this time. Right now, a lot of would-be home buyers are shelving their purchase plans until after the holidays. That means they are looking ahead to 2015, with an eye on mortgage rates, home prices, and lending standards.

To support these “over-the-horizon” buyers, the Home Buying Institute is publishing a series of updates for 2015. This update includes 2015 FHA loan requirements and guidelines, along with a 12-month rate forecast provided by Freddie Mac.

What Is an FHA Loan?

The FHA loan program remains one of the most popular financing options for home buyers, especially first-time buyers. But the rules of the game have changed over the last few years. In short, it has become harder to qualify for these loans, and the government is charging higher mortgage premiums than in the past.

We will get to the 2015 guidelines and requirements in a moment. But first, let’s answer a common question among first-time home buyers:

What is an FHA loan anyway?

FHA mortgage loans are insured by the federal government. The program is managed by the Federal Housing Administration and its parent organization, the Department of Housing and Urban Development (HUD). The Federal Housing Administration insures lenders against losses that may result from borrower default. This government-provided insurance is the primary difference between FHA and conventional or “regular” home loans (learn more).

Down payments are another FHA distinction. Borrowers who use this program can put as little as 3.5% down when buying a house.

These days, many of the banks and lenders that provide home loans in general offer FHA products as well. The program has become much more popular since the housing market crashed, though its popularity has waned a bit over the last two years. These loans are particularly popular among first-time buyers, due to the relatively small down payment mentioned above.

Here’s one thing borrowers should know about FHA loan requirements in 2015: Contrary to popular belief, they are not necessarily “easy” to obtain. That may have been true to some extent in the past. But it’s not anymore. Let’s discuss the reasons why…

FHA Changes: Not an ‘Easy’ Loan Anymore

There is a longstanding notion that FHA loans are easier to obtain, when compared to a “regular” conventional loan. This is due to the government insurance mentioned above.

There is some truth to this notion. Historically, borrowers who could not qualify for conventional financing have been able to use the FHA program as a last resort. The government backing makes lenders a bit more forgiving, when it comes to borrower qualifications and credentials.

But the qualification “gap” has narrowed over the last two or three years. The reason for this is that the Federal Housing Administration’s capital reserve fund (the money they are required to have on hand) took a huge hit during the housing crisis and subsequent recession. In fact, the FHA went into the red for a while, having no reserve funds at all.

In 2013, the usually self-sufficient agency required a taxpayer bailout of $1.7 billion to cover losses resulting from shaky loans made during the housing collapse. That was the first time in the agency’s 79-year history that it required taxpayer funding to stay afloat.

In the wake of those troubles, the Department of Housing and Urban Development made a series of FHA program changes designed to (A) bolster revenues and (B) reduce future losses. Among the changes were new credit-score rules for borrowers, higher insurance premiums, and reduced limits on maximum loan size. In short, the agency is now requiring higher standards for borrowers, and charging more for FHA loans. These rules will apply to borrowers in 2015 as well (see the guidelines section below).

2015 Guidelines and Requirements at a Glance

FHA guidelines and requirements for 2015 will be very similar to what they are now. No major changes have taken place over the last few months, and none have been announced for the months ahead. That doesn’t mean HUD won’t make additional program changes sometime during 2015. They certainly could. It just means we don’t anticipate anything new for the foreseeable future.

Here is an overview of FHA loan requirements and standards for 2015:

  • This program is open to all borrowers who meet the minimum eligibility requirements below. It is not limited to first-time buyers, contrary to popular belief.
  • All FHA borrowers are required to make a down payment of at least 3.5% of the sale price or the appraised value (whichever is less).
  • To qualify for the 3.5% down-payment option mentioned above, borrowers must have a credit score of 580 or higher.
  • Borrowers with a credit score between 500 and 579 must put at least 10% down, if they can get approved at all.
  • There are debt requirements as well, but these are a bit more lax when compared to the credit scores above. Generally speaking, a borrower’s total monthly debt load should account for no more than 43% of his or her monthly income.
  • HUD allows borrowers to have higher debt-to-income ratios if the lender can identify and document “significant compensating factors.” Such factors might include a long history of timely mortgage payments, excellent credit, or significant cash reserves. For a complete list of compensating factors for “high-debt” borrowers, refer to HUD Handbook 4155.1, Chapter 4, Section F.
  • Borrowers with credit scores below 620, and total debt-to-income (DTI) ratios above 43%, may encounter additional scrutiny during the application and approval process. Borrowers in this bracket may have to undergo manual underwriting. The underwriter will be looking for compensating factors to make up for the low-score / high-debt situation.
  • Lenders can impose their own guidelines on top of those promulgated by HUD. This is known as an “overlay.” So it’s possible for a borrower to be turned down due to a low credit score (for instance), even though the score meets HUD’s minimum cutoff. There are essentially two sets of requirements — the lender’s, and the government’s.

