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
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
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
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].