As published in Scotsman Guide's Residential Edition, November 2008.
As the mortgage market reels from its latest upheaval, many mortgage brokers still have a stable product to offer their clients: Federal Housing Administration (FHA) loans.
The FHA offers a range of products for many borrowers. Owner-occupants, as well as owner-occupants with a non-occupying co-borrower such as a relative, can obtain an FHA loan. There are no income limits, geographic restrictions, or distressed- or declining-market definitions. Plus, FHA loans represent an affordable option for many homebuyers, especially first-timers.
For success with FHA, brokers must understand the basics. Partnering with an experienced FHA lender can help.
Even with the Housing and Economic Recovery Act of 2008's increase, the down-payment requirement for FHA loans remains low at 3.5 percent. Although the housing bill prohibits seller-funded downpayment assistance for FHA loans, funds still can come from a relative's gift. In addition, interest rates for FHA loans compare favorably with conventional financing.
Further, the FHA offers cash-out refinances to as much as 95-percent loan to value (LTV) and rate-and-term refinances to as much as 97-percent LTV. It also allows subordinate financing to remain in place regardless of the combined LTV.
Brokers might have misconceptions about working with the FHA. Processing an FHA loan is no more time-consuming than conventional financing. You just need the proper upfront disclosures, and you must order the appraisal through the FHA Connection Web site.
This is where lending partnerships can be helpful. Ask your lending partner about its background with the FHA and how it can help you better understand the risks associated with underwriting these loans. As you discover some of the FHA's nuances, your lender's knowledge can help you navigate the process.
Also, automated underwriting can still be used with FHA financing. With Fannie Mae Desktop Underwriter or Freddie Mac Loan Prospector approval, you may see reduced documentation requirements. And if a loan receives a "refer" decision, it doesn't mean that it can't be done; it simply has to be underwritten manually. Therefore, working with an underwriter who understands how to underwrite an FHA loan manually can be the difference between a loan being approved or denied.
With home prices slipping and interest rates at current lows, many potential borrowers can enter the market with an FHA mortgage.
The FHA even allows borrowers who don't have FICO scores to get a loan. For these borrowers, you must develop a nontraditional credit history, a necessary task when working with many underserved borrowers today. A knowledgeable lending partner can help you learn how to do this properly.
In addition, you can finance manufactured housing with FHA loans, provided the home was built after June 15, 1976; is at least 400 square feet; and sits on a permanent foundation.
As you plan your next move in today's mortgage market, pay special attention to FHA opportunities and the lenders who offer FHA insights and assistance. The coming year is sure to offer plenty of options for growing into this space.
Julie Krause is chief operating officer for NetMore America Inc. She has more than 36 years' mortgage-banking experience and received one of the first Computer Homes Underwriting Management System numbers in the Northwest. Krause's previous roles as vice president of operations with Mann Financial, owner of Residential Mortgage Co., and owner of her own consulting firm make her a solid expert in government lending and the development of efficient and effective lending operations. Reach her at Julie.Krause@NetMoreAmerica.com.