FHA Frequently Asked Questions
1) What is an FHA Loan? Does FHA insurance cover flood damage?
FHA is a loan insurance program issued by the Department of Housing and Urban Development, which insures lenders against principal losses for loans which have been approved for insurance under HUD guidelines. Otherwise an FHA loan is like any other loan funded and held by any lender, including FNMA. FHA is a loan insurance program, not a property insurance program, and no, FHA loan insurance doesn't cover flood damage.
2) How is FHA going to be different for my clients than a regular conventional loan?
FHA Insurance is strictly geared toward Owner-Occupied properties, and is generally forbidden to be used for investment properties. However, FHA loans should provide your clients with additional leverage value at purchase, with greater latitude in FICO score, look-back periods on mortgage ratings, and bankruptcies. It will allow your purchase clients to put as little as 3% down on a property, with no further investment. In some cases no down is required subject to coverage by low-down-payment assistance programs. The only downside is that FHA insurance generally has to be in place on the loan longer, and there is an upfront mortgage insurance premium of up to 2% at the close of escrow, unlike most PMI requirements.
3) How does the program differ from conforming conventional loans?
First of all, FHA is not a loan program, rather a loan insurance program. Conventional loans dictate mortgage insurance over a certain LTV, whereas all FHA loans have mortgage insurance for at least the first 5 years, regardless of LTV. FHA loan limits are dictated by HUD, and those loan limits typically are not tied to Fannie Mae, or Freddie Mac. They are usually lower. An FHA loan to begin with, is assigned a case number, which attaches the loan application to a subject property. HUD loans typically don't engender the type of scrutiny since buybacks are not common with investors. FHA loans also carry a federal exemption from recourse statutes. FHA insurance includes the right to pursue recourse for deficient foreclosure proceedings: see question 17 below.
4) What is the maximum LTV on a regular FHA loan?
(The answer to the above question can be found in the 4155.1 Revision 5 underwriting manual, section 1-7, and 1-8.) The maximum Loan To Value on any FHA loan involves several criteria. The general maximum rule is 97.15% on a purchase or refinance, however:
The borrower must have 3% of the purchase price into the transaction, regardless of seller concessions, or credits, except in case of Down Payment Assistant programs (DPA's). The borrower's 3% must include the origination fee, down-payment in cash, appraisal, credit and other non-recurring closing costs. Those items figure into the 3% cash-settlement requirements.
The above items, do not include the UFMIP, unless paid wholly in cash by the borrower at closing.
Items not to be included: Chattel, seller contributions such as paying points or fees on a borrowers sale property, Discount points on the loan being acquired for the purchase, repairs to the subject property (hold-outs for carpet etc), broker fees related to the sale of the property and all other non-allowable fees listed in the 4155.5 section 1-9.
5) What is the maximum loan amount for an FHA?
FHA loan limits are determined by either 87% of the Freddie Mac limits for each high-cost area (Hawaii, Guam, Alaska, Virgin Islands) or whatever limit is set by the local HOC (Home Ownership Center). You can determine these limits by examining the following website: https://entp.hud.gov/clas/ where loan limits by county are posted. Currently the highest loan amount for non-high-cost areas are $729,500 by special act of Congress due to expire in December of 2008.
6) Do I have to be certified, or what?
FHA loans cannot be brokered like other loans. FHA brokers are licensed through HUD as correspondents, and are supervised through their sponsoring institution, such as CMG. Brokers cannot get referral fees, or marketing fees generated by a closing of an FHA loan. This is federal law, and such activities are prohibited.
HUD certification usually involves minimum liquidity levels, a physical location or commercial location, creditworthiness, experience in the loan business, a bond, and possessing or having as a company employee a Direct Endorsement certified underwriter, who actually underwrites the file and applies for insurance for each loan.
7) What is FHA Connection?
FHA Connection is the system by which you run CAIVRS, assign case numbers, etc. It is used by a Direct Endorsement underwriter to register and process certain information from the file. It is administered by HUD and your local HOC.
8) What is C.A.I.V.R.S?
It is the Credit Alert Interactive Voice Response System. CAIVRS will verify the status of Social Security numbers, etc, much in the same way lenders will use third party QC services.
9) Can I process my own CAIVRS?
Typically the sponsoring institution for your company will process CAIVRS along with underwriting the loan. If you are an employee of that lender in the capacity of loan agent, you may process CAIVRS under the company CHUMS ID#.
10) What is my CHUMS ID #?
CHUMS is the Computerized Homes Underwriting Management System user identification number. This is issued to lenders, appraisers, and to entities approved to do business with HUD.
11) Where do I go for current information on underwriting and guidelines?
Typically your sponsoring institution is the best source of information. You may also go to www.hudclips.org and download the latest revision of the 4155.1 credit manual for mortgagees, or the 4150.1 which is the manual for appraisal topics related to HUD insured loans. Secondary sources such as this one also have posted copies of these manuals and are updated with ALLREGS updates. These are the basic underwriting texts issued by HUD, along with Mortgagee letters which indicate changes in underwriting the HUD-insured loan as well.
