Category Archives: FHA Loans

How Does FHA Handle “Cloud” Condominiums?

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condo2It appears that the “cloud” concept has spread wider than in the area of computing.  A newer type of condominium community, called a cloud condominium, has been popping up and is already approved in certain large cities such as Denver, Orlando and San Diego.

A cloud condominium is a community under a declaration of condominium but there isn’t a Home Owner’s Association (HOA) because there are no common elements in the project.  The community is governed by CC&Rs (covenants, conditions and restrictions) but does not maintain an HOA to enforce them.

The unit boundaries contain the interior and exterior of the unit and the adjacent land (front, back and side yards as applicable).  The boundaries also contain the air space above the unit to about 50 feet and the footprint of the unit.  The units can be attached (like townhomes) or free standing like “site condos”.  The units are generally smaller than a standard single-family home which is seen as decreasing the maintenance for the unit owner.

The primary purpose of these communities is to circumvent local zoning restrictions on lot size (as is the case typically with condominiums and planned communities) but without having the political structure of the HOA.

The major downside to not having an HOA is that there is no governing body within the community to enforce the CC&Rs. This means that if a unit owner is in violation of the rules or by-laws, a unit owner (or a group of unit owners) would have to take the matter to civil court to resolve it.

Because these projects do not have an HOA to enforce the CC&Rs, FHA has decided not to approve these condominium projects and, so far, it has made the decision to not lend in these projects either.  If the project consists of attached units, it is not approvable.  If the project qualifies as a “site condo”, it would not need project approval, but FHA has decided not to provide financing for these units.

Because this concept is still relatively new, we would expect that FHA would revisit this decision if the need becomes large enough or if there is more pressure from national organizations.

Fannie Mae Reintroduces 97% Financing for Condominium Units

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Last week Fannie Mae announced the reintroduction of 97% financing for single-family homes, PUD units and condominium units.  This program would compete directly with FHA 96.5% financing…or will it?

From our experience, when Fannie Mae previously offered a 97% loan product, it wasn’t widely used.  This is primarily because the monthly mortgage insurance (MI) was so high.  Fannie Mae requires 35% insurance coverage on loans greater than 95% loan-to-value.  Depending on the borrower’s credit score, this can be very expensive.

The table, below, provides figures for three different loan scenarios: Fannie Mae 97% with a 660 credit score, Fannie Mae 97% with a 720 credit score and FHA (monthly MI not impacted by credit score).

Fannie Mae 97%
720 credit		 Fannie Mae 97%
660 Credit		 FHA 96.5%
Purchase Price $150,000 $150,000 $150,000
Down Payment $4,500 $4,500 $5250
UFMIP* – – $2,533
Total Loan Amount $145,500 $145,500 $147,283
Monthly MI $133 $179 $98
*Up Front Mortgage Insurance Premium of 1.75% charged on all FHA loans; often added to the loan amount.

The other contributing factor to the monthly payment is the increase in the loan’s interest rate.  97% poses more risk as do lower credit scores and Fannie Mae requires loan-level pricing adjustments which effectively increase the borrower’s interest rate.

Often we hear that condominiums don’t want to get FHA-approved because they don’t want “those people” moving in.  Typically, this comment is in reference to low-downpayment buyers.  Essentially, Fannie Mae has just opened the door for “those people” by offering a similar product, albeit one that is more expensive.

Now, even if associations opt to not get approved with FHA, the same 3%-downpayment buyers have the ability to purchase units, but with much higher monthly payments.  By not being approved with FHA, it forces these buyers to use a more expensive loan product.

Note:  97% loans in the State of Florida must be approved through Fannie Mae’s automated underwriting system and require full project approval of the lender or Fannie Mae through PERS for existing projects; PERS approval is required for loans in new and newly-converted projects.

FHA Announces Reduction in Monthly Mortgage Insurance

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stuartmiles (14)On Friday, December 9, 2015, HUD released Mortgagee Letter 15-01 which announced a 0.50% (50 bps) reduction of the FHA monthly mortgage insurance on most forward mortgages with terms greater than 15 years.  This comes on the heels of months of lobbying by housing groups such as the National Association of RealtorsⓇ and the National Association of Mortgage Brokers.

Since 2010, FHA has been steadily increasing the monthly mortgage insurance rates to provide for the stability of the FHA Mortgage Insurance Fund.  The Fund is what allows FHA to insure lenders against losses due to foreclosure; loss of the Fund means the loss of the FHA mortgage loan program.  When foreclosure rates increased during the recession, FHA began to realize losses and determined the need to increase the premiums to raise the balance of the Fund.

