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they will need to provide other evidence that the funds were theirs (such as the bank statement showing the funds being withdrawn from their account).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: , ,

Documenting Alternative Credit with FHA Loans

July 15, 2008 by 15 Comments

EDITORS NOTE: This post was originally published in 2008. Underwriting guidelines ALWAYS change. Please contact me if you have any questions.

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 Tagged With: , ,

Do you need great credit and a big down payment to buy a home?

May 28, 2008 by Leave a Comment

Cindy, one of my clients that I helped finance their first home, emailed me this question:

"I know home loans have changed a lot but is it true that you can’t get a home loan with a credit score under 700 and 20% down?"

Not true.  Although I’m sure it feels that way and I’ve even heard some in the media make similar wrong statements…it’s no wonder you would have this question.

Having a high credit score and significant down payment certainly doesn’t hurt a home buyer.  It is true that many of the mortgages of recent years are no longer available.  And actually a 700 credit score pays more for their interest rate than someone with a 720 credit score now.   Conventional underwriting guidelines continue to tighten during these historic times.

FHA continues to be a very strong option for home buyers and home owners needing to refinance.   Even when FHA begins to implement risk based pricing for mortgage insurance, as reported by Kenneth R. Harney, borrowers can still have 3% down and lower credit scores:

"On 30-year mortgages with down payments of 10% or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25% of the loan amount upfront and annual renewal premium payments of 0.5. Borrowers with down payments of less than 5% and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25% up front and 0.55% annually. All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5% premiums upfront and 0.5% annually."

One thing to keep in mind is that borrowers do need to have clean credit (no lates) for the past 12 months.  And even if FHA allows a 500 credit score, many lenders have their own underwriting guidelines that may not allow it and they have higher rates for lower credit scores.

To learn more about FHA, please check out my FHA Resource Center or contact me.   Mortgage Master is proud to have our Full Eagle.  We are a direct endorsed HUD lender…what does this mean to you?   We have an FHA underwriter on site at our King County office…we’ve been providing FHA insured mortgages to Pacific Northwest families for over 30 years.   

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

Changes to Conforming Underwriting Guidelines and Why You Should Consider FHA

May 22, 2008 by 2 Comments

A big thanks to Anne for asking me this question:

"I just looked at your blog and didn’t see any mention of upcoming guideline changes.  Any idea what’s on the chopping block this weekend at Fannie and Freddie?"

You see, I’ve written about the changes that are happening with the release of Fannie Mae’s new underwriting guidelines that will take place over Memorial Day weekend…but I did so earlier this week over at Rain City Guide and not at Mortgage Porter.   Please do check out Get Approved before Memorial Day Weekend:  More Changes with Fannie Mae.

In a nutshell, Fannie Mae is anticipating more Expanded Approvals due to tighter underwriting guidelines and fewer approvals.   An Expanded Approval comes with various levels and means that a borrower is receiving an "a-minus" or lower loan approval and a higher interest rate.

This segues into another post I wrote at RCG this week:  Sellers and Agents:  Don’t Rule Out FHA Buyers.   With the new conventional guidelines, I’m anticipating that we are going to have even more FHA buyers.   Just because a borrower is using an FHA mortgage to purchase a home, doesn’t mean that they are subprime or less desirable than buyer using conventional financing.   Remember, the FHA loan limit for a single family dwelling in King, Pierce and Snohomish Counties is $567,500–same as the conforming loan limit. 

A buyer may select FHA over conventional because

  • They are putting less than 20% down.
  • Reduced monthly mortgage insurance.
  • They received an Expanded Approval for a conventional loan and would rather have the lower rate offered by FHA over the higher EA rat

Thanks for your question, Anne!  If you have an idea that you would like me to address at Mortgage Porter, drop me a line.

Filed Under: FHA, Underwriting and Qualifying

Is it a Primary Residence, a Second Home or Investment Property?

April 23, 2008 by 437 Comments

Every so often, someone will be interested in financing for a home they will not be living in 100% of the time…they want the best rate which is “owner occupied”.   It’s crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud.  Bottom line, the property and situation needs to make sense to the underwriter.   Here are some basic definitions:

[Read more…]

Filed Under: Investment Property, Mortgage, Underwriting and Qualifying Tagged With: , , ,

Is the Seattle Area in a Recession?

