As published in Scotsman Guide's Residential Edition, February 2009.
It has been more than a year since Federal Housing Administration (FHA) loans returned to playing a major role in the mortgage industry. Today, many mortgage companies that don’t have FHA approval find it difficult to survive, yet alone thrive. Some of these companies even find themselves closing their doors.
Because of this, it’s wise for mortgage brokers without FHA approval to learn how they can get it. In evaluating whether they will seek FHA approval, brokers should consider four major requirements: audited financials, commercial space, origination experience and credit standing.
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1. Audited financials: The largest barrier that keeps brokers from achieving FHA approval often is the requirement for audited financials. To receive approval, brokers must prove a net worth of $63,000. Of that net worth, at least 20 percent must be liquid.
In other words, a broker’s company must have at least $12,600 in the bank as part of its net-worth requirement. The remainder of the net worth can include other company assets, from which company liabilities -- including outstanding loans and credit card debt -- must be subtracted.
Many people think this net-worth requirement applies to the company’s owners, but that is incorrect -- the company itself needs to meet the requirement, not the individual owners.
There is, however, a catch: The U.S. Department of Housing and Urban Development (HUD) requires the company’s financial statements to be audited by a certified public accountant. In looking at your financials, this accountant must verify all expenses, income, assets and liabilities using strict auditing standards. The cost for this service can run from $7,000 to $10,000, although some certified public accountants charge as little as $2,500 to audit small-business financials.
2. Commercial space: While many mortgage brokers work from commercial space, some work out of their homes. For the purposes of achieving FHA approval, brokers must work from commercial space.
Although there are some exceptions, a home-office base generally will disqualify you from receiving FHA approval. In addition, the commercial space used as an office must be separate from other companies, though a shared receptionist may be allowed.
3. Origination experience: To achieve FHA approval, at least one of the company’s senior officers must have at least three years of origination experience. If your company lacks this requirement, one way to achieve it is to hire someone with the necessary experience. You might also consider promoting one of your employees who meets the requirement.
4. Credit standing: To receive FHA approval, all senior officers and all owners of 25 percent or more of the company must provide their credit reports to HUD. If any of these credit reports show major derogatory items in the past two to three years, then you likely will have a problem getting approved.
In determining whether the company’s owners and officers are financially fit, HUD uses FHA-underwriting guidelines. If any of these individuals have a recent foreclosure, bankruptcy, tax lien or numerous late payments, they may need to be removed as a senior officer or have their ownership role reduced to less than 25 percent.
Mortgage brokers who meet these four requirements should have few to no problems achieving FHA approval. Even so, you may still want to hire someone to help you with the paperwork, which many people find onerous. Such assistance should cost no more than $1,000. Additionally, HUD charges a $1,000 application fee.
As of press time, HUD required eight to 10 weeks to approve new applications. That might seem like a long time, but the wait could turn out to be the only way to find success in today’s mortgage market.
Steven Sheasby is owner and president of Integrity Mortgage Licensing. Throughout his career, Sheasby has worked as a compliance and licensing manager for some of the top nationwide mortgage companies. His company has completed state mortgage licensing and Federal Housing Administration (FHA) licensing projects for many mortgage companies across the country. He can be reached at email@example.com or (714) 656-3960.
Visit www.integritymortgagelicensing.com for detailed licensing requirements by state or for information about FHA lending.