Helping Washington State homeowners learn more about their mortgage options.
Someone recently landed on my blog by entering the phrase:
Why are so many homes not FHA approved?
It's an interesting question. I'm assuming the person doing the research on the internet is a home buyer and that they're looking at a stand-free home and not a condo…pure assumption on my point. (If it is a condo, that's another story).
I'm wondering if the person is finding that sellers are not promoting that they will accept FHA financing on their listed homes…which is a huge mistake.
FHA loan amounts in the Seattle and Bellevue area goes up to $567,500 for a single family dwelling and currently allows a down payment as low as 3.5%. FHA is also more flexible with credit and some underwriting guidelines.
FHA loans are more popular than ever with the ever tightening guidelines and risk based pricing that conventional loans have. Many of my FHA home buyers are putting down more than the minimum required investment of 3.5%.
Some might be selecting FHA for their purchase because they're converting their existing home to a rental property and FHA does not have the same reserves conventional guideline requiring 6 months of mortgage payments (PITI) for EACH property owned (or buying) if the converted home has less than 30% equity (which is often the motivation for turning the home into a rental).
Some select FHA financing because they plan on selling their home in the future and are hedging that mortgage interest rates will be higher in the future. They know that their current low rate FHA mortgage may be assumable to a future buyer in a higher rate environment.
I've had well established clients opt for an FHA mortgage because FHA treats alimony payments different than conventional financing.
FHA is not the same mortgage that it was a few years ago. At the end of 2005, appraisals became more "common sense" allowing minor conditions to exist, focusing more on the safety and soundness of the property. FHA appraisals are very similar to conventional these days.
FHA transactions do not take longer to close nor are their higher closing cost for the seller than a conforming loan
My point is, there are many reasons sellers should accept FHA financing. If a seller or real estate agent is steering away from an FHA approved buyer, they're really reducing the potential of excellent buyers for their home.
One benefit of FHA insured mortgages is that they are assumable to qualified buyers. This means that if you have an FHA insured mortgage at today’s low rates and you’re selling your home during a higher mortgage rate environment, being able to offer a lower rate to potential buyers could provide a distinct advantage over other competing listings. [Read more…]
Often times when gifts from family members are involved, borrowers my opt to use FHA financing since the guidelines are (currently) more flexible than conventional with regards to gifts. With FHA, a gift from a family member can go towards to borrowers minimum required investment with conventional financing, it cannot.
Here’s an example. Let’s say we have a sales price of $265,000 with 10% down payment creating a loan amount of $238,500. Once you factor in estimated closing costs of $2,400 and and prepaids/reserves of $3,100; the amount due at closing is roughly $32,000 (10% down = $26,500 + $2,400 + $3,100). The borrowers also have a $5,000 contribution towards closing costs from the seller.
At this loan to value, with conventional financing requires that the borrower invests a minimum of 5% of their own personal funds into the transaction. Unlike FHA, these funds cannot be gifted from the family members. NOTE: if the gift is 20% down or more, the 5% rule for conventional financing does not apply (the whole down payment can be gifted).
Staying with our example, this means that the borrower must contribute 5% of $265,000 of their “seasoned” funds = $13,250.
With the amount due at closing at $32,000, the borrower must contribute at least $13,250 (5% of the sales price) of their own funds towards the $32,000 (10% down payment). This leaves $18,750 remaining “due at closing”. The borrowers earnest money check (if sourced – meaning documented as being their own funds) can count towards the 5% investment requirement and so can deposits with the mortgage company. For example, the our borrowers submitted an earnest money check in the amount of $5,000 with their purchase and sales agreement, they would have $8,250 remaining to invest into the transaction of the 5% requirement ($13,250 – $5,000 = $8,250).
Once the borrower meets the 5% down payment, the gift and any seller credits can be applied towards the transaction. A seller contribution can only go towards allowable closing costs and prepaids. With this scenario, that totals $5,500 ($2,400 + $3,100). The seller cannot contribute more than $5,500 (actual closing costs and prepaids).
Unlike a seller contribution, the gift from parents can be applied towards down payment or closing costs/prepaids, once the borrower’s 5% investment is met. If your gift from the parents is larger than the remaining amount due at closing, you can either reduce your loan amount or not use the entire gift. NOTE: Your parents may want to check with tax adviser regarding possible tax implications with gifting funds.