More recently, housing groups began to argue that now that the Fund is flush with cash, FHA should lower the monthly mortgage insurance premiums to encourage greater usage of the FHA loan program.  The lowering of the monthly mortgage insurance premiums (MIP) makes FHA more competitive in the marketplace (when compared to the mortgage insurance rates of Fannie Mae).

The chart below illustrates the changes in the rates that will be effective on and after January 26, 2015.

Term >15 Years
Base Loan Amount LTV Previous MIP New MIP
≤ $625,500 ≤ 95.00% 130 bps 80 bps
≤ $625,500 > 95.00% 135 bps 85 bps
> $625,500 ≤ 95.00% 150 bps 100 bps
> $625,500 > 95.00% 155 bps 105 bps
Term ≤ 15 Years
≤ $625,500 ≤ 90.00% 45 bps 45 bps
≤ $625,500 > 90.00% 70 bps 70 bps
> $625,500 ≤ 90.00% 70 bps 70 bps
> $625,500 > 90.00% 95 bps 95 bps

The rate reduction does not apply to single-family forward streamline refinance transactions that closed on or before May 31, 2009 or to Section 247 mortgages on Hawaiian Homelands.

A basis point (or bp) is 1/100th of a percent.  For a loan amount of less than $625,500 and a loan to value (LTV) greater than 95%, the mortgage insurance factor is 85 bps, or .85% of the loan amount.  This factor is applied to the outstanding balance of the loan and then divided by twelve (12) to calculate the monthly mortgage insurance premium.

By comparison, the monthly mortgage insurance rates for a Fannie Mae loan of $200,000, 95.01% LTV and borrower credit score of 700 is 131 bps.  For the same loan and borrower but for 95% LTV, the mortgage insurance factor is 89 bps.

While the mortgage insurance for an FHA is for “the life of the loan”, I believe that the lowered MIP will encourage borrowers to see FHA as a viable option for purchasing and refinancing.  I placed “life of the loan” in quotes because the average life of an FHA loan is around 8 years.  Lifetime FHA MIP is a red herring in my opinion.

I did find the second half of the Mortgagee Letter interesting in that FHA is temporarily allowing the canceling of Case Numbers that were assigned to loans that have not yet closed.  This will allow lenders to cancel the Case Numbers (and therefore the loan) and obtain a new case number after 1/26/15 to allow borrowers to take advantage of the new, lower MIP rates.

In order to take advantage of the new MIP rates, lenders must first cancel the existing Case Number before it submits to acquire a new Case Number.  Cancellation requests may begin on 1/15/2015 and must be submitted no later than 11:59pm, Eastern, on February 26, 2015.

This is encouraging news for condominiums with unit values in FHA’s “sweet spot” of $100,000 to $250,000.  Until this announcement, FHA’s MIP was very expensive and made buying condominium units out of many buyers’ abilities.  The lowered MIP rates will allow more borrowers to qualify to purchase units.

Image courtesy of Stuart Miles/freedigitalphotos.net

3 Myths About FHA Loans Condominium Associations Must Know

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imphot_2The FHA loan program is a balancing act to remain competitive in the market, mitigate risk to its insurance fund and fill the niche role for which it was designed.  FHA loans have changed a great deal even since I began my career as a loan officer in 2001.  This is not your father’s FHA loan!

FHA Loans are NOT Low-Income or Affordable Housing Loans

This is a common misconception about FHA buyers that we run into frequently.  Because the Federal Housing Administration (or FHA) is a division of the Department of Housing and Urban Development (HUD), people associate FHA loans with low-income loans, subsidized “Section 8” housing and Affordable Housing programs.

This is not the case.

In order for a buyer to qualify for an FHA loan, he/she has to meet income guidelines that are nearly the same as “conventional” Fannie Mae loans.  FHA does not provide subsidies for these loans; the buyer has to qualify on his/her own merit.

FHA does not have minimum or maximum income limits and only verifies if the buyer earns sufficient money to meet his/her financial obligations.

More than 20% of FHA’s loans are in excess of $200,000 and nearly 40% are in excess of $150,000.  “Low-income” borrowers would not qualify for loan sizes this large.