Note: This is a brief overview of 2015 FHA standards and guidelines. For more information on this subject, refer to FHAhandbook.com or HUD.gov. Additionally, there are exceptions and allowances to many of the requirements mentioned above. Borrowers should not assume they are unqualified based on one or more of these guidelines. The only way to know for sure is to apply for the program.

Mortgage Rate Forecast for 2015

This is the part where we gaze into our crystal ball to conjure an FHA mortgage rate forecast for 2015. Actually, I’m going to defer to a third party on this one. Here is a chart that shows Freddie Mac’s expectations for 30-year fixed mortgage rates, between now and the end of 2015.

FHA rate forecast for 2015
Freddie Mac outlook for 30-year mortgage rates

Freddie Mac is the government-controlled corporation that buys and sells mortgage-backed securities. They have been running a weekly survey of lending rates since 1971. The chart above shows their economists’ “best guess” for rate changes over the next four quarters. This chart applies to both FHA and conventional (non-government-insured) products. So it could be viewed as a 2015 forecast for FHA loan rates as well.

If this forecast proves accurate, it means that borrowers should expect gradually rising interest rates between now and the end of next year. Not a spike by any means — but a motivator nonetheless. When you consider that home prices are also expected to rise next year in most U.S. cities, it sends a pretty strong signal to buyers. Postponing a purchase could cost you money.

Learn more: We have built a separate website for borrowers who are interested in this financing program. If you would like to learn more about FHA loan requirements and guidelines for 2015, visit FHAhandbook.com and download our e-book. It is available in PDF format at no cost whatsoever. The website also includes a Q&A blog with new articles added every week.

Disclaimer: The 2015 FHA rate forecast above is based on third-party data and estimations. This outlook does not necessarily reflect the views of the publisher. We make no claims or guarantees about future conditions within the mortgage industry or broader economy.

2014 FHA Rule Changes Explained in Free 65-Page Handbook for Borrowers

Summary: Home buyers who are considering an FHA-insured home loan can download our brand-new, consumer-friendly handbook. It explains the program in layman’s terms, and is available in a convenient PDF format at FHAhandbook.com.

Learn how to share the book with your readers

Early in 2014, the publishers of the Home Buying Institute and QualifiedMortgage.org began offering an e-book about FHA loans. The 65-page book was written specifically for home buyers and borrowers, as opposed to mortgage lenders. Among other things, it explains some of the new rules and other changes made to the FHA program in recent years.

The latest version of the book is now available as a free download. Readers can download the handbook in PDF format by visiting the book’s official website: www.FHAhandbook.com.

FHA Loans Popular Among Home Buyers

The Federal Housing Administration, a division of HUD, insures mortgages originated by lenders in the private sector. This insurance protects the lender against default-related losses and makes FHA loans different from “regular” home loans. Among other benefits, the program allows for a down payment as low as 3.5%.

In the wake of the U.S. housing crisis, the FHA’s market share skyrocketed. In 2005, before the housing market collapsed, these government-backed loans accounted for only 5% of the purchase mortgage market, based on dollar volume. In 2012, that number shot up to 27%, a dramatic increase fueled in part by stricter requirements on the conventional side of the market.

FHA market share has declined a bit since then. But it is still one of the most popular financing tools among borrowers in 2014.

This program is especially popular among first-time home buyers with limited funds, due to the low down-payment option. The 3.5% down payment is what attracts most borrowers to this program in the first place, as shown by a 2010 survey conducted by the Home Buying Institute.

