FHA and Hope For Homeowners - Part I

Last week I attended FHA's Hope for Homeowners training in Atlanta. I will reserve comment (if I can) for now and give you the cliff notes version that you may find useful. First off, do you remember FHA Secure? Well, it had a fixed beginning and end. H4H simply picks up where FHA Secure trails away.

FHA's desire to continue to help struggling homeowners is admirable but I believe they need to return to the drawing board on this one, call in a committee of salt-of-the-earth loan officers who talk to borrowers everyday and get the real deal on what's needed to slow down this foreclosure boom.

Here's how the program was laid out: "Under the program, borrowers having difficulties paying their mortgages will be eligible to refinance into FHA-insured mortgages they can afford. (JG-Gotta love it so far).

...cont'd: For borrowers who refinance under HOPE for Homeowners, lenders will be required to "write down" the size of the mortgage to a maximum of 90 percent of the home's new appraised value. (JG - Well, you're probably asking --which lender is going to agree to do this? Also, what about the numerous borrowers who have 1st and 2nd liens--both lien holders would have to agree to this). Here's their response: In many instances, lenders will determine that such a reduction in principal will allow them to avoid a costly foreclosure, while helping borrowers stay in their home.

I admit I like this as an option to lenders. Certainly, with the high cost of foreclosing on a property, lenders need more options. OK, so what criteria must borrowers meet in order to be eligible for this program?

• Their mortgage must have originated on or before January 1, 2008
• They cannot afford their current loan;
• They must have made a minimum of six full payments on their existing first mortgage and did not intentionally miss mortgage payments*;
• They do not own a second home;
• Their mortgage debt-to-income must be at least 31 percent;
• They did not knowingly or willfully provide false information to obtain the existing mortgage, and they have not been convicted of fraud in the last 10 years;
• They must follow FHA's long-standing and strict policy of fully documented income and employment.

OK class, I have a problem with * for obvious reasons. Most lenders today do not want to help a homeowner unless they show evidence they are behind on their mortgage, thus confirming there is a hardship situation in play. This is reality. Also, the last bullet--if you go deeper--it was explained during the training that the borrower could not have come from a "Stated" loan program in which they falsified income. They are going back to the old loan application and comparing this to the 1040s that were submitted to the IRS. Well, let's keep it real. Stated programs did not represent the exact income of an IRS tax returns. At the time, lenders created this program so that self-employed borrowers could still buy homes. The income used on the application had to be deemed reasonable for the profession. There was a "reasonable test" administered and a salary.com system used for this. So, with this criteria, automatically you will eliminate quite a few folks.

In the next post we will discuss 2 additional criteria which are huge in my mind and thus the reason that I think FHA needs to revisit this program. We will also discuss the program timeline and the steps that a homeowner should take to participate in H4H.

Until then....

Less Than 2 Years After a Bankruptcy for FHA

Never let anyone tell you, "No," when you believe in your heart there's another way. And so the story goes for one of my borrowers that closed last month (smoothly, I should add).

He had been declined by multiple lenders due to a bankruptcy that had been discharged less than two years ago. Luckily, he did not accept that. He went online and found my blog and read about a borrower that I had closed with his same profile. Sure enough, we were able to use the FHA guideline that clearly speaks to accepting an applicant less than 2 years out of BK provided they have extentuating circumstances that are beyond their control that can be documented. Also, you must be able to show current stability. With proper documentation and a clean current profile, this can be easy. And so was the case with my Borrower X last month.

There's a life lesson here we can't ignore -- Choose a positive outcome for yourself and never accept the words: It's impossible.

FHA Guideline Change You Need to Know

OK, hold on to your life jackets. The Federal Housing Administration (FHA) has made an important change in their guidelines that affects us all. Feel free to read Mortgagee Letter 2008-25 but here's the gist of it.

HUD is trying to avoid a practice known as "Buy and Bail," where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage. Not good. So here's the deal going forward: If a borrower wants to hold on to their current property (and provide the lender with a lease agreement) and purchase another, HUD is allowing this under two conditions:

1. Relocation

Homebuyer is relocating with a new employer, or transferred by current employer to an area not within resonable commuting distance

2. Sufficient Equity in Vacating Property

Have a minimum of 25% equity in the existing property (departing residence), as evidenced by a current appraisal (no older than six months old) or by comparing the unpaid principal balance to the original sales price of the property

Yes, this is utterly unfair to move-up buyers who have legitimate leases in place, but here's a ray of light in darkness: this change is only temporary "while FHA analyzes this situation to determine whether permanent measures may need to be taken." And remember, your borrower can always go Conventional if they meet the guidelines.

