Gifts from the Bank of Mom and Dad – Part 1: FHA

August 17, 2008 by Leave a Comment

Home buyers using FHA to finance the purchase of their home can get help from family members towards the down payment and closing costs in the form of a gift.  NOTE:  With the passage of HR 3221, parents will actually be able to contribute towards the down payment and closing costs as a loan instead of a gift (more info to follow–this is not in effect until October 1, 2008).

Both FHA and conventional mortgages allow for gift funds; they have different requirements.  Part 2 of this post will address gifts when conventional financing is involved. 

FHA Gift Requirements…create a paper trail.

HUD wants to make absolutely sure that gift funds are NOT from the seller, real estate agents, builder or anyone who has an interest in the transaction.   Although to the gift giver (donor) this seems invasive, the donor must prove that the funds they are giving are their own and they must sign a Gift Letter that includes the gift amount and that no repayment is required. 

If the gift funds are already in the home buyer’s account:

A copy of the canceled check (front and back) from the donor will be required along with a copy of the home buyer’s deposit slip or bank statement that shows the deposit.   If the donor is not able to provide a copy of the canceled check, they will need to provide other evidence that the funds were theirs (such as the bank statement showing the funds being withdrawn from their account).

If the funds are to be provided at closing to the escrow company:

When the gift funds are from a certified check, cashiers check or money order; the donor must provide a copy of the withdrawal document or canceled check, copy of the check and a copy of their bank statement showing the with drawl of funds.

If the donor borrowed the gift funds, they must provide evidence of where the funds came from and that they did not come from a party who has an interest in the transaction (seller, real estate agent, builder, etc.).

“Cash on hand” is never an acceptable form of gift funds.

Documentation and creating a paper trail is the key with gift funds.   Gift funds can go towards both the down payment and closing costs for an FHA buyer.  Seller contributions are limited to actual closing costs and prepaids (and cannot go towards down payment) after the buyer has met the minimum required investment (3% until December 31, 2008; then the minimum required investment is 3.5% for the buyer).

Gift funds are not limited by family members; employers and charitable organizations (as long as they are not funded by the seller after October 1, 2008) are also permitted to contribute gift funds with FHA financing.  Family members may include brothers, sisters, aunts, uncles–even close family friends as long as the relationship can be documented.

Gift donors may want to check with their Tax Advisor to make sure they avoid paying gift tax (currently $12,000 per parent/donor per child/family member).  For example, two parents (Mom and Dad) could gift $12,000 each for a total of $24,000 for to a child per year.  If the Bank of Mom and Dad want to gift to their daughter or son in law as well, the gift amount could go up to $48,000 without incurring gift tax.  (Again, always check with your CPA or tax advisor).   

If you’re considering FHA financing, check HUD’s site to make sure your lender is FHA approved–many are not.  Mortgage Master is a HUD approved Direct Endorsed FHA lender with FHA underwriters at our location.  Be sure to ask your Loan Originator how long they have been originating FHA loans.  I have been helping home owners with FHA financing for over eight years.   

Do you have questions about financing your home located in Washington State?  Please contact me.

Filed Under: FHA, Underwriting and Qualifying Tagged With: , ,

FHA Minimum Down Payment Increasing January 1, 2009

August 13, 2008 by 4 Comments

With the passage of HR 3221, the minimum required investment of a home buyer utilizing a FHA insured mortgage is increasing from roughly 3% to 3.5% effective January 1, 2009.  You may think this sounds like small change, but with larger loan amounts, this adds up.

For example, if a home buyer is utilizing a FHA Jumbo and they are buying a home priced at $500,000.   Their current minimum required down payment of 3% is $15,000.  Effective January 1, 2009, the minimum required down payment of 3.5% is $17,500; a difference of $2,500 for the amount required to invest into the transaction.   With a home priced at $300,000; the current required investment from the buyer would be $9,000.  As of January 1, 2009, the new amount required will be $10,500.