Many Changes Over the Last Two Years

There have been many changes to FHA rules and requirements over the last couple of years. These changes were primarily the result of financial losses suffered by the Federal Housing Administration in the wake of the housing crisis.

The end result is that it’s harder, and more expensive, to obtain an FHA-insured home loan today than it was in the past. That’s why it is so important for borrowers to have access to current information about the program.

The Home Buying Institute’s handbook is updated several times a year, as new information becomes available. As a result, it is one of the most current handbooks of its kind and a valuable resource for borrowers. But unlike the official handbooks on the HUD website, it is concise and easy to read. In just 65 pages, this book gives home buyers a solid overview of FHA loans. It explains the pros and cons of the program, minimum qualification guidelines, and all of the major rule changes that took effect in 2014.

The official handbooks published by the Department of Housing and Urban Development are written for lenders, and therefore contain a lot of information home buyers don’t need (such as document filing and coding instructions). The handbook available through FHAhandbook.com was written specifically for home buyers. It is concise, clearly written, and full of current information about the program. The book focuses on qualification criteria for borrowers, application procedures, and other topics relevant to borrowers.

Home Buyers, Mortgage Shoppers Can Download the Book for Free

In May 2014, the Home Buying Institute launched a new website where home buyers and mortgage shoppers can download the book. To download the FHA Loan Handbook in PDF format, visit www.FHAhandbook.com and click the “download” button. No registration is required.

Real estate agents, mortgage brokers, and other housing-related professionals are encouraged to link directly to the aforementioned website. That way, their readers will always have access to the most recent version of the book (as opposed to a static downloaded version that may be outdated). The most recent version is always available at FHAhandbook.com.

In addition to offering the free book, FHAhandbook.com also has a growing library of articles and tutorials for home buyers. New articles are added every week to keep readers informed.

Share the Book With Your Readers

We encourage you to share the FHA e-book with your blog or website readers. The best way to do this is by linking directly to FHAhandbook.com. If you download a static copy and offer it through your website, it will eventually become outdated and less useful to your readers. The book is updated several times a year to keep up with changes to the FHA program. The latest version is always available at FHAhandbook.com. That’s why we encourage you to link directly to the source.

You may link to the website however you wish. Here is some sample code you can use.

Download the 2014 FHA Loan Handbook in PDF format, for free, by visiting:
<a href="http://www.fhahandbook.com" target="_blank">FHAhandbook.com</a>

Disclaimer: The publishers of this website, and the author of this e-book, are not affiliated with the Federal Housing Administration, HUD, or any other government agency. We are independent housing researchers and writers. This handbook is not meant to replace the official FHA guidelines established by HUD. It is meant to complement those guidelines in a consumer-friendly way.

New FHA Program Aims to Extend Mortgage Financing to ‘Underserved’ Borrowers

A new program launched by the  Department of Housing and Urban Development (HUD) is designed to increase access to FHA mortgage financing. The new FHA program was announced this week and will be implemented in a series of steps throughout 2014. The end goal is to extend financing to a broader pool of “underserved” borrowers — that is, responsible borrowers with less-than-perfect credit.

The “Blueprint for Access,” as it is know, emphasizes counseling for home buyers and clearer policy guidelines for lenders. HUD is also developing a new handbook for FHA loans, to make the program easier for both lenders and borrowers to understand. Here are some of the key components of this new program for home buyers.

Purpose of the New FHA Program

The “Blueprint for Access” is a multifaceted mortgage program with one overriding goal. According to HUD, this initiative is designed to “expand access to mortgage credit for underserved borrowers.” In other words, they are trying to make FHA-insured home loans available to more home buyers, particularly those who may not have qualified previously.

As mentioned, the new FHA program focuses on “underserved” borrowers. These are people who have minor credit problems in the past but are otherwise well-qualified to purchase a home and take on a mortgage obligation. And there are millions of people who fall into this category.

