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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2008

FHA: An FAQ

To get started with this product, brokers should learn more about eligible loans and programs

Brokers shy away from Federal Housing Administration (FHA)-insured loans because they’ve heard that they are a pain to do or that there are too many conditions. While FHA loans may require more back and forth with underwriting, they do have benefits for brokers.

For one, these loans have a strong reputation; the FHA pioneered mortgage insurance in 1934. Also, brokers may earn higher yield-spread premiums from FHA-insured loans than from conventional or nonprime loans. In addition, branding yourself as an FHA expert in your market can help increase your business.

Given the FHA product’s stability and the way it can boost your income, it can be a good niche. It can help you do more loans and increase your income. But you first must commit to learning and following the guidelines.

Here are three common questions brokers have as they work through the learning process.

1. What are the guidelines for a cash-out refinance? You can use FHA for refinances, even if the original loans were not FHA-insured. The maximum loan to value (LTV) for FHA cash-out refinances increased to 95 percent in 2005, as noted in Mortgagee Letter No. 43 from that year.

To be considered for a refinance, the property must be a one- or two-unit dwelling. The borrowers must have owned the property as their primary residence for at least 12 months before the loan-application date, and they must not have payments that are more than 30 days late. Any co-borrower or co-signer being added to the note at refinance must also occupy the property.

You can subordinate second liens to an FHA-insured first mortgage, regardless of the total indebtedness or combined LTV. As long as the first mortgage doesn’t exceed 95 percent of the value, the combined LTV can be greater than 100 percent. In these situations, however, it may help to have a bank sign the subordination.

2. How do the downpayment-assistance programs work with FHA? This issue has been under scrutiny in the past year. In October 2007, the U.S. Department of Housing and Urban Development (HUD) established a rule that would have prohibited borrowers from using downpayment funds from:

  • The seller or any other person or entity with a financial interest in the transaction;
  • Any third party or entity reimbursed directly or indirectly by the seller; or
  • Any other person or entity with an interest in the transaction.

Several downpayment-assistance providers filed suit against HUD, however, and because of this, a district-court judge ruled to block the prohibition until there is a verdict on the lawsuits.

This is how the downpayment-assistance programs worked in the past: If a home is being sold for $100,000, for example, and the buyers need $5,000 to close, they can arrange to receive that amount from the assistance program. After the purchase, the sellers give $5,000 to the assistance program, plus an administration fee.

It’s important to note that the rule HUD is trying to pass applies only to the downpayment itself. Sellers and lenders can still cover as much as 6 percent of borrowers’ closing costs and prepaid expenses. In addition, borrowers can receive downpayment funds from acceptable government programs and charities that provide funds for homebuyers.

3. What are the minimum credit scores for FHA? FHA has no minimum-credit-score standard. Proposed FHA-reform bills, however, call for credit profiles to play a larger role in FHA decisions.

To take advantage of the current FHA-credit situation, develop relationships with lenders that will do manual underwriting according to FHA guidelines. This will increase your approval ratio with these loans. FHA loans are “story” loans -- that is, the better you can present the borrowers’ story to the underwriter, the more successful you’ll be.

Whatever results from the proposed changes to the program, FHA-backed loans will remain an important product for brokers. It’s a great time to educate yourself about FHA-insured loans.


 


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