Have a productive week.

Juanita

FHA and Down Payment Assistance

I want to make you aware of potential changes in FHA that may affect us all. For years borrowers have used Down Payment Assistance (ex.Nehemiah) as a way of satisfying FHA's requirement of having 3% in the transaction. However, thanks to the House and Senate, we will no longer be able to do this. The highlights of the bill are below.


· Seller participation in down payment assistance loans is being terminated. Must have obtained credit approval prior to October 1st.

· New Risk-based pricing moratorium is effective October 1 (risk based MI that rolled out 7/14/08 will be suspended for 1 year)

· Proposed Downpayment requirement of 3.0%-3.5% (gifts from family, bond programs allowed)

· House is expected to begin debate and possibly vote on Wednesday (July 23rd) on the final version of the omnibus housing bill

· The Senate could vote as early as Friday on the final bill with the President signing shortly thereafter (possibly early next week).

Stay tuned...

FHA and the Self-employed - Part III

Self-employed borrowers come in different shades and sizes. If you are applying for a mortgage loan for your personal use, you need a better understanding of what the lender is concerned about and why. This post will guide you.

The legal structure of a business determines the way income or loss is reported to the IRS, the taxes that are paid, the ability of the business to accumulate capital, and the extent of the owner's liability. There are five principal business structures: Sole Proprietorships, Partnerships, Limited Liability Corporations, S Corporations, and Corporations.

Knowledge of the structure of a self-employed borrower's business will assist the lender in evaluating the stability of the business and the degree of the borrower's involvement. In analyzing a self-employed borrower's personal income, the lender should focus on earnings trends and the actual sources of the income, not just on the total amount of the income. The lender must confirm the stability and likelihood of continuance for each.

Federal income tax returns (both individual returns and business returns) for the past two years, with all applicable schedules attached. Instead of obtaining a copy of a self-employed borrower's applicable tax returns directly from the borrower, the lender may use IRS-issued transcripts of the borrower's individual and business federal income tax returns that were filed with the IRS for the most recent two years, provided the information is complete and legible and the transcripts include the information from all of the applicable schedules.

Post questions and I will post answers.

FHA and the Self-Employed Borrower - Part II

OK, as promised this post will follow-up on the topic of mortgage lending for self-employed borrowers. Let’s finish up by asking this question: Who is considered self-employed?

Answer: Any individual who has a 25% or greater ownership interest in a business is considered self-employed. A number of factors need to be considered in underwriting a self-employed borrower, some of which may be beyond the borrower's control (although they still have a significant effect on the borrower's business).

Lenders analyze many factors before approving self-employed borrowers:

As per the guidelines (let’s discuss a few of these):

1. Stability of the borrower's income. This is a no-brainer and these days looked at by underwriters very closely.
2. The location and nature of the borrower's business, the demand for the product or service offered by the business, the financial strength of the business, and the ability of the business to continue generating sufficient income to enable the borrower to make the payments on the requested mortgage.
   
   Let’s discuss this briefly. Occasionally I receive calls from out of state borrowers who have a successful business, say in New York, and now they wish to relocate to GA. This is a problem for an underwriter trying to assess risk on a mortgage loan. It will take several months if not years to build up a new clientele. And your success is not automatic. In the process your income is lower. This must be taken into consideration.

Another question I am often asked: Why a two year history for self-employment?

Here’s a small dose of reality: Because income from self-employment may be unpredictable and the business owner is often personally liable for the business debt, self-employed borrowers tend to default at a much higher rate than other borrowers. For this reason, lenders require a two-year history of the borrower's prior earnings as a means of demonstrating the likelihood that the income will continue to be received. As stated previously, a person who has a shorter history of self-employment -- 12 to 24 months -- may be considered, as long as the borrower's latest federal income tax returns reflect the receipt of such income for a 12-month period and he or she has a history of receiving income at the same (or a greater) level in a field that provides the same products or services as the current business or in an occupation in which the he or she had similar responsibilities to those undertaken in connection with the current business.

In the next post, we will analyze the self-employed borrower in more detail.

Until then…….

