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National Mortgage Professional
Jan 03, 2008

Finding success with FHA loansJeff Mifsudcapacity, cash, credit, collateral Think like an underwriter! During the portion of my career that I spent as a Federal Housing Administration (FHA) underwriter, I had the opportunity to experience the numerous and consistent errors frequently made by loan officers and loan processors when packaging their loans. Nearly 50 percent of the loans I had to deny were because the loans were not packaged properly. A thorough understanding of the core FHA guidelines will allow you to think more like an underwriter and package your loans accordingly. The question you must always ask yourself, from the initial acceptance of the application to the packaging of the loan, is: "If this doesn't meet FHA guidelines, can I document that there is good reason for making an exception?" It's "get back to the basics" time in our industry. At this critical juncture, I will take you through the four Cs of credit and point out some of the common errors I see loan officers make. If you don't know what the four Cs are, then you will benefit greatly from this information. The four Cs of credit are the fundamental principles of underwriting a loan package. The more awareness you have of each of these areas, the better loan officer you will become. The four Cs are as follows: •Capacity: One's financial ability to make the payment; •Cash: The amount of funds available to close the loan; •Credit: How they've paid their obligations in the past; and •Collateral: The condition of the property securing the loan. Over the next several articles, we will take a detailed look at each of these categories and what to look for. This month's article will focus on a borrower's capacity to pay the loan. Capacity The underwriter's key concern with respect to capacity is whether or not the borrower can afford the payment. The obvious question you have to ask yourself is: "Can my client afford the payment?" Equally important, but often overlooked, is the question: "Will this loan set them up for long-term success in their loan and their home?" This is a question that too many loan officers failed to ask these past seven to 10 years. As a mortgage professional, you have a social responsibility to put people in loans that are to their benefit. Our lack of income should never be the motivating factor as to whether someone is put into a particular loan! The determining factor must always be whether the loan will benefit the borrower. Trust me, I know first-hand how tough things can be at times, and I've had my ups and downs like everyone else. It's not always easy, but you must make an ethical decision to do what is right for the client—always. If I have a circumstance where the borrower absolutely needs a sub-prime loan, I will do it only on the condition that I have an achievable exit strategy by which to get them out of that loan in the future. The following are some answers to common questions concerning capacity: Question: What is the minimum amount of time a borrower has to have had a job to qualify for an FHA loan? Answer: According to FHA guides, there is "no minimum length of time a borrower must have held a position of employment to be eligible." (4155.1, Ch. 2-6). However, out there in the world of loan originations, you will commonly hear that the minimum amount of time on the job is six months. Just be aware that this may be a lender-specific rule. If you feel you have a good loan and the lender refuses it based on length of employment, find another lender (if you have the ability to broker loans). The FHA leaves this guide open in order to allow the underwriter to determine the stability of the income, and to make his decision based on the information presented to him. For example: If a borrower just graduated from high school, has been working for three months and has no other credit, this would be considered unstable income and the loan would be denied. However, if you have a borrower who has just graduated from a two-year program at a trade school and has been on the job in that field for three months, this is considered stable income. In the latter case, you can document the trade school education with a diploma and include this information on the 1003 form (in the Employment History section). In this case, their education is considered as part of their work history. Q: What are the FHA guidelines regarding self-employed borrowers? A: There are three main points to consider when doing a loan for a self-employed borrower (4155.1, Ch. 2-9): 1. If the borrower has ownership of 25 percent or more interest in a business, they are considered to be self-employed. 2. The minimum length of self-employment to be considered stable income is two years. 3. A borrower who has been self-employed between one and two years must have at least two years of previous successful employment (or a combination of one year of employment and formal education or training) in his line of work. If you have a good relationship with some accountants, they should know about this one-year self-employment rule so they can refer you their clients in this circumstance. Q: What are the guidelines for gaps in employment? A: FHA states that any gaps of one month or more must be explained (4155.1, Ch. 2-6). An underwriter will use this explanation to determine the stability of the income. The question you have to ask in this case is, "What was the reason for the gap, and is their income stable?" If the borrower reveals information to you which indicates job instability, then discuss with your client the risk of taking the loan, given the uncertainty of their employment. A real estate agent recently referred me a husband and wife looking to purchase their first home. The wife was very excited to buy a particular home, and she made the initial contact. Based on her answers to my pre-qualification questions, it looked like a good loan in the making. However, once I had the opportunity to speak with the husband, I got a different picture. Technically, he qualified with his income. He had only been working on the current job for a few months, and was unhappy there. He was trying to get re-hired by a previous employer and was unsure how things were going to work out long-term with the current job. Although it was a fairly new job, and because he was still in the same line of work, the loan would have gone through fine. But due to his uncertainty with regard to future employment, I recommended he wait until he had more confidence in his employment. It was clear in speaking with him that he was very nervous about ending up without a job, and in foreclosure. I'm taking the time to tell you this story because this type of borrower fear is real and must be taken into account. The pain that financial ruin can cause—and often the marriages that are destroyed as a result—are real. A single commission earned on your part is not worth the pain that people experience when they are unable to find financial success in their new home. FHA guidelines are very forgiving in many cases, but we must always do what's best for our clients. Study the guides, become proficient in these loans and brand yourself as an FHA originator, and you will see that great rewards can come from having an FHA niche. Go FHA! Jeff Mifsud founded Mortgage Seminars LLC in 2004, has been an FHA originator for 13 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] For upcoming FHA Webinars, visit www.mseminars.com.
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