FHA Lending for Dummies

Why FHA? Reason #1: Close More Loans Borrowers who don’t quite fit under prime lending guidelines are excellent candidates for an FHA loan. Knowing how to identify and qualify these borrowers is critical to your success!

Why FHA? Reason #2: Earn More $ Many borrowers who obtain sub-prime loans could have closed FHA loans at lower rates. FHA loans offer much more YSP which means more commission dollars for you.

Why FHA? Reason #3: Survive the Market In the current lending environment, if you don’t adapt you won’t survive. Current market is ideal for FHA lending due to declining LTV’s and increasing credit score and reserve requirements for sub-prime and Alt-A loans.

Some of the Most Common FHA Myths A typical FHA borrower has a derogatory credit history Non-reported alternative credit will offset derogatory credit on the credit report Medical collections and charge-offs will not be considered derogatory credit NSF's on a borrower’s bank statements can be ignored Less than a 2 year work history or job instability is acceptable Non-occupant co-borrowers can be removed from the loan after 6 months Gift funds can be used as reserves Loans with AUS approvals are always insurable by FHA

Things Every LO Should Know About FHA Lending Tri-merged credit reports are required. No derogatory credit items in the last 12 months. No foreclosures in the last 3 years. Re-established credit after derogatory credit items. Collections (except medical) may have to be paid. Judgments/tax liens must be satisfied/released. Clear CAIVRS is required. No prepayment penalties. May have non-occupying co-borrower(s) or co-signer(s). Must be legally able to work in U.S. (citizenship not required). Must have valid Social Security Number. No income limits. Borrower can have only one FHA insured mortgage at a time.

FHA 101 Occupancy Owner Occupied Only! 2 nd homes and investment properties are not permitted.

FHA 101 Full Doc Income/Asset Verif. Salary/Wage: 2 years W-2’s + YTD pay stub + verbal VOE Self-Employed: 2 years tax returns (all schedules and business or partnership returns when applicable) + YTD P&L Assets: VOD + 1 month bank statement or 2 months bank statements.

FHA 101 FHA Advantages Sub-prime borrowers who were once able to obtain 100% financing are in need of an alternative -- and FHA is it. FHA loans are assumable. As rates rise, assumability makes an FHA loan more valuable.

Property Types 1-4 units (owner occupied). Existing or new construction. Stick built, modular/manufactured. Condominium in an FHA approved project. Must meet Minimum Property Standards (MPS). FHA 101

Maximum LTV’s 1-4 Units: 97%

FHA 101 LTV’s: Cash-Out Refinance 1-2 Units: 95% Borrower must own subject property for at least one year with no lates (not available in Texas). 3-4 Units: 85%

FHA 101 Credit The credit must be analyzed to determine the borrower’s ability and capacity to repay the mortgage and to service other debts and household expenses.

FHA 101 Alternative Credit Use of alternative credit accounts, such as utilities, phone, insurance, etc., is allowed. At least 3 to 4 accounts with a 12 month history is required. One of them should deal with housing, such as a VOR. Alternative credit history is an acceptable way to establish credit worthiness for borrowers with little or no credit, but it is not a way to overcome derogatory credit.

FHA 101 Tell the Story Instead of evaluating credit using a matrix of guidelines and limitations, FHA underwriters view each borrower individually on a case-by-case basis. Every borrower who has struggled with credit related issues has a story to tell. To determine if circumstances will warrant credit approval, that story must be told.

FHA 101 Chapter 7 Bankruptcy Must be discharged at least 2 years prior to funding. Exceptions can be made to the 2 year rule only under “extenuating circumstances.” There should be no new derogatory credit after a bankruptcy.

FHA 101 Chapter 13 Bankruptcy No seasoning requirement as long as the plan has been paid on time for at least 12 months (the mortgage is of particularly importance). If not discharged, the trustee must give written permission. No derogatory credit items allowed after a BK.

FHA 101 Maximum Seller Contribution All LTV’s: 6%

FHA 101 Minimum Investment Requirement 1-4 Units: 3%

FHA 101 Minimum Investment FHA requires an investment of 3%. This can be in the form of savings, gift or grant. The entire investment can be a gift from a blood relative or a bona-fide grant (meaning that the borrower is NOT required to come in with cash).

FHA 101 Gifts There is no requirement to demonstrate the “donor’s ability” to give. Evidence that the gift check is drawn on the donor’s account is required.

FHA 101 Gift Documentation FHA Gift Letter. Copy of bank check payable to escrow account. Evidence check was drawn on donor’s account (withdrawal slip, interim printout, letter, etc.) Escrow Letter from settlement agent confirming receipt of the gift check into escrow account.

FHA 101 Income Ratios 31/43* *Ratio guidelines may only be exceeded with strong compensating factors.

FHA 101 Common Compensating Factors 3 months PITI reserves 10% or more down payment Payment increasing by less than 10%

FHA 101 Appraisals Appraiser MUST be on the FHA Approved List. Repair requirements are the same as for conventional appraisals. Appraisal reviews, drive-bys, AVMs, BPO’s, or other additional steps may be required at underwriter discretion.

FHA 101 Streamlined Refinance Borrowers with FHA loans can refinance into a lower-rate FHA loan with extremely reduced documentation requirements. No employment, income, or asset documentation is needed. No credit report required (only a mortgage history). A no appraisal option is available.

FHA 101 Loan Limits: Low Cost Area 95% of median house price is less than 45% of the Freddie Mac limit. 1 Unit: $200,160 2 Unit: $256,248 3 Unit: $309,744 4 Unit: $384,936

FHA 101 Loan Limits: High Cost Area 95% of median house price exceeds 87% of the Freddie Mac limit. 1 Unit: $362,790 2 Unit: $464,449 3 Unit: $561,411 4 Unit: $697,696

FHA 101 Requisites for FHA to Insure Borrower can not be listed on the HUD Limited Denial of Participation (LDP) list. [ ] Borrower’s name can not appear on the Federal Government’s list of excluded parties. [ ] Borrower can not have delinquent Federal debt noted on Credit Alert Interactive Voice Response System (CAIVRS).