FHA Loans are Not for People with “Bad Credit”

FHA has always been more lenient with its credit-qualifying criteria than Fannie Mae – this is one of the niche areas for which the program was designed.  But it does not offer loans to folks with “bad credit”.  In fact, roughly 25% of FHA borrowers have credit scores of 720 or better; these are commonly referred to as “Tier 1” or “A+” credit ratings.

Like Fannie Mae, FHA has minimum credit requirements and an automated underwriting system.  In order to qualify for a loan, buyers must meet FHA’s credit standards, which have become stricter since 2007.  There are two primary differences between FHA and Fannie Mae:

Arcady

  • FHA will allow borrowers with no credit scores.  FHA understands that there are folks who choose to not use traditional credit such as car loans and credit cards.  Instead, they run on a cash system.  If this is the case, these folks would not have credit scores.  Instead, FHA examines the buyers’ non-traditional credit by obtaining letters of payment history from other sources such as electric companies, insurance companies, rent receipts, phone companies, etc.  These buyers are examined very closely by the lender.
  • Fannie Mae does not allow loans to buyers who are not approved by the automated underwriting system; FHA will if it can be shown that the buyers meet FHA’s credit standards.  FHA understands that life-changing events occur which can affect a person’s ability to pay their bills.  Such “life events” include car accidents, serious illness or fire.  If it can be shown that a life event was the cause of the low credit rating AND that it is unlikely to occur again (e.g. the illness is cured or won’t return) then FHA may still approve the loan.  Again, the buyers are very closely examined by the lender.

The FHA Loan Process is Not Tedious

I just had this conversation with mortgage loan officers yesterday.  They mentioned that many real estate agents – even very good agents – still hold on to the idea that the FHA loan process is more tedious and takes longer to close than conventional loans.  One loan officer noted to me that his lender is closing FHA loans in less than 30 days.

This misconception is lingering from the days when FHA appraisals typically found faults in the home that required curing prior to closing.  FHA appraisers were required to to complete a Valuation Conditions (or “VC”) sheet as part of the appraisal.  It was a checklist for the appraiser to search for defects in the property.  This form was removed as a requirement in 2005 making an FHA appraisal virtually the same as one for Fannie Mae.

Top Photo Credit: (c) Can Stock Photo / imphot
Approved Photo Credit: (c) Can Stock Photo / Arcady

FHA Eliminates So-Called “Pre-payment Penalties” for Loan Payoffs

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FHA Eliminates So-Called “Pre-payment Penalties” for Loan Payoffs

Yesterday, August 26, 2014, HUD modified its procedure for interest charges when an FHA loan is paid off.  As of January 21, 2015, lenders will only be allowed to collect interest from a borrower up until and including the date on which the loan balance is paid in full.

Previously, FHA allowed lenders to charge borrowers for an entire month of interest regardless of the day during the month the loan was paid off.  If the loan was paid off due to a refinance, this allowed borrowers to be charged interest twice: once from the old loan and once from the new loan.

For example, John has an FHA and is refinancing his loan this month.  He refinanced on the 11th which means that his FHA loan was paid off on the 14th (after the 3-day rescission period expired).  The FHA lender would be able to charge John interest on the loan for the entire month of August.  The new lender would begin charging interest on the 14th, which is the date the loan funded.  In this example, John would be responsible for the interest charges on both loans for 18 days.

When I was a mortgage broker, we would try to schedule FHA refinances as close to the end of the month as possible to lessen the effect of being double-charged interest.

Under the new procedure, FHA lenders will only be able to charge interest up to and including the date the loan is paid off.  In our example above, the FHA lender would charge interest until the 14th and the new lender would charge interest from the 14th through the 31st.  There is still overlap, but nothing like it was.

HUD made this procedural change because of the CFPB’s final rule regarding pre-payment penalty.  This is broadly described as a “charge imposed for paying all or part of the transaction’s principal before the date on which the principal is due”.

HUD understood this to apply to FHA’s current method of collecting interest beyond the date the loan was paid in full and had to modify this procedure.

This is good news for borrowers, loan officers and lender’s closing departments.  Because refinances of FHA loans would happen at the end of the month, the volume of closings in the last week of the month is much higher than the other weeks.  This dramatically increases the workload of the closing department, which can also increase the likelihood of mistakes.

Without the need to close at the end of the month, I would suspect that FHA refinance loans would be more evenly broadcast throughout the month.  This should decrease stress and the chances of mistakes occurring.

