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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2013

Add a Little Zest to Your Pot of Products

What ingredients do you need to become an FHA loan specialist?

Add a Little Zest to Your Pot of Products

In the current economic climate, an increasing number of mortgage bankers are looking into government-backed loans as a way to expand the breadth of their products and increase their market share. Considering the appeal of Federal Housing Administration (FHA) loans among consumers, branching out in this respect certainly may be a recipe for success. From first-time homebuyers to seniors and renovators, loans insured by the U.S. Department of Housing and Urban Development (HUD) give those who need assistance a chance to claim their version of the American dream.

For mortgage bankers and brokers, playing a significant role in making that dream come true while also growing their businesses has an allure all its own. Transitioning into this niche may be easier said than done, however. It’s vital for any organization looking to heat up in the FHA market to have the right cooks in the kitchen — mortgage professionals with the knowledge, experience, patience and persistence to get the job done.

FHA loans offer consumers the opportunity to own and renovate homes that they otherwise could not. The benefits are easy to sell: low downpayments, low closing costs, the option to include repair costs for renovations, less stringent credit requirements and low interest rates. Even borrowers without bank accounts can qualify for these loans, a particular bonus among those borrowers who prefer to keep cash on hand instead of storing it in a bank.

For homeowners looking to refinance their existing FHA loans, the benefits are equally compelling. For instance, compared to conventional loans, FHA streamline refinances offer a simplified approach by eliminating the need for income verification and appraisals, as the appraised value is based on the value that the FHA has established from the home’s prior purchase or refinance. Even more, borrowers who have recently changed jobs are not penalized for having done so.

"Streamline refinances can be a great product with which to cut your teeth, as they require the least amount of paperwork."

With all of the possibilities that FHA loans offer, it’s easy to wonder why mortgage bankers and lenders everywhere aren’t already offering them alongside conventional loan products. The explanation, however, is relatively simple: FHA loans are more complicated than many people realize — or, at least, they’re complicated for those who aren’t adequately prepared to handle them.

Setting up

Mortgage bankers who are interested in the FHA niche should know that underwriting these loans can be a tricky business. Understanding the unique way in which government-insured loans are processed is something that takes time, energy, training and practice. Even then, producing quality FHA loans comes with a certain level of risk, especially when the members of an organization still are feeling their way through the process.

The first step to becoming a government-lending specialist is to apply to be an FHA lender through HUD. All lenders seeking new FHA approval must submit an application package online, the details of which are outlined on HUD’s website, which also provides the appropriate application forms. HUD offers four types of lender approval: nonsupervised mortgagee, supervised mortgagee, government mortgagee and investing mortgagee. Although application times can vary, they typically take between 45 days and 60 days to process.

Starter projects

Once approval has been obtained, arguably the best FHA loans to begin with are 203(b) purchases, rate-and-term loans and streamline refinances. To begin building a potential customer base, remember that FHA customers tend to have less cash on hand for purchases and often are interested in purchasing properties located in less affluent areas. Keeping that in mind can help your organization determine where and how to market its services, especially when it comes to first-time homebuyers who may become repeat customers in the years to come.

Streamline refinances can be a great product with which to cut your teeth, as they require the least amount of paperwork and usually can be processed without appraisals. There are a few exceptions to this, however. An appraisal is necessary, for instance, when a borrower wants to qualify for a larger loan in light of the property’s value having increased.

Additionally, the process of identifying potential customers for these loans is fairly simple because existing FHA loans can be found in lead sources and in lender-servicing portfolios whenever they retain servicing. Even this comparatively simple product has a few fine-point details, however. For instance, mortgage professionals should know that their potential borrowers must be employed at the time of funding and have no missed mortgage payments if they want to refinance into a new FHA loan with a lower interest rate.

The next level

Once you’ve gained an understanding of FHA standards and have become accustomed to processing 203(b) loans, you’ll soon realize that your organization can close a high volume of FHA loans each month. Mortgage professionals should realize, however, that the FHA monitors lenders’ performances and measures their success by their Neighborhood Watch ratio — that is, the number of defaults per insured loan compared to local and national averages.

Mortgage bankers and lenders should know that a ratio lower than 100 percent is widely considered to be an above-average ratio, and one above 175 percent is widely considered to be a below-average ratio. The latter can raise concerns with the FHA. Once you’ve consistently achieved a good Neighborhood Watch ratio, you may decide that it’s time to branch out and start tackling another level of FHA loans — the 203(k) product.

Intended for the purchase of properties that require minor repairs, FHA 203(k) loans are a popular option among buyers looking to score deals on homes that need renovations. Because of exactly this, real estate owned properties in need of routine upgrades are common targets for 203(k) loans.

Mortgage bankers and brokers should forewarn potential 203(k) buyers that many “fix-it” projects aren’t as quick, affordable and easy as may be expected. Partnering with a novice 203(k) lender sometimes can frustrate buyers, because repairs can take a long time and they can cause more financial complications when completed incorrectly.

With that in mind, take care when venturing into the world of FHA 203(k) loans. Your organization should be well-trained to recognize early red flags, maneuver around possible pitfalls and essentially be equipped to deal with any number of other bumps that may occur along the way.