What does this mean to you?

If you are planning to buy a home utilizing a FHA insured mortgage, be aware of the changes to the minimum down payment requirements.   After December 31, 2008, you'll be required to come up with additional funds towards your down payment which may be a gift or loan from family members.

If you are wanting to take advantage of the lower down payment requirement, meet with a Mortgage Professional who is qualified to provide FHA loans (not all loan originators are, you can check HUD's site to verify).

If you would like me to provide la rate quote for a FHA mortgage on a home located anywhere in Washington, please click here.

Editors Note: this post wass been modified to correct the effective date.

Filed Under: FHA, Jumbo/Non-Conforming, Legislation, Residential Purchase

Conforming/FHA Jumbo Limit to Decrease January 1, 2009

August 12, 2008 by Leave a Comment

November 7, 2008 Update: FHFA has announced the new conforming jumbo loan limits for 2009 which are based on a lower median home price than used here (which was 2008’s limits).  Based on these figures, a single family unit will be $506,000 for King, Pierce and Snohomish Counties.  Read more here.

Recent legislation, HR 3221 included what the new conforming loan limits will be.  Our conforming-jumbo limits will be rolled back slightly to the following effective for all mortgage loans not closed December 31, 2008.   Here’s what the new limits will be effective January 1, 2009 (based on HUD’s current median home prices at the time of this post):

King, Pierce and Snohomish Counties:

Single Family:  $506,000 $522,100 ($567,500 until 12/31/2008)

Two Family:  $668,350 ($726,500 until 12/31/2008)

Three Family: $807,850 ($878,150 until 12/31/2008)

Four Family: $1,004,000 ($1,091,350 until 12/31/2008)

Kitsap County:

Single Family:  $437,000 ($475,000 until 12/31/2008)

Two Family:  $559,450 ($608,100 until 12/31/2008)

Three Family:  $676,250 ($735,050 until 12/31/2008)

Four Family:  $840,350 ($913,450 until 12/31/2008)

San Juan County:

Single Family:  $546,250 ($593,750 until 12/31/2008)

Two Family:  $699,250 ($760,100 until 12/31/2008)

Three Family:  $845,250 ($918,800 until 12/31/2008)

Four Family: $1,050,500 ($1,141,850 until 12/31/2008)

Clark and Skamania Counties:

Single Family: $417,000 ($418,750 until 12/31/2008)

Two Family:  $533,850 ($536,050 until 12/31/2008)

Three Family:  $645,300 ($648,000 until 12/31/2008)

Four Family:  $801,950 ($805,300 until 12/31/2008)

Jefferson County:

Single Family:  $417,000 ($437,500 until 12/31/2008)

Two Family:  $533,850 ($560,050 until 12/31/2008)

Three Family:  $645,300 ($677,000 until 12/31/2008)

Four Family:  $801,950 ($841,350 until 12/31/2008)

Watch for my follow up post on what this means to you.

Read my related articles on HR 3221:

First Time Home Buyers Tax Credit

Down Payment Assistance Programs Days are Numbered

Filed Under: FHA, Jumbo/Non-Conforming, Legislation, Mortgage, Refinance, Residential Purchase, Seattle

Down Payment Assistance Programs Days are Numbered

August 11, 2008 by 6 Comments

With the passing of HR 3221, Down Payment Assistance Programs will no longer be allowed with FHA mortgages as of October 1, 2008.    DPA’s such as Nehemiah, have been popular for helping home buyers come up with their down payment.  FHA allows Sellers to pay for closing costs and prepaids as long as the buyer has met their minimum required investment (which has also changed with the passing of HR 3221–another post will follow on this subject).   With DPAs, the seller contributes funds to the DPA (like Nehemiah) which is a "charity" (they collect a small fee from the seller which is used for charitable causes).   The DPA then contributes the funds towards the down payment for the buyer.