March 10, 2008 by Leave a Comment

Not according to this graph from USA Today.

Cnnmoney

The article reports that Washington State is a leader in exports, which is helping our State stave off recession.   Even though our State seems to be fairing well as compared to other economies, it’s important to keep in mind:

"Businesses and consumers not in areas most affected by the housing boom and bust are not escaping the effects of the housing slump entirely. That’s because in the fallout from the subprime mortgage mess, banks have tightened lending standards for a variety of loans, no matter where the borrower is."

Hat tip to Transparent Real Estate

Filed Under: Current Affairs, Real Estate, Underwriting and Qualifying

Debt to Income Ratios (aka DTI)

December 27, 2007 by 3 Comments

This is a follow up to the email I received asking several excellent questions.  I addressed what is required for a full doc loan in my previous post.   Now it’s time to answer Question #2:

[Read more…]

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

What is required of income documentation for a “full doc” loan

December 10, 2007 by 2 Comments

Last night, someone contacted me with excellent questions regarding buying a home priced over 1,000,000.   His questions are excellent and worthy of answering on a post to share with other readers.   Since the answers may be a bit detailed, I’ll break this up into separate posts.

“I was wondering if you can provide me with some information regarding loans.  We are looking to buy a house in the next 6-12 months with a price range of 1.1 million to 1.3 million.  We plan to put 20% down on a 30 year fixed mortgage and our credit score is between 760-790. 

1)  What type and duration of income documentation is needed for a full doc loan in the current lending environment?
2)  What is the debt to income ratio that most lenders are using for loans of this size?
3)  What is the typical interest rate differential for a loan of this size compared to the jumbo rates that you quote on Rain City Guide?”

The short answer is 2 years of annual income documentation and 30 days of paystubs.  Income requirements for a conforming and non-conforming are essentially the same and depend on what the automated underwriting system’s (AUS) response is.  Underwriters are looking for trends in income and if they spot what they determine to be a downward trend, they will make an issue of it. 

Here are some basic guidelines that you can rely on which vary depending on how one is paid and if they are self employed.  

Annual Salary

Underwriters like to see two years in the same line of work.  College courses in your line of work can be included in your two year history.   Be prepared to back it up with transcripts which may or may not be required. 

If you’re paid an annual salary, plan on providing 1-2 years of your W2s and paystubs documenting 30 days of income showing your year to date earnings.   Often times, just one W2 is required; it all depends on the AUS findings.

Bonuses, overtime and commissions are typically averaged over the past two years.  If you are relying on this type of income to qualify, you may need to provide your last two years complete tax returns.   A Verification of Employment may also be sent to the employer with a request to provide your income information.   If tax returns are provided, the lender may require you to sign a 4506 or 4506T.  If a borrower has not received bonuses, overtime or commission for the past 24 months; it may not be used for qualifying for a mortgage.

Hourly Employees

When you are paid hourly and the hours vary, your hours and income are averaged for the past two years.  Be prepared to provide your last two years W2s and paystubs covering 30 days of income. 

 

Self Employed

Two years complete (all schedules) business and personal tax returns are required for a full doc loan.    This is the “short answer” and I promise I’ll do a follow up post what may be needed to document self employed income.   A key factor is that you must be able to document that you have been self employed for two years and this income is averaged.   Again, underwriters are looking for trends.  If your most recent year shows a less income than the previous, this will be questioned.

Other types of acceptable income may include:

  • Military
  • Income from rental properites (not for renting rooms in your primary residence)
  • Retirement
  • Alimony
  • Child Support
  • Interest income
  • Part time employment/second jobs
  • Disability/Social Security

As long as the income can be documented for the past two years and is likely to continue, it’s likely that it can be used for qualifying purposes. 

During these times in the mortgage industry, guidelines are constantly changing and underwriters may lean towards the more cautious side.  If you’re planning on obtaining a mortgage for a new home purchase or refinance, the earlier you meet with a Mortgage Professional to review your options, the better off you may be…especially if you’re in the non-conforming market (loan amounts over $417,000).

Watch for Part 2 where I answer Questions 2 and 3.

 

 

 

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