FHA and the Self-employed Borrower - Part I

I have received numerous calls from self-employed borrowers since I posted an entry a while ago. I have decided to revisit this issue but I want to break it down in parts so that it is clearly understood. With the elimination of Stated loans (unless you have 25% to put down), self-employed borrowers need the facts on how to proceed on a fully documented loan using FHA.

So, here's your first tidbit for my caller in Texas who called and said, "A lender here told me I need a solid 2 years of self-employment in order to qualify for a FHA loan. Is that true?"

My response: Often the answer is yes. However, per Fannie Mae:

A person who has a shorter history of self-employment -- 12 to 24 months -- may be considered for a FHA loan, as long as the borrower's latest federal income tax returns reflect the receipt of such income for a 12-month period and he or she has a history of receiving income at the same (or a greater) level in a field that provides the same products or services as the current business or in an occupation in which the he or she had similar responsibilities to those undertaken in connection with the current business.

However, every file is different and must be taken as a whole. There's more to the story which we will cover in tomorrow's post. Stay tuned.

Is FHA Only for First-time Homebuyers?

No, is the answer to this question. As long as the FHA loan has not been used in the last 3 years you may still obtain a FHA loan.

This is great news for move-up buyers.

FHA and Bankruptcy

Let's revisit the following question: Can I obtain a FHA loan if I am less than two years out of a bankruptcy (Chapter 7). Most often, the answer is, "No." However, remember that every file stands on its own merits. FHA considers circumstances that are beyond the applicant's control (such as the death of the principal wage earner or serious long-term uninsured illness, etc.). As I have said before, you never know until you ask your lender.

Are There Income Limits With FHA?

The answer is "No." I have received this question lately, now that FHA has increased its loan limits. If you make a millionaire dollars per year (and lucky you), you can still obtain a FHA loan.

With the revived popularity of FHA loans, I will try to post a popular question and answer each day. As always, feel free to contact me on 404-401-6209 if you need additional information on FHA loans. I'm here to help!

FHA - Reduce Your Rate

If you have one of those funky subprime loan with a high interest rate and your loan is within the FHA loan limits for your area (www.fha.gov), you may want to consider a FHA refinance. Especially if you have a credit score less than 620. If your goal is only to reduce your rate, FHA will allow you to do a "Rate and Term" refi for up to 97.75% of your value.

And rates are good right now. Don't wait until your ARM has already adjusted. Act quickly!

FHA Loan Requirements

FHA Loan Requirements

As I have posted before, the FHA loan is ideal for these borrowers:

1. Individuals with no credit or newly established credit.For now FHA accepts such a situation, provided you have “alternative credit,” which includes (but is not limited to) car insurance, cell phone, a utility bill such as gas, electric, or water. It goes without saying that a stellar rent history is always a plus. A lender verifying this type of credit history prefers at least 3 types of alternative credit that has an on-time, twelve month history.

2. Families with previous credit challenges but are now credit-worthy.FHA is not a credit score (as of 1/3/2008 anyway) driven loan and FHA underwriters allow written explanations for past credit problems. Sometimes these explanations will require supplemental paperwork to support them. An example includes a borrower who has written that she was hospitalized for several months during a particular year. An underwriter may ask for a doctor’s note or proof of hospitalization. A word of caution: Do not write anything that you cannot back up!

3. First-time home buyers. HUD was created to help low-to-moderate income families. Many first-time buyers are fresh out of college, starting a new job and therefore lack an established work history of 2 years.

FHA also allows a borrower more acceptable sources of down payment as well as higher qualifying ratios. For these reasons, as well as others listed above, you can rely on the FHA loan.

Here’s a review of items your lender will need to get you started:

1. 2 years of W-2s (most recent 2 years)
2. 2 paystubs (if you get paid once a month, 1 is sufficient) for all jobs
3. Most recent bank statements for the last 2 months
4. If you are self-employed, tax returns for the last 2 years
5. Landlord name and # for the last 2 years (or residential history for the last 2 years)
6. Employer name and number for the last 2 years
7. Go to http://www.getdownpayment.com/ and take the homebuyer's course if your organization uses Nehemiah. If not, this is still a great online class for the first-timer. Should not take more than 20 minutes.
8. IF you have student loans, make sure they are in deferment or you know the monthly payment amount. Sometimes credit reports are not accurate.
9. IF you have paid collections or judgments, also submit any payoff letters that you have
10. IF you have experienced a divorce, provide the decree. IF you pay or receive child support, provide the documentation that supports this.

Get to work. :-) Make 2008 the year you become a homeowner.