Image credit: (c) Can Stock Photo / AndreyPopov

My Condo’s FHA Approval Expired – Can We Still Close?

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IMG_1094As FHA/VA Condominium Project Consultants, we do not typically get involved with the “loan level” side of things.  Our primary objective is to assist condominium projects to get on FHA’s and the VA’s Approved Condominiums List.

One question that is often asked is “if I have an FHA case number and the project’s approval expires prior to closing, can we still close the loan?”

If the case number was generated prior to the expiration of the condominium’s approval, generally the answer is “yes” but it depends if the criteria is met found on pages 49-50 of the Guide.

The “Guide” is the Condominium Project Approval and Processing Guide that was released as part of ML 11-22.  Pages 49-50 reference the Mortgagee (lender) Certification requirements.

It states: “If a project is currently or was previously approved, the mortgagee must certify that it has reviewed and verified the investor ownership, percentage of owners in arrears for condominium association fees, and owner-occupancy ratio.”

This requires mortgagees to sign Appendix B of the Guide which makes certain certifications to HUD.  One such certification is that the condominium project was on FHA’s approved condominiums list when the case number was assigned.

The remainder of the certification itself reads similarly to the certification that is signed by the HOA, property manager, developer or project consultant on the project-level side, that is, before the project is approved and placed on FHA’s approved condos list.

Additionally, the Guide states that Appendix B must be signed by a representative of the mortgagee that is authorized to bind the company when the loan approval decision is made and it must be signed within 30 days prior to the date of the closing.  It cannot be signed after the loan has closed.

“My condo’s FHA approval expired – can we still close?”  If the case number was obtained prior to the expiration, then chances are you will be OK.

What are the Pros/Cons of FHA Loans?

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hud_bldg (2)The Federal Housing Administration, or FHA, is a mortgage loan insurance provider.  FHA is housed with The Department of Housing and Urban Development, or HUD.  It has a set of guidelines for housing loans and if a borrower meets these guidelines, FHA will insure the loan to protect the lender against losses.  FHA is not a loan provider and does not lend money for home purchases.

FHA has different criteria with which it qualifies borrowers than the so-called “conventional” loan programs of Fannie Mae and Freddie Mac.  FHA allows for lower down payments and has slightly more lenient credit-qualifying criteria than conventional loan programs.

Contrary to popular belief, FHA loans are not “low-income” or “Section 8” housing loan programs.  Because FHA is a part of HUD, many folks have the misconception that these are subsidized loan programs, which is not the case.  FHA borrowers have to meet similar income criteria as those who apply for conventional loan programs.

Then why would someone use an FHA loan instead of a Fannie Mae loan?

Conventional loan programs through Fannie Mae and Freddie Mac account for risk by making pricing adjustments.  These adjustments effectively increase a borrower’s interest rate or cost of obtaining the loan.  There are many different risk factors that can increase a borrower’s rate.

  • Down Payment.  Conventional loans offer higher interest rates to most borrowers who contribute less than a 20% down payment.  The adjustments get steeper the less the borrower contributes.  FHA does not have a pricing adjustment; the borrower will receive the same interest rate with 20% down as he/she would with 3.5% down.
  • Credit Scores.  Conventional loans have increased interest rates for credit scores below 740.  Credit scores also impact the monthly mortgage insurance premium (see below).
  • Multi-family homes.  Conventional loan programs require higher down payments for multi-family (2-, 3- and 4-unit) homes.  In addition, there are pricing adjustments for loans on multi-family homes.  FHA allows for 3.5% down payment for all of its loan programs.  [Note: FHA does require that the borrower have reserves, or funds left after closing, for 3- and 4-unit purchases.]
  • Monthly Mortgage Insurance (MMI).  MMI rates for conventional loans are also priced according to credit score, down payment and number of units.  Lower down payments and credit scores and multi-unit properties result in higher MMI rates.  FHA has a slight MMI rate increase for 3.5% down versus 5% down.

Then why wouldn’t someone want to get an FHA loan?

The primary reason why someone wouldn’t want an FHA loan is because of the MMI.  FHA’s mortgage insurance is higher than conventional loans and, in most cases, would last for the life of the loan.  Lifetime MMI has scared many borrowers who shudder at the thought of mortgage insurance for 30 years.  The reality of it is that the average life of any loan is 7 years.

It is important that borrowers weigh the pros and cons of FHA and conventional loan programs prior to obtaining either of them.