With FHA financing, their is also a minimum required investment from the borrower, which is currently 3.5% of the sales price. A gift from parents CAN be applied towards the borrowers minimum required investment (the 3.5%).
When parents provide a gift with conventional or FHA financing, they need to be prepared to provide documentation of where the funds came from. They will sign a gift letter and provide a recent bank statement showing that the funds are available. There also needs to be a “paper trail” documenting the transfer of the gift funds (photo copy EVERYTHING–you’re better off having too much paper work to provide your mortgage originator than not enough).
If you have questions about financing a home located in Washington State, please contact me, I’m happy to help! We have both FHA and conventional programs available.
Related post: Gifts from the Bank of Mom and Dad – Part 1: FHA
UPDATE: HUD HAS EXTENDED THIS WAIVER THROUGH DECEMBER 2014. Information in this post from March 2010 may be outdated – as are many blog posts about mortgages (thanks to our ever changing guidelines).
I recently shared with you some of the upcoming changes to FHA insured loans that were addressed in a letter from HUD’s David Stevens. In this letter, he reminds readers that FHA has recently “waived the regulation that prohibits the use of FHA financing to purchase properties that are being resold within 90 days of previous acquisition”.
Due to previous FHA guidelines, investors who purchased homes to renovate and resale in a short period of time (90 days), would not be able to accept an offer from an FHA buyer. They were limited to cash buyers or those who qualified with conventional financing. From Stevens:
“During this period of high foreclosures, FHA wants to encourage investors that specialize in acquiring and renovating properties to renovate foreclosed and abandoned homes for homebuyers. Our aim is to help stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high. The waiver is applicable to all properties being resold within the 90-day period acquisition and is not limited to foreclosed properties.”
The waiver takes effective February 1, 2010 and not every flipped home will qualify. Per the Waiver of Requirements:
The waiver is set to expire one year, unless it is extended or withdrawn from the Commissioner. More information is expected to follow from a HUD Mortgagee Letter.
Currently, the FHA loan limits for single family residences in King, Pierce and Snohomish counties is $567,500. FHA mortgage insurance is set to increase on case numbers issued April 5, 2010 and later. And this summer, the amount a seller can contribute to allowable closing costs will be reduced from 6% to 3%.
I won’t mention that the Home Buyer Tax Credit is expiring in 50 days on April 30, 2010 (oops…guess I just did)!
If you would like a rate quote for an FHA insured mortgage for homes located anywhere in Washington, please click here. I have been originating FHA mortgages at Mortgage Master Service Corporation since April 2000 and I’m happy to help you.
HUD Secretary Shaun Donavan testifed before House Finance Committee earlier today pledging to continue making adjustments to toughen up FHA insured loans.
Here is the future of FHA:
From Secretary Donovan's prepared testimony:
Indeed, while most of these changes I’ve just described we can make on our own with no additional authority—and we expect to provide detail and public guidance for these changes by the end of January—in some cases, we will need Congress’ help. In addition to asking Congress to increase the current cap on the annual mortgage insurance premium for new borrowers, we are asking for additional authority for our proposals to hold all FHA lenders responsible for their fraud or misrepresentations by indemnifying the FHA fund. We will also be asking Congress to expand FHA’s ability to hold lenders accountable nationally for their performance as I mentioned earlier.
Around the summer of 2008, FHA had implemented risk based based pricing on mortgage insurance. However the passage of HR 3221, The Housing and Economic Recovery Act of 2008, placed a 1 year moratorium on risked base pricing for FHA mortgage insurance. The one year moratorium has quietly passed without the risked based mortgage insurance going into effect–you can see the writing on the wall.
Just last month, FHA tighted up FHA streamline refinances. I agree that borrowers should show they qualify but I think the changes with appraisals being required if the closing costs are to be financed into the new loan is really bad timing.
If you're considering a mortgage, delaying to try to get a slightly better rate can cause you to not qualify at all. We will continue to see with both government and conventional loans tougher guidelines. Waiting longer will mean more hoops to jump through.
Rhonda Porter is a Licensed Mortgage Originator MLO121324 living in the greater Seattle area. Rhonda began her career in 1986 in the title and escrow industry and began her mortgage career in 2000. She enjoys helping people understand the mortgage process and started writing The Mortgage Porter in late 2006. Read More…
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