Section 2113 of HR 3221 states that down payments for FHA insured mortgages may not come from "the seller or any other person or entity that financially benefits from the transaction" or "any third party or entity that is reimbursed directly or indirectly".  This applies for new loan applications on or after October 1, 2008.

Family members can still contribute towards the down payment on FHA insured mortgages.  In fact, Section 2113 of HR 3221 allows family members to loan up to "100% of the appraised value of the property plus any initial service charges, appraisal, inspection and other fees in connection with the mortgage".   The borrower must qualify for both mortgage payments (the first mortgage-FHA insured at 96.5% of the appraised value and the second mortgage from the Bank of Mom and Dad for the remainder).   This may make family members more comfortable with helping out with down payments as it will not be treated as a gift and the loan is documented, terms would be clear and recorded as well as secured against the property as collateral.  (Hopefully the Bank of Mom and Dad never have to foreclose).

What does this mean to you?

If you’re considering buying a home with minimum down payment, your family can gift or finance the 3.5% required investment of the buyer for FHA insured financing.  However, if you’re family not in the position to do so or if you don’t want to ask the Bank of Mom and Dad, then you have limited time to take advantage of the Down Payment Assistance Programs.

If you’re hoping to use a down payment assistance program to purchase your next home, you have just over a month to do so.  Meet as soon as possible with a qualified Mortgage Professional who can help you become preapproved with an FHA insured mortgage (NOTE:  not all lenders are approved to do FHA loans).  You must be credit approved prior to October 1, 2008 (and the closer we approach that date, the busier FHA approved lenders will be trying to beat the deadline).

Of course, DPAs are going down kicking and screaming to stay alive.  At this point, the countdown to the demise of DPAs is clicking away.

Update: 9:30 am August 11, 2008.   I’ve just received notice from one of the banks that we work with are no longer allowing DPAs.   This serves as a good reminder that lenders may have their guidelines that overlay government requirements.

Related posts on HR 3221:

First Time Home Buyer Tax Credit

Filed Under: FHA, Legislation, Residential Purchase

FHA Question from a Mortgage Porter Subscriber

July 31, 2008 by Leave a Comment
I love receiving emails like this one:
Hi Rhonda. Thank you for your helpful information on your website. The Gov’s FHA site is not very user friendly!
I hope to be a first time homebuyer in the next year or so. I am working on repairing my damaged credit and know I need at least a solid year of "good payment history, etc" to demonstrate I’m a good buyer.
I realize the higher the credit score the better…but what is the minimum score one could have to be considered for this type of loan? And what is the min down payment I could expect to pay? I’m hoping to purchase a condo in Kirkland for under $350K and just need to see what I should plan for. Thank you!
Here’s my response:
  • FHA does require the last 12 months of a borrowers credit to not have late payments.  As far as credit scores, FHA is not credit score sensitive–however some lenders will charge you a higher rate if your mid credit score is under 620.  You can actually have no credit scores or shallow credit and possibly qualify with FHA by alternative credit.
  • 3% is the minimum investment required by FHA currently except this is changing on January 1, 2009, thanks to the new law passed yesterday, to 3.5%.  Based on a sales price of $350,000, the new required investment would be $12,250 (instead of $10,500).   
Last, even if you’re considering buying twelve months from now, I recommend contacting a qualified Mortgage Professional (like me) who works for a HUD endorsed lender (like my company, Mortgage Master) to make sure you’re on the right track with improving your credit.

Filed Under: FHA

How Much Home Can You Buy with $17,550 Down

July 22, 2008 by 1 Comment

I’m taking a brief blogging break.  This is a reprint from Rain City Guide.  To read the original post and 100 plus comments, click here.

My purpose for this post is to hit it home what a great window of opportunity we have with FHA Jumbo windowmortgages which are only around until December 31, 2008 unless Congress passes an extension of some sort (which is a possibility-but not guaranteed).

