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May 11, 2009

The FHA revivalJohn P. Finnessystreamline refinance, purchase money, HUD, bankruptcy, judgments, collections If you do not have the Federal Housing Administration (FHA) as a program to offer your clients, you need to get it. In the 1990s, this powerful tool enabled homeownership opportunities for many who would have otherwise been shut out of the market. For a period of 15 months in the late 1990s, I received 1,046 calls for purchase money. One-hundred percent of them were FHA loans. For a period of five years, that is all I did--no Fannie Mae products and no refinances. I was an FHA purchase lender. I have personally looked forward to this day for many years. The focus of this column is going to be the opportunities that lie in the loopholes of FHA--the little unknown secrets that most originators are not even aware exist. First, though, you need to go to and type in "4155.1" (just those numbers, which will open up the Pandora's Box of government lending for you). This is the underwriting manual of FHA. It is something you must know. Don't be intimidated. It is very easy to read and understand. Let's cover a few areas that you can benefit from immediately. FHA streamline refinance I have known many lenders who made their living refinancing borrowers who had higher-rate FHA loans. If, based on today's market, your borrower has a higher-than-normal FHA rate, did you know you could refinance him without checking his credit? How about this--no credit check, no appraisal, no pay stubs, nothing. All you need to do is verify he paid his mortgage on time for the previous 12 months and you can improve his current situation by $20 per month. This is an awesome program. Here is the best part. Unlike other FHA programs, if you are approved to do FHA in one state, you can originate FHA streamline refinances in any state in the country. There are other forms of refinances, but the streamline is my favorite. It is quick and simple, and when you figure out how to price them properly, you can not only benefit the borrower, but also make a nice profit for the limited work that is needed. Purchase money Recently, there was a huge battle to eliminate the non-profit downpayment assistance program (DPA). The U.S. Department of Housing and Urban Development (HUD) has temporarily been defeated in this effort. However, as an industry, we only have a few months to resolve this issue, before HUD, in all its wisdom (or lack thereof), will attempt once again to eliminate this powerful tool. Let me explain further. FHA requires that a borrower have three percent of the purchase price in the game (2.25 percent for the downpayment and the rest toward closing). Here is where the problem lies. In most high-cost areas, many borrowers who would use FHA do not have three percent of $300,000. Currently, the maximum loan amount allowed by FHA is $362,790. Check your area for its current limits. The DPAs allowed the borrower to receive a grant to be used for the purpose of downpayment or closing costs. If you have never used one before, this is a seller-assisted program. You can learn more by searching non-profit downpayment programs, or visit my favorite non-profit Web site, They are quick and do a wonderful job facilitating the grant. Let's finish up and chat a little bit about what to do with someone who has experienced past credit issues. FHA is wonderful in allowing borrowers who deserve a second chance the opportunity at homeownership. The key word is "deserve." This is not a deadbeat dumping ground, but many lenders are open to working with your borrower and his past issues. If you take time to read the 4155.1, you will see there is an entire section on credit. Let me highlight a few things for you. Bankruptcy If your borrower had an extenuating circumstance he could not control and had to file a Chapter 7 bankruptcy, did you know he is eligible for a fixed-rate home loan as early as 12 months after the discharge? Wait until you read about Chapter 13! Judgments It says in Section 1, 2:3c, all court-ordered judgments must be paid off. Underwriters love to hang you on that. What many ignore is the very next sentence. "An exception may be made if the borrower has agreed with the creditor to make regular and timely payments on the judgment and documentation is provided that the payments have been made in accordance with the agreement." Ask you lender its policy regarding judgments. Collections FHA does not require collections to be paid off. However, many lenders will want them paid. Again, ask your lender its position. In the world of FHA, you will find lenders and underwriters fall all over the spectrum. You need to know who your "go-to" lenders are. Can I make a suggestion? When you do find a lender who will manually underwrite your loan--one who will make deals happen because they make sense--reward that lender with your "A-paper" FHA. Give the lender your streamlines that have proven track records. Heck, they are stepping up for you when you need them. Ask them about pricing improvement for excellent credit. Believe me, they will work with you. They want those loans. FHA is an incredible tool, if used correctly. So, many of your borrowers who had to be put in sub-prime loans now have a true opportunity through this proven product. The FHA movement is upon us. The train is moving. Are you on it? John P. Finnessy is a regional vice president of Great Oak Lending Partners in Baltimore, Md. He may be reached at (443) 889-2828.
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