To help ensure that approved repairs positively affect a property’s value, a 203(k) loan requires appraisers to provide two values for the property — one for the property prior to the repairs and another that reflects the added value of the completed repairs. You can rest assured that your bank’s direct involvement will be much more intense and will be required for longer periods of time compared to more conventional loans. When dealing with 203(k) loans, here are some additional points to keep in mind:

  • Certain extensive and unnecessary upgrades cannot be approved.
  • Total repair costs to be rolled into the final loan amount cannot exceed $35,000 when dealing with the Streamlined 203(k).
  • Properties with health and safety or structural issues typically require completion of the repairs before funding.
  • HUD has particular specifications on work-completion time frames, as well as on which contractors are approved to perform the work.
  • Organizations must review all contractor bids upfront before disbursing funds per a specified incremental schedule spanning the process.

Because it’s the lender’s responsibility to disburse funds out of escrow, your organization also must monitor all work progress and ensure the timely completion of the work being performed — a time frame that’s typically defined as 60 days. Because of these factors, mortgage institutions should be aware that they may need to retain a larger staff to meet all project-management needs.

Negative-equity programs

In addition to these programs, mortgage bankers and lenders also can pursue business originating FHA short refinances. These loans are designed for borrowers who are current on their mortgage payments but still owe more than their homes are worth. Negative-equity programs like this are designed specifically to help such homeowners refinance into more stable and affordable government-insured loans. Institutions who participate in these programs agree to write off a portion of a loan, reducing the amount owed on a first mortgage to no more than 97.75 percent of a home’s current value.

Because of the many checks required to establish eligibility, effectively qualifying borrowers for such loans takes experience, diligence and patience. Lenders must verify that their borrowers have either previously refinanced, had their loans modified or are currently in a state of pre-foreclosure. Further, the existing loan must be conventional, which means that the mortgage cannot be owned or guaranteed by the U.S. Department of Veterans Affairs or the U.S. Department of Agriculture.

Although these are a few of the most basic stipulations of the FHA’s short refinance program, lenders also must be aware of several other requirements. Be sure that your staff knows the following points:

  • Borrowers must be able to prove that they have made three timely payments recently, that they currently occupy the home as their primary residence and that their total debt does not exceed 48 percent of their monthly gross income.
  • They must not have been convicted of felony larceny, theft, fraud, forgery, money laundering or tax evasion in connection with a mortgage or real estate transaction.
  • They must meet all standard FHA underwriting requirements to be considered eligible.

To conduct these transactions correctly and in a timely fashion, mortgage bankers and lenders must be willing to invest in seasoned staff members and offer appropriate training to keep current on policies and periodic changes. These loans can be complex, so it’s important never to underestimate the amount of work and diligence that’s necessary to originate them successfully.

Assemble your team

Because FHA loans are unique in terms of their complexity, customer base, eligibilities and processes, it’s critical for lenders working in this niche to staff their teams appropriately. Mortgage bankers who are considering this market should hire senior-level processors and underwriters who are already well-versed in the aforementioned products to lead their organization’s various teams of associates.

In addition, existing employees should receive third-party training on how to process and underwrite government loans correctly. There are a number of companies nationwide that provide such training, and with the requisite effort and investment, lenders can effectively create their own government-loan specialists by mentoring conventional underwriters and transitioning them into working with FHA loans via test cases and training.

The intricacies of processing these loans, along with the subjective nature in which they must be reviewed, mean that manual underwriting should be emphasized in addition to automated underwriting processes. Although all lending requires the use of search tools to minimize the potential for fraud, decisionmaking for FHA loans often is a bit trickier than it is for conventional loans and requires underwriters to personally look at all documents closely.

For instance, licenses and tax verifications should be checked throughout the process for everyone involved in the transaction to ensure that appropriate validations are being met and that all associations are being kept at arm’s length. Reviews should be intuitive and analytical, as these transactions require less money down and often appeal to cash-strapped or inexperienced borrowers.

•  •  •

Becoming an FHA specialist isn’t for those expecting to make a swift transition, nor is it for those who learn by trial and error. Although there’s definitely a cost associated with thoroughly preparing to do business in this niche, the cost of doing haphazard business can be significantly higher. Cutting corners in a rush to close FHA transactions simply will not work in this arena.

For newer FHA-approved lenders, HUD reviews all case binders for endorsement and performs reviews in which any findings must be resolved by the lender. If certain problems aren’t resolved, HUD can require indemnifications. An FHA lender with at least two years of experience and a low Neighborhood Watch ratio can participate in the Lender Insurance Program (LI), which enables high- performing lenders to insure FHA forward mortgage loans without a pre-endorsement review by HUD. When lenders are given this status, they’re able to complete all insuring electronically, and HUD then randomly selects case binders for sample review before issuing a mortgage insurance certificate. Although pursuing this status may seem like a burden upfront, this process is put in place to provide the best protection for everyone involved.

Inevitably, however, some loans will fail to qualify for insurance by HUD, and even the ones that do qualify may be brought into question when HUD performs a post-endorsement audit and notices potential issues. In those cases, lenders may be required to sign an indemnification. Should one of these loans stop performing, HUD will not cover any of the loss, meaning that all responsibility for making prudent underwriting decisions — and the associated costs of a non-insurable loan because of hasty decisionmaking — falls squarely on the shoulders of the lender.

For this reason among so many others, mortgage bankers and lenders must take care when transitioning into this niche. Adding FHA loans to your repertoire can be a great move, but it’s important to make that move cautiously and thoughtfully. Otherwise, your recipe for success may quickly turn into a recipe for disaster.


 


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