Consider the numbers: The average credit score for home loans solid into the secondary mortgage market is 752. But, as HUD officials point out, there are roughly 13 million Americans with scores between 580 and 680. These consumers meet the official credit requirements for the FHA program, but they are often turned down by the mortgage lenders who actually originate these loans. The new FHA program for 2014 is intended to make mortgage credit more available for these so-called “underserved” borrowers.

“Shutting these consumers out of the market hurts American families and undermines our efforts to build more stable communities,” HUD officials stated.

The HAWK Program: Counseling for Home Buyers

Counseling is a key component of the new FHA program for home buyers. HUD officials want to increase the use of approved housing counselors, in order to increase knowledge and awareness among home buyers. This phase of the program is known as Homeowners Armed With Knowledge, or HAWK.

The Department of Housing and Urban Development has actually offered counseling for years. They train and support a nationwide network of housing counselors. These services are available to borrowers for little or no cost, but they are frequently overlooked.

HUD wants to increase the number of consumers who undergo counseling, and with good reason. Mortgage delinquency rates for homeowners who have undergone counseling are 29% lower among first-time buyers, and 15% lower overall.

HUD and FHA officials are launching the HAWK initiative, a four-year pilot program, to increase the use of housing counselors. And they’re offering a pretty strong incentive. Home buyers who undergo an approved counseling session before signing a purchase agreement to buy a home could receive a 50 basis point (0.50%) reduction in their upfront FHA mortgage insurance premium (MIP), as well as a 10 basis point reduction in the annual premium. These reductions could add up to thousands of dollars in savings, over the life of the loan.

Providing Clear Guidelines for Mortgage Lenders

The new FHA program is meant to help home buyers make smarter choices about mortgage financing. But it doesn’t stop there. Blueprint for Access is also designed to provide clearer instructions and guidelines for the lenders who originate these loans.

HUD officials explained that mortgage lenders are often concerned about making underwriting mistakes, and the resulting enforcement that stems from such errors. So, as a protective measure, they tend to increase their lending standards above and beyond the FHA’s minimum standards. This is known as an “overlay.” These overlays make it harder for home buyers to obtain government-backed loans.

According to the fact sheet announcing this new program: “We want to work with lenders to provide clarity and transparency in FHA’s policies to encourage lending to qualified borrowers across the credit spectrum.”

Coming Soon: New FHA Handbook for Home Buyers, Lenders

The Department of Housing and Urban Development is also revising the official FHA handbook. This is a much-needed overhaul that, hopefully, will clarify their policies for lenders as well as home buyers.

The first section of the new handbook was posted for review in October 2013. Throughout 2014, HUD will publish additional sections of the new book, including appraisal guidelines, condominium policies, loan-servicing procedures and more.

The purpose of the new handbook is to establish clear (or clearer) guidelines about the program, so that mortgage lenders can “confidently originate loans for a larger number of FHA-eligible borrowers.” In other words, they want to remove some of the fear of back-end enforcement and financial losses, so that lenders will offer financing to a broader pool of home buyers.

What Does the New Program Mean for Home Buyers?

How will the new FHA program affect home buyers in 2014 and beyond? That’s the million-dollar question. In truth, it’s much too early to say. HUD’s goals for the new program are clear. They want to expand access to mortgage financing among underserved borrowers, such as those with less-than-perfect credit scores. They want to make FHA home loans available to a larger pool of responsible borrowers. That’s the government’s primary objective. But mortgage lender’s play a role here as well — and a big role at that.

The FHA does not lend money to home buyers. They insure the loans made by banks, credit unions, and mortgage companies that operate in the private sector. These lenders can establish their own guidelines for borrowers, using their own criteria. They are the first obstacle along the path to FHA financing, and sometimes the last. HUD’s goal with this new program is to encourage lenders to offer financing to well-qualified borrowers, even if they have a few credit issues in their past. So if the program works as intended, it could put previously out-of-luck borrowers on the path to a government-insured home loan.

Here is a timeline issued by HUD earlier this week, which outlines the various stages and implementation dates.

FHA program timeline

We expect additional details about the new FHA program for home buyers throughout 2014, and will update this story accordingly.

Are Bad Credit FHA Loans Making a Comeback in 2014?