12) What is the Santa Ana Home Ownership Center, or Santa Ana HOC?
The Santa Ana HOC is the Western Regional HUD office which issues regionally related information for Hud Insured loans, as well as providing underwriting review and interpretations of Mortgagee letters and manuals for lenders and investors of Hud Insured loans. They typically oversee foreclosures, REOs held by HUD, and perform other administrative functions for HUD.
13) How much money can I charge on an FHA loan?
The HUD correspondent usually only charges one (1) origination point maximum plus customary fees for closing an FHA loan. HUD discourages overcharging, and prohibits brokers from obtaining discount points specifically intended to reduce interest rates on loans insured under the FHA program.
14) Can I charge discount points on an FHA loan?
A correspondent or lender is prohibited from realizing profits from discount points on an FHA loan, and is only allowed to charge one (1) origination point, and may receive Yield Spread Premiums, (YSP) even to pay the borrower's closing costs, but not to contribute to the Cash-Investment for the borrower.
15) What is allowed to be charged by an FHA lender?
This question goes to the old guidelines whereby a lender and other third parties were prohibited from charging anything listed as â¿¿non-allowablesâ¿¿. All customary charges, which vary from region to region, are allowed to be charged to an FHA loan.
16) What's the big deal about brokering FHA loans? I see other brokers doing it.
The big deal is that doing so, without being certified by HUD is a federal crime, which is vigorously prosecuted by HUD.
17) What is a recourse loan, and why does HUD get to pursue recourse on a purchase loan if losses occur as a result of fraud or foreclosure?
HUD's charter allows this specifically to protect the insurer against losses, and to help perpetuate the insurance program. It is like defaulting on a student loan, or your taxes. Typically those debts aren't forgivable in bankruptcy, and follow you until you pay them. HUD insurance is unique in this aspect. A client will typically have a judgment placed on their credit until they pay the deficiency off. Also, persons having had a foreclosure on an FHA loan will not be eligible to obtain an insured loan until that debt is paid, even if significant time has passed since the foreclosure.
Appraisals & Properties
18) What kinds of properties will FHA insure a loan on?
FHA loans can be written on SFR's 1-4 units owner-occupied. FHA will allow loans on Agricultural-zoned properties as well as residentially-zoned properties. FHA will not allow insurance to be placed on loans for commercially zoned properties within the 203b loan program.
19) Can I use my own appraiser on FHA loans?
You may use your own appraiser provided that appraiser has been listed and certified by HUD and has a current CHUMS ID#, and has not been prohibited from providing appraisal services by HUD. There is a list of persons prohibited from doing business with HUD, available from HUD if you are a certified broker.
20) Does CMG fund rehab loans or loans on mobile homes using FHA financing?
No. CMG is currently not funding Mobile Home loans, or rehab (403K) loans.
21) How does an FHA appraisal differ from any other appraisal I'm used to seeing?
Typically, a FNMA appraisal is done on a 1004 form, whereas a FHA appraisal is done on a current HUD approved form. Other than that, the appraisal will cover inspection stipulations, such as specific condition-of-property questions usually not raised on a FNMA appraisal. The property must be inspected by a HUD approved appraiser with his own CHUMS ID#.
22) Why do I have to have 2 appraisals on my FHA loan?
Loans not meeting loan limit guidelines, (exceeding 392,500 in some areas) or those considered under the new Jumbo guidelines for HUD, may require a second appraisal to fairly determine the market value. The appraisals may be done by two separate appraisal companies, not involving a review appraisal specifically.
23) Does the appraiser need to inspect the roof and electricals on the subject property?
Typically the HUD appraisal will request a condition report on specific items on a property, one of which is the roof, and a condition of utilities by the appraiser.
24) Does HUD cut the appraisals like other lenders? What about declining areas?
Declining areas are not necessarily considered, however blighted or prohibited areas, such as airport pathways, commercial areas, etc., or areas where functional obsolescence are considered prevalent, may be prohibited, and will be reviewed when performing a HUD appraisal. Automatic soft-market cuts may be imposed by participating lenders, but are not directed to do so by HUD.
25) Can the appraiser sign off on repairs and conditions such as a 442?
HUD certified appraisers may sign off on certain conditions, such as workmanship-like manner of items, but may not take the place of a talented and experienced home inspector, or city building code inspector. An appraisal is not a home inspection. HUD certified inspectors will be called in from time to time to inspect certain repairs, etc.
26) How do I get my appraiser up to speed on FHA?
Your appraiser must already be certified by HUD, and must obtain the proper licensing and training required to perform HUD appraisals. Usually only committed individuals get the training as it is very involved and costly.
