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.
