FHA: Questions and answersJeff Mifsudyield-spread premiums, eligibility, guidelines, downpayment assistance The time to learn how to do Federal Housing Administration (FHA) loans is now! With all of the changes occurring in our industry, it's critical that you take the time to develop a plan to make you a successful originator. Before we get to the Q and A, let me tell you this: I teach loan officers to stop listening to the news so much. Why? Because the news focuses on the negative. If you constantly feed your brain negative information, your views and actions will reflect this. What you won't hear on the news is the fact that right now, there is a tremendous opportunity for you in our industry! The opportunity I refer to, as you may have guessed by now, is doing FHA loans. Not only do FHA loans have great yield-spread premiums, but they offer a good loan to your customers--more income for you, greater opportunity and stability for your customers, and, in turn, the economy. More often than not, it's a winning proposition. Q: How can I develop FHA business? A: The most profitable source of FHA business continues to be from real estate agents. I know many of you come from shops whose managers hold negative attitudes toward working with agents. If you hold this same attitude, it's time to change it. I've had great relationships with agents throughout my entire career because of the way I was trained to handle purchase transactions. Analyze your loan process and figure out ways you can perfect the process. At LoanToolbox.com, Tim Braheem outlines 71 actions that occur throughout the loan process and identifies who is to perform each action. Tim calls it the "Perfect Loan Process." You need to develop your perfect loan process based on your team and your client's needs. View agents as you would a client, and service them like one! Think of agents as partners in helping people attain homeownership. Develop a team synergy with them, and become a part of one another's success! Q: Does a borrower have to be a resident of the United States to get an FHA loan? A: No. The guidelines state the following: "Citizenship of the United States is not required for eligibility. For those borrowers with lawful permanent resident alien status, FHA will insure the mortgage under the same terms and conditions as U.S. citizens" (See FHA Guidelines, 4155.1, Ch. 2-2 B). FHA will also insure mortgages for those with non-permanent resident alien status, provided: (1) the property will be the borrower's principal residence; (2) the borrower has a valid Social Security number; and (3) the borrower is eligible to work in the U.S. Non-U.S. citizens with no lawful residency in the U.S. are not eligible for FHA-insured mortgages. Depending on what part of the country you work in, this guideline is an important one. It can give you an opportunity to create a profitable referral base within an immigrant population. I have worked with managers in the past that have specifically hired bi-lingual loan officers to capitalize on this growing market and have found great success. Q: Can part-time income be used for qualifying the borrower? A: Yes. The guidelines state that part-time/second job income, including employment in seasonal work, may be used in qualifying. In addition, "seasonal employment (e.g., umpiring baseball games in summer, working at a department store during the holiday shopping season) is considered uninterrupted and may be used in qualifying." For further information and details, see FHA Guidelines, 4155.1, Ch. 2-7 A. When interviewing your customer, be sure to ask if he has any additional part-time employment income. This income is often the key in getting a loan approved, if the income from the primary job is insufficient. Q: If my customer is going to get a raise or start a new job within 60 days, can we use this (higher) income to qualify? A: Yes. While "projected or hypothetical income is not acceptable for qualifying purposes ... exceptions are permitted to this rule for income from cost-of-living adjustments, performance raises, bonuses, etc., which are both verified by the employer in writing and scheduled to begin within 60 days of loan closing." In addition, "If a borrower is about to start a new job and has a guaranteed, non-revocable contract for employment that will begin within 60 days of loan closing, the income is acceptable for qualifying purposes." Please refer to FHA guideline 4155.1, Ch. 2-7 R for further details and qualifications. Please note that if a loan is denied because of high ratios, take a look at the verification of employment in the "Date of Next Pay Increase" section. Often people will be getting a raise within the next 60 days, and this income can be the difference between approval and denial. Q: How is an FHA loan structured when using a downpayment assistance (DPA) gift? A: First, it is important to know that the borrower must contribute three percent of their personal funds to any FHA transaction. What is important to know is that this money can come from a gift from family, or from a DPA gift. Note that the DPA must have 501(c)(3) status. In essence, it works just like a seller contribution, only with an administration fee added on by the DPA (which cannot be paid by the borrower). For example, let's say a seller is selling a home for $100,000 and is hoping to get about $95,000. The buyer needs $5,000 from the seller to close, and is willing to pay $100,000. The purchase agreement is then written up as a $100,000 sales price with an addendum which states: "Seller to contribute $5,000 plus a $300 administration fee to (name of DPA), and buyer to receive a gift from (name of DPA) in the amount of $5,000." With the current market, many buyers are capitalizing on some great buys and are able to easily negotiate seller assistance. The FHA market will continue to be a very important product for you and those of your customers who have little money or weak credit profiles. If you take the time to learn the guidelines and become proficient in doing these loans, you will always have a marketing edge over your competition. 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 underwriter. He may be reached at (877) 342-9100 or e-mail [email protected].