For the remainder of this year, you can use $17,550 to buy a home priced at $585,000 using FHA Jumbo with 3% down.    FHA requires the buyer to invest 3% into the transaction (which can be a qualified gift).  3% of $585,000 = $17,550.  (With roughly 5% down, utilizing FHA Jumbo, you can puchase a home for $600,000).  The Seller can contribute up to 6% towards closing costs and prepaids as long as the buyers 3% required investment is met.  With this scenario, the Seller is contributing around $14,000.   The loan amount is just under the maximum allowed FHA Jumbo for King, Snohomish and Pierce County of $567,500.   

With FHA there are no income limitations and much easier on credit scoring than conventional mortgages which ding you if your score is 719 or lower.   Effective January 1, 2008 2009 (as things currently stand) the FHA loan limit will be reduced to their actual loan limit of $362,790 for King, Snohomish and Pierce Counties. 

Of course, you’re not limited to FHA if you only have around $17,550.  There’s also Fannie Mae Flex (someone please knock on wood fast before Fannie shelves decides to put this product on the shelf) which allows lower down payment–currently as low as 97%.  However the highest loan amount allowed is the true conforming of $417,000.   Utilizing a Fannie Flex program, you could purchase a home priced around $434,000 with the seller contributing about $12,000 towards your closing costs and prepaids.

So we’re talking $585,000 sales price using FHA Jumbo (while supplies last!) or $434,000 with Fannie Flex97 (while this product is still available) if you have $17,550 for a down payment.   Can you see why I’m so crazy about FHA Jumbo?  This is a window of opportunity for those who qualify for the payment but may be shy on the down payment that’s scheduled to close on December 31, 2008

Filed Under: FHA, Jumbo/Non-Conforming, Residential Purchase

New Risk Based Pricing for FHA Mortgage Insurance

July 16, 2008 by Leave a Comment

Update: 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.  This will not go into effect until October 1, 2008.

Effective July 14, 2008, FHA has implemented risked based pricing for monthly and upfront mortgage insurance.  Previously, upfront mortgage insurance on FHA insured loans was always 1.5% of the loan amount and the monthly mortgage insurance was 0.5% of the base loan amount.   Now, depending on the borrowers down payment and credit score, the amount of upfront and monthly mortgage insurance required for FHA loans is staggered.   

Here is a quick breakdown of the new formula for FHA mortgages with 30 year terms (includes FHA ARMs):

Loan to value of 90% or less (minimum 10% down payment)

600 or better mid credit score = 1.25% upfront mortgage insurance (MI) and 0.50% monthly MI.

599 – 560 mid credit score and non-traditional credit = 1.50% upfront MI and 0.50% monthly MI.

559 – 500 mid credit score = 1.75% upfront MI and 0.50% monthly MI.

Loan to value of 90.01% – 95% (5% – 9.99% down)

640 or better mid credit score = 1.25% upfront MI and 0.50% monthly MI.

639 – 600 mid credit score = 1.50% upfront MI and 0.50% monthly MI.

599 – 560 mid credit score and non-traditional credit = 1.75% upfront MI and 0.50% monthly MI.

599 – 500 mid credit score = 2.00% upfront MI and 0.50% monthly MI.

Loan to value greater than 95% (less than 5% down)

850 – 680 mid credit score = 1.25% upfront MI and 0.55% monthly MI.

679 – 640 mid credit score = 1.50% upfront MI and 0.55% monthly MI.

639 – 600 mid credit score = 1.75% upfront MI and 0.55% monthly MI.

599 – 560 mid credit score and non-traditional credit = 2.00% upfront MI and 0.55% monthly MI.

559 – 500 mid credit score = 2.25% upfront MI (may be reduced to 2.00% upfront MI if it’s a first time home buyer who participates with HUD-approved counseling) and 0.55% monthly MI.

Credit scores are determined by the middle of three credit scores when three scores are available.  If a borrower only has two scores, then the lower of the two scores will be used.  When there are more than one borrower, the lowest "mid score" of all borrowers will be used to determine the required amount of mortgage insurance.  For information on non-traditional credit (weak credit history), click here.

