With FHA loans becoming more popular in the Ringwood NJ real estate market due to the increased loan amounts, declining market issues, and changing MI guidelines, I have put together some FHA FAQs to cover some questions we've received concerning FHA loans.
Is there a limit on the percentage of discount points that can be charged?
Per HUD requirements, discount points, origination fees, and other such fees cannot exceed two percent. Keep in mind, only one percent in origination can be charged. If the two percent limit is exceeded, the variation must be based upon actual fees or costs charged to the lender to make the loan.
Is there a minimum Credit Score requirement for?
FHA does not have a minimum credit score, however most lenders in the market today do. For standard FHA loans, we currently only have one investor that will purchase loans with credit scores below 580 and those loans must receive an AUS approval. We also have some options for borrowers with no credit scores at all utilizing Non-traditional Credit. FHA Jumbo loans require a minimum credit score of 580.
Does FHA allow Manually Underwritten loans?
FHA allows the use of DU or LP and also allows loans to be manually underwritten if an AUS approval cannot be obtained. Manually underwritten loans must be fully documented and must adhere to FHA guidelines such as ratios of 31/43, etc. As stated in the previous question, our investors will not take a loan with less than a 580 score unless it is approved by DU/LP and we still have some investors that allow the use of Non-traditional Credit. Loans utilizing Non-Traditional Credit or loans without an AUS approval using DPA's (Ameridream, Genesis, Nehemiah, etc.) with credit score less than 600 require a Credit Review from senior management.
Does FHA allow Non-Occupant Co-borrowers in order to help for qualifying purposes?
Yes, this is allowed as long as both the borrower and co-borrower are family members and they qualify with all combined debts. The purpose of this provision is to enable a family member to have a joint interest in a property so as to enable another family member to attain homeownership. All borrowers regardless of occupancy status must sign all documents relating to the purchase of the property. This provision is not intended to circumvent FHA's ban on loans to private investors. Mortgages with non-occupying co-borrowers are limited to one-unit properties if the LTV will exceed 75%. If a parent is selling to a child, the parent cannot be the co-borrower with that child on the new mortgage unless the loan-to-value is 75% or less.
Does FHA have Seasoning Requirements for Refinance transactions?
No Cash Out Refinance: If the property was acquired less than one year before the loan application and is not already FHA-insured, the original sales price of the property must be considered in determining the maximum loan amount.
Cash Out Refinance: The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.
Streamline Refinance (FHA to FHA Rate/Term Refi): Except for loans that were assumed, there are no seasoning requirements for streamline refinances.
Are previous late mortgage/housing payments allowed on FHA Streamline Refinances?
No more than 1x30 day housing payment delinquency in the last 12 months is allowed on FHA Streamline refinances.
Is there a maximum combined loan-to-value limit?
It depends on the subordinate financing. If there is a seasoned second lien (12 months or more), there is no CLTV limit provided the lien is subordinated to the FHA loan and it has been paid as agreed. If the transaction is a purchase with a new second lien, the CLTV cannot exceed 100% of the acquisition costs (sales price plus allowable eligible borrower-paid closing costs, energy efficient improvement costs, discount points, and rehabilitation expenses).
Can the FHA Monthly MI be cancelled when buying?
Per FHA guidelines, monthly MI is charged on all loans regardless of the LTV and will be collected until the loan reaches 78% LTV from the original purchase price or for at least a minimum of 5 years.
Do deferred debts need to be included in the overall debt ratio?
If a debt payment, for example a student loan, is scheduled to begin within 12 months of the mortgage loan closing, the lender must include the anticipated monthly obligation in the qualifying ratio, unless the borrower provides written evidence that the debt will be deferred to a period outside this timeframe. Similarly, balloon notes that come due within one year of loan closing must be considered in the underwriting analysis.
Do all liabilities need to be included in the debt-to-income calculation?
It is the lender's responsibility to determine if the overall risk is acceptable based on the borrower's cash reserves after closing, debt-to-income ratio, and overall risk of the loan. The borrower's liabilities should include all installment loans, revolving charge accounts, real estate loans, alimony and child support payments, and all other continuing obligations. In calculating the debt-to-income ratio, the lender must include the monthly housing expense and all other recurring charges extending 10 months or more. Debts lasting less than 10 months must be counted if the amount of the debt affects the borrower's ability to make the mortgage payment during the months immediately after loan closing (this is the underwriter's discretion so if in doubt, ask the underwriter upfront).
If a revolving credit line has an outstanding balance but does not have a minimum monthly payment amount, the monthly payment must be calculated as the greater of five percent of the balance or $10. Revolving debt cannot be paid down to qualify.
What income can be grossed up and when?
If a particular source of regular income is not subject to federal taxes (for instance, certain types of disability and public assistance payments, military allowances, child support, etc.), the amount of continuing tax savings attributable to the non-taxable income source may be added to the borrower's gross income. The percentage of income that may be added may not exceed the appropriate tax rate for that income amount and no additional allowance for dependents is acceptable.
The adjustments made (the amount the income is "grossed-up") for any non-taxable income source must be documented and supported. Either the published IRS tax tables may be used for calculating the amount that may be grossed up, or the tax rate of 25%. The lender is responsible for justifying the amount used and ensuring that the income is exempt from federal taxation.
What is the maximum property seller contribution when buying a home?
The property seller can contribute up to six percent of the purchase price toward closing costs, prepaids and discount points. Money contributed by a non-profit organization for down payment assistance is not included in the six percent.
Are escrow/impound accounts mandatory on FHA loans?
Yes, an escrow/impound account for taxes and insurance is required.
Can a down payment assistance program (DAP) such as Ameridream, Nehemiah, or Genesis be used?
Yes; however, they are typically only allowed with FHA 203(b) loan programs (regular FHA Fixed Rate), other FHA programs such as FHA 203(k) using DAPs are not allowed. Due to possible termination of approved status from the IRS for Non Profits, files must contain evidence from the IRS Website and the FHA list of approved Non Profits when DPA's are used for closing. Here is the website to check the Non-Profits and the HUD guidelines: www.hud.gov/offices/hsg/sfh/np/irstatus.cfm.
Are FHA loans on manufactured homes eligible for purchase?
Yes, some investors allow manufactured homes.
To learn more about investing in Ringwood NJ real estate, or for a referral to a reputable local lender who can tell you more about FHA loans, please call me at 973-962-5410 or visit HomesByOrly.com. You may also use my complimentary MLS search to begin searching Ringwood NJ real estate!
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