Mortgage lending standards have been high for the last few years, an over-correction from the housing crisis. But we are now seeing some easing in this area, for both FHA and conventional financing. In fact, some lenders are now offering FHA loans to borrowers with credit scores as low as 600, and sometimes even lower.

Are we witnessing the return of the bad credit FHA loan? It’s starting to look that way. Here are the latest trends and developments from the world of government-backed mortgage financing.

Long story short: In a hurry? Here’s the gist of this story in 100 words or less. Mortgage lenders use credit scores to determine how risky a particular borrower is, based on his or her previous borrowing patterns. This is true for both conventional and FHA home loans. Credit standards rose significantly in the wake of the housing crisis, and understandably so. Now they appear to be easing slightly. Some lenders, including Wells Fargo, are now offering FHA loans to otherwise stable borrowers with bad credit scores as low as 600.

From Easy to Strict, and Now Somewhere in the Middle

Traditionally, the FHA loan program has been viewed as a sort of last resort for people with bad credit scores. Borrowers who were denied conventional financing could often turn around and qualify for an FHA loan, even with shaky credit and other issues.

But then came the housing crisis of the late 2000s. In the wake of that crisis, mortgage lenders increased their standards for all borrowers across the board. Suddenly, they wanted to see lower debt ratios, bigger down payments, and higher credit scores — for FHA and conventional financing. So the lending industry went from being overly lax to overly strict, in just a couple of years.

So where are we today? Somewhere in the middle, actually. Credit standards have eased a bit since the post-crisis days. And some lenders are now offering what amounts to a bad credit FHA loan. That is, a government-insured loan for people who fall into the “subprime” range with a score below 620.

FHA Allows Bad Credit Scores, But Some Lenders Don’t

What is considered “bad” credit in 2014? That depends on who you ask. There are no standard definitions of good, bad or excellent scores. According to Equifax, one of the three major credit-reporting companies in the U.S., anything below 620 on the standard credit-scoring scale is considered to be subprime. That means bad.

The FHA program is managed by the Department of Housing and Urban Development (HUD). Which begs the question: What does HUD say about bad credit scores and FHA loans? Not much. In fact, the phrase “bad credit” doesn’t appear anywhere within the official HUD handbooks. But they do mention the numbers 500 and 580 a lot.

Here are the current credit-score guidelines for this program, according to HUD Mortgagee Letter 10-29:

  • Borrowers with a minimum “decision credit score” of 580 or higher are eligible for 96.5% financing.
  • Borrowers with a minimum score between 500 and 579 are eligible for 90% financing (for a 10% down payment).
  • Borrowers with minimum scores below 500 are not eligible for the FHA loan program.

But these are the government’s standards. The FHA does not actually make loans to consumers. They only insure the loans generated by lenders in the private sector. So borrowers must meet two sets of credit criteria. They must meet the official guidelines established by HUD, as well as those imposed by the mortgage lender. So a person with bad credit might meet the minimum FHA loan standards, while falling short of the lender’s criteria. This is known as an “overlay” in lending parlance.

Related: Amerisave removes overlays for borrowers

So what are lenders looking for in 2014, in terms of credit scores? Based on our own (Home Buying Institute’s) mortgage lender surveys and inquiries, it seems that most of them are setting the bar at 620 or higher for FHA approval. Some will go down to 600 for otherwise well-qualified borrowers, while others set the bar even higher at 640.

It varies. But the overall trend is one of easing. Some borrowers with bad credit are qualifying for FHA loans in 2014, whereas they were unable to do so a few years ago.

Wells Fargo Will Now Allow Scores as Low as 600

In February 2014, Wells Fargo (the largest mortgage lender in the U.S. by volume) announced it was lowering its minimum credit score for FHA loans from 640 to 600. They will now consider borrowers with scores as low as 600, compared to the previous minimum of 640.

This is a major development for three reasons:

  1. As mentioned, Wells Fargo is the nation’s largest mortgage lender.
  2. FHA is one of the most popular loan programs in the U.S., particularly among first-time buyers.
  3. A 40-point reduction in the minimum score will open up financing to many previously unqualified consumers.

