It’s all about FHAJeff MifsudFHA, FHA loans, credit score, FICO, HUD, Mortgage Seminars LLC,
At long last, the sub-prime market has shifted back to a more
traditional underwriting model. As a result, many loan originators
have suffered a dramatic loss in income. In order to restoreand
even dramatically increaseincome, savvy loan originators are
turning to Federal Housing Administration (FHA) loans to fill the
gap.
As most loan originators know, FHA loans have the highest yield
spread premiums in the industry. Better yet, its a good loan for
your client. Unfortunately, to the loan originators disadvantage
and clients disservice, there is rampant ignorance within the
industry about FHA loans. It is my hope that this article will help
to dispel many FHA myths, and increase your knowledge about FHA
guidelinesgiving you the confidence to make them a significant part
in your product portfolio. This, of course, will result in
significant increase in loan originator income. And what could be
better than being a key player in contributing to the stability of
our nations housing market? This is one of the most compelling
assets of the FHA loan: providing a stable loan to borrowers who
would likely risk foreclosure if put into an adjustable-rate
mortgage (ARM). According the National Association of Realtors,
nearly 40 percent of all home purchasers are first-time homebuyers.
With an average FHA commission of $5,000, its time to make FHA an
important part of your product offering.
FHA is a very powerful loan product if you learn how to use it.
I have seen throughout the years what a positive impact it can have
on peoples lives by helping them achieve homeownership when no
other loan product was available to them.
Q: What is the minimum score required for FHA
loans?
A: It might surprise you to learn that there is no minimum credit
score requirement (MSR). This is one of those misconceptions I was
referring to. Where does this myth originate? Simply this: Many
wholesale lenders impose their own MSR on FHA loans (580 being the
most common). As a loan originator, you need to be aware that a
great percentage of FHA buyers get denied financing because their
loan originators lender imposes this MSR. As a result, clients
either continue renting or are prevented from refinancing out of
their current 80/20 time bomb loan. To be a successful FHA
originator, you must deal with a lender that underwrites according
to traditional FHA guidelines.
Since FHA loans are story loans, its critical to have a good
working relationship with your underwriters. I work primarily with
local boutique lenders with whom I can develop a relationship. An
added bonus is that I support local business. A common credit
profile of an FHA borrower is the following: scores in the range of
525 to 550 and several open collections older than two years
totaling $1,500. Also, they have paid rent, utilities and cell
phone bills on time for the past two years. With this profile, a
loan originator with no knowledge of FHA will deny the borrower a
loan. The borrower is not properly serviced, and the loan
originator misses out on the great FHA revenue.
Q: Isnt the income limited on FHA loans?
A: There are no income limits on FHA loans. Because of this, I
encourage my students to target their marketing to borrowers with
higher income limits in order to increase their average loan
amount. This, of course, increases the income dramatically. You
work just as hard whether its a $200,000 loan or a $100,000 loan,
and the income difference between the two can be as much as $3,500
(when making 3.5 percent on the loan).
Q: Doesnt the borrower have to pay off their collections
to get an FHA loan?
A: FHA guidelines state: As a rule, collections do not have to be
paid.(HUD 4155.1, Ch. 2-3). Many wholesale lenders make their own
rule that collections do have to be paid. Because some of the
biggest lenders have made paying off collections a condition of
loan approval, many loan originators now think it is an FHA
requirement. Remember that an underwriters role is to determine
credit worthiness, meaning if a borrower has no late payments or
collections in the last two years, but still has several open minor
collections that are older than two years old, an underwriter has
better reason to not require them to be paid off. On the other
hand, if a borrower has many late payments over the last two years
and several open collections, it makes sense that the underwriter
will require some or all to be paid. The FHA leaves it to the
underwriter to make the decision as to whether or not the borrowers
collections should be paid.
Q: How long does someone have to be out of a bankruptcy
to qualify for an FHA loan?
A: FHA guidelines state that two years must have elapsed since the
discharge of the bankruptcy (HUD 4155.1, Ch. 2-3). However, between
one and two years may be acceptable if the bankruptcy was due to
extenuating circumstances that arent likely to recur, and the
borrower has re-established good credit. When analyzing the
borrowers credit, you should be able to get an idea whether the
bankruptcy was due to extenuating events or an inability to
properly manage funds. If no extenuating circumstance exists, then
the borrower will, in most circumstances, have to wait the full two
years and have re-established good credit. Late payments after a
bankruptcy usually will cause a rejection of the loan. Though this
is not stated in the guidelines, this is one of many unwritten
rules that exist in the FHA space. When attempting to get an
exception to the two-year rule, be prepared to provide a good
letter of explanation from the borrower along with supporting
documentation.
Q: Dont FHA appraisals come back with a long list of
needed repairs on the prospective home?
A: As of Jan. 1, 2006, the FHA permits an as-is appraisal (HUD ML
2006-04). This was an important move by the FHA as they continue on
their quest to gain back market share. No minor repairs are
required, and the appraisal technique currently reflects that of a
standard conventional appraisal. The focus is on the three Ss:
Safety, security and soundness. In other words, is the property
safe? Is the property sufficient security for the loan? Is the
structure sound? The one thing the FHA is still strict about is
chipping or peeling paint on homes built prior to 1978. Pest
inspections are also not an FHA requirement and are left to the
lender to determine its necessity. Generally, if the home is in a
region known to have infestation, an inspection will be needed. If
not, generally an inspection will not be needed.
Q: Do 401(k) loan payments have to be included in the
debt-to-income ratio?
A: FHA guidelines do not require the 401(k) loan payments to be
included in the ratios (HUD 4155.1, Ch. 2-10). This is a
significant rule because it can be the difference between approval
and denial, as well as significantly impact the purchase price.
Q: Can I refinance a borrower from a non-FHA loan into a
FHA loan?
A: Yes! There is a misconception that FHA loans are only for
purchases. In this market, there is a lot of money being made by
originators whose marketing efforts are targeting people in ARMs,
refinancing them into FHA loans and earning them a lot of referrals
in the process!
Picture this scenario: A homeowner has a $175,000 time bomb loan
whose payment has adjusted. Their payment is $1,666, and they can
barely afford it. They have a perfect credit history for the past
two years, but still have low scores and need to get out of the
ARM. You come along and refinance them into an FHA 95 percent
cash-out refinance, get them $14,000 cash out and save them $377 a
month on their monthly payment! To top it off, you just grossed
$7,500. It doesnt get much better than that. You saved a family
from potential foreclosure, got them cash, dropped their payment
drastically, made a lot of money and a new referral source.
According the Mortgage Bankers Association, more than $1 trillion
in ARMs will adjust in 2007! A great percentage of these borrowers
will have either lower scores or lack equity, and will need FHA
financing. They need you to help them refinance. Imagine if you
could do just one FHA loan a month. Does an extra few thousand
dollars in monthly income sound good to you?
Dear readers! Having an expertise in FHA loans creates a great
niche for yourself. It gives you a great way to develop
relationships with real estate agents. Agents are fed up with
sub-prime loans, and the FHA message is one they are listening to.
They want the best for their homebuyers with credit challenges
and/or little money to put down. The product has been around since
1934 and is shielded from the whims of Wall Street. If youre
looking for a loan specialty, if you like making a positive
difference in your clients lives and the idea of earning more per
transaction appeals to you, then youve found your loan. Get the FHA
training you need, and get to work writing those loans!
Jeff Mifsud founded Mortgage Seminars LLC in 2004,
has been an FHA originator for 12 years, is a faculty member of LoanToolBox.com and is a
former FHA. He may be reached at (877) 342-9100 or e-mail
[email protected].