NOTE: although FHA is offering mortgage insurance on lower credit scores, most lenders have their own price adjustments on FHA mortgage loans with credit scores under 600 and will not provide a FHA mortgage when a mid score is under 580.

All FHA insured loans have private mortgage insurance–even if the borrower is putting 50% down and will remain on the mortgage for a minimum of 5 years AND 78% of the original loan balance.

Check out the article I wrote at Rain City Guide on these changes which has examples of how this impacts a mortgage loan payment. 

Filed Under: FHA, Mortgage Insurance

Documenting Alternative Credit with FHA Loans

July 15, 2008 by 15 Comments

EDITORS NOTE 12/13/2012: This post was written in 2008 and currently, our company (and many others) will not consider “alternative credit”. We now have a minimum credit score of 640 required.

FHA insured loans, which are quickly becoming the mortgage of choice unless you have 20% down payment and 720 credit scores, allows people to obtain mortgage financing if they are shy on an established credit history reported to the credit bureaus.  Typically, a borrower needs to the following shown on their credit report for it to be considered “established”: 

  • At least three trade lines (credit accounts) in good standing.
  • Two of the three trade lines must be at least 12 months old.
  • One trade line must be at least 24 months old.
  • Three credit scores per borrower.

Sometimes, if someone does not have established credit that is reported to the credit bureaus, they need to use “alternative credit” or “non traditional” credit, which may be acceptable with FHA financing.   Proving you have credit that is not reported to the bureaus requires that you obtain documentation from three different sources that you have made on time payments to during the last 12 months.   

Possible types of non-traditional credit (preferred–at least one of these types of sources are required):

  • rent payments
  • utilities (telephone, electricity, gas, water, garbage, cable, etc.)–not included in housing payment.

Other acceptable sources of non-traditional credit are (two out of three sources may come here):

  • insurance (medical, auto, life, renter’s, etc).
  • payment to child care providers
  • internet/cell phone service
  • personal loan with terms in writing supported with canceled checks
  • department, furniture, rent-to-own stores, etc.
  • a documented 12 month history of saving by regular deposits (at least quarterly) that are not payroll (automatic) deducted.

Note:  Debts that are paid automatically from your payroll are not allowed to be used in documenting non-traditional credit.  Lenders want to make sure that you are able to make timely payments “voluntary”.

The “form of proof” can be:

  • canceled checks for the last 12 months, or
  • written letter from creditor which is written on their letterhead, includes your name and account number stating the you have made on-time payments during the last twelve months.   The letter should include what the payment amount is and the total amount due.

In order to qualify for a non-traditional credit approval with FHA, over the last 12 months, there must be:

  • No late payments for housing.
  • No collections or court records reporting (with the exception of medical).
  • No more than one 30 day delinquency on payments due to other creditors.

Qualifying ratios are restricted to 31% for the payment to income ratio and 43% for the total debt to income ratio.   Two months reserves (two months mortgage payments in savings after closing) is also required.  When non-traditional credit is used, the mortgage is a “manual underwrite” meaning that you need to allow for more time during the underwriting process as a real live human is underwriting your transaction.   

Last but not least, do make sure that you are working with a Mortgage Professional who is qualified to provide FHA mortgage loans.  Not all mortgage companies are approved and, with many products no longer available, they may try to illegally provide an FHA mortgage with hopes of finding another lender to broker it to.  Ask your Mortgage Professional if they have provided FHA loans before, how long and how long their company has been approved for FHA loans.  By the way, I cut my mortgage teeth on FHA 8 years ago and our company has been providing FHA loans since our inception.  (We are a Direct Endorsed HUD lender).  You can always check out HUD’s site to confirm whether or not your lender is approved.

Questions or concerns about FHA (or any) mortgages for Washington State properties?  Contact me.

Filed Under: Credit Scores and Reporting, FHA, Underwriting and Qualifying
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