They are essentially offering bad credit FHA loans, since anything below 620 is typically labeled subprime. According to Tom Goyda, the company’s spokesperson:

“The goal is to increase access to credit, especially for low- and moderate-income borrowers and first-time home buyers. These are fully underwritten, fully documented loans, consistent with FHA program guidelines and responsible lending principles.”

How Much of an FHA Loan Can I Borrow in 2014?

Reader question: “There is no way I can come up with ten or twenty percent for a down payment on a house, so I am leaning toward the FHA program. My question is, how much FHA loan can I borrow in 2014? Is it based on my income, the price of the house, or what? How do lenders decide how much I can borrow?”

There are three limiting factors you need to know about. They are the loan-to-value ratio, the HUD-authorized loan limit for your county, and the debt-to-income ratio. Put these three things together, and you’ll have a pretty good idea how much of an FHA loan you can borrow in 2014. Let’s start with some definitions of these three items.

  • Loan-to-Value (LTV): When using the FHA program, home buyers are limited to borrowing 96.5% of the sale price or appraised value, whichever is less. This means you must come up with a down payment of at least 3.5%, the remaining amount. According to HUD Handbook 4155.1, “For purchase transactions, the maximum LTV is 96.5% (the reciprocal of the 3.5% required investment).”
  • Loan Limits: The Department of Housing and Urban Development (HUD) establishes loan limits for each county in the United States. You can borrow as much as your local FHA loan limit, but no more than that. In most parts of the country, the limit is currently set at $625,500. Borrowers can exceed this amount in a handful of areas with higher building costs, such as Alaska, Hawaii and Guam.
  • Debt-to-Income: When you apply for an FHA loan, the lender will measure your debt-to-income ratio, or DTI. This is simply a numerical comparison between the amount of money you earn each month, and the amount you pay toward your various debts. Current HUD guidelines state that your total debts (including the estimated monthly mortgage payments) should “not exceed 43% of the gross effective income.” But there are exceptions to this rule.

So there is a maximum loan amount for your county. The amount you can actually borrow, with an FHA loan, will depend on your current debt-to-income situation. Last but not least, there is a minimum investment on your part, in the form of a down payment. Borrowers must put down at least 3.5%, which may come in the form of a gift.

How much of an FHA loan you can borrow will depend on these three factors, above all else.

You Borrow from a Lender, Not the FHA

Just to be clear, you are not actually borrowing money from the Federal Housing Administration, or FHA. That agency does not act as a bank or lender. They merely insure the home loans made by “regular” lenders in the private sector.

For instance, you approach ABC Mortgage Company to apply for an FHA loan. They approve you and give you a certain amount toward the purchase or your home. The Federal Housing Administration (part of HUD) insures the lender for some or all of the amount they’ve loaned to you. If you default on your loan down the road, the lender will be reimbursed for losses by the FHA’s insurance fund.

It’s a common misconception that home buyers can borrow directly from the FHA (i.e., the federal government). But that is not the case.

Borrowing Rules in 2014: Multiply LTV by Sales Price or Appraised Value

The aforementioned HUD handbook explains how much you can borrow with a government-insured home loan in 2014, based on the LTV. HUD guidelines state that “the maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s sales price … or appraised value.”

How much is the house worth, based on the appraisal? How much have you agreed to pay? Take the lesser of those two numbers and multiply it by 96.5% (.965), and you’ve determined how much you can borrow based on the LTV amount.

For example, if the home I want to buy appraises for $300,000, I can multiply that number by .965 to determine the maximum amount FHA is willing to insure. In this case, it comes out to $289,500. That means I must make a minimum investment (down payment) for the difference of $10,500. I am putting down 3.5% of the appraised value.

Of course, you have to start with the county-specific loan limits mentioned earlier. If you’re set on using an FHA loan to buy a house, there’s no reason to shop outside of the maximum approved price range for your area. You can find your local limit on the HUD website.

Disclaimer: This article answers the question, How much FHA loan can I borrow in 2014? The information above is based on current guidelines and criteria established by the Department of Housing and Urban Development. Due to the ongoing evolution of the FHA program, portions of this article may become less accurate over time. For the most current and accurate information about this program, refer to the official HUD website or speak to a HUD-approved housing counselor or mortgage lender.