27) Why does the FHA appraisal cost more than a regular conventional FNMA appraisal?
Typically they may cost more because of the involved training and continuing education and certification requirements required of a HUD approved appraiser. There are also many more steps required to perform a HUD appraisal versus your typical FNMA appraisal.
Borrowers and Credit
28) What is the minimum FICO score for a borrower on an FHA loan?
The minimum credit score is an overlay for CMG and is 620 on normal limit FHA loans. The minimum credit score for jumbo limit FHA is 620 without exception.
29) How many years must a borrower have after a BK on FHA loans?
The rule of thumb is 2 years with a really good explanation (medical BK for instance). Abuse of credit will be determined if more than 1 BK is detected and the loan may be declined. B.K.s with subsequent late payments or judgments or other defaults, may be declined as well.
30) What is the look-back period on mortgage lates?
Generally speaking, 12 months on streamlined refinances, and 24 months on regular purchase or refinance loans. However if going back further reveals multiple mortgage lates, the loan may be declined as the borrower having unsuitable credit risks.
31) What kind of credit is FHA looking for?
HUD is looking to insure loans where the borrower has demonstrated creditworthiness, but may be unable to meet stricter private guidelines. Clean credit for at least 24 months may be required.
32) What is non-traditional credit?
In some cases, where a borrower hasn't utilized traditional credit resources such as unsecured credit lines, etc, he may demonstrate creditworthiness by having a credit agency rate and report certain traditionally non-reported credit history on Cell-phones, furniture contracts, private automotive contracts, or any credit items which would demonstrate a credit pattern over a 24 month period.
33) How many months of reserves does FHA require?
FHA requires 2 months reserves typically, however additional reserves are noted in â¿¿compensating factorsâ¿¿ when a borrower exceeds a specific guideline or otherwise might not qualify.
34) How many credit references does my borrower need for an FHA loan?
The borrower must have a minimum of 3 credit references in addition to the rental rating for a minimum of 24 months. See non-traditional credit.
35) Does FHA do limited or stated documentation loans?
No. Period.
36) Does FHA allow multiple borrowers to buy a home?
Yes. HUD insurance will allow multiple buyers on a property but all buyers must occupy the home, unless a non-occupant co-buyer is present. All parties must meet a minimum DTI to qualify.
37) What is the maximum Debt-to-Income ratio on an FHA loan?
The maximum DTI on an FHA loan is 40%. Some compensating factors (3) may allow the maximum DTI to exceed 40% subject to other factors of the loan being less than the maximums set by the 203b program.
38) Why did my borrower get referred by CAIVRS and how do I get it cleared to get him/her an FHA loan? Is there a waiver I can obtain?
CAIVRS will alert the lender that the borrower does not qualify for an FHA loan for various reasons including the following:
a. Inclusion in the persons prohibited from doing business with HUD list,
b. Student loans outstanding and not kept current
c. Federal Tax liens not listed on the credit report or county rolls,
d. Previous federal obligations such as child support, debts to Armed forces entities, etc.
e. Previous FHA foreclosure either not having aged enough, or having still owed monies on a deficiency from an FHA or HUD-related foreclosure.
Clearing any items will be necessary before the borrower can be considered for a loan insured by HUD. HUD may issue a waiver on certain items subject to sufficient evidence that the obligation is not connected to the borrower, but this is time-consuming and not always successful. Student loans must be cleared by either paying them off, or bringing them current, Tax liens must be released and recorded as such, and other obligations must be dealt with to the satisfaction of the issuing entities.
39) What is â¿¿mattress moneyâ¿¿ and how does that affect my FHA borrower's loan?
Each transaction must take into account the seasoning and tracking of funds both for reserves and for cash investment requirements. A borrower who doesn't use traditional banking vehicles for savings, may obtain approval under a HUD insured program by demonstrating effectively the ability to save the down-payment, and closing costs out of their checks by filling out a form and schedule examining debt to income ratios and remaining or disposable cash. Traditional or conventional loan programs don't typically allow this. FHA does. The loan must be manually underwritten in this case, as LP won't show seasoning of funds or sources, but requires a DE underwriter to examine and sign this off.
40) What if the seller wants to carry a 100% 2nd on his property in an FHA purchase? Can I carry a 2nd to cover closing costs?
HUD typically will not insure a transaction where the borrower does not have the sufficient cash investment of at least 3%. Variances to this rule only include down-payment assistance programs such as city, county or certified DPA programs such as Neimiah. Loan to values may never exceed 100% except in very few instances of State-sponsored DPA's.
A broker who records or carries a second TD to cover his closing costs may be criminally prosecuted under fraud statutes, and will certainly lose certification as a correspondent, as this action is expressly prohibited.
41) Does my borrower have to be a citizen to obtain FHA financing?
No. HUD programs are only precluded from persons who do not have the right of residency under the Immigration law. Legal residents are a great source of borrowers for FHA.
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