Are FHA Loans The New Sub-Prime?
Written by:
Misty Nixon
NAMP Volunteer Writer
FHA is the NEW sub-prime and is becoming more frequent than VA or Conventional. Out of 30 loans I process more than half are FHA. One of the great features of FHA is that someone with less than perfect credit can purchase a home if your borrower is willing to document all income and assets. You might find that they are also a bit more cumbersome to process than your typical borrower with much better credit.
While analyzing your file, the first place I start is the credit. You will want to look and see if they have had any recent collections in the last 2 years other than medical collection’s as those will be required to be paid off (more on credit issues to come). If they own a home do they have any late mortgage payments? Have they paid what credit they do have on time? If you have a borrower without any open trade lines you will want to ask them to provide you with 3 alternate credit letters from their electric, phone or cable company showing they have not missed any payments in the last 12 months. You are trying to show your DE Underwriter that this person has had a “hiccup” in their credit and have overcome that bad situation and can pay for this new home on time and without missing a payment. To build a good file you should have them write a very detailed chronological letter of explanation for all of their derogatory credit and have a very good reason and that it is not likely to happen again.
Your ratios need to be in line at about 31/43 to be safe. If you want to run your loan through the automated underwriting system known as LP you will find they need above a 580 mid score to be approved. IF you do not get an ACCEPT on your findings you will be heading for a manual underwrite which you will want to prepare your file well (more to come on that in the future).
Most of my loan officers like to use the YTD income on a pay stub but if that includes a bonus and/or overtime in that YTD and you do NOT have a two-year history of receiving that income your underwriter will reduce your income to the wage without the bonus and overtime. If you can document the borrower has received that income for 2 years (by getting a full written VOE completely filled out) you will need to average it over 24 months, not the actual YTD as it all fluctuates (more to come on the self-employed borrower).
If you find your borrower has good credit but not enough funds for the down payment and/or closing costs, you might want to try Down Payment Assistance, if the seller is willing to participate in the program. The seller will contribute to the non-profit charitable organization called the PreferredProgram (http://www.preferredprogram.org/) provided by the Genesis Foundation. The funds for the down payment come from the pool of funds in the program along with a service fee. The buyer does not need to repay this money and it is NOT tax deductible for the seller. This is one of the organizations I use quite frequently and have had no problems using it thus far and it has been acceptable to most of the lenders I have been using. To be on the safe side you might want to check if this program is on their preferred list (9 times out of 10 it is). You can create an account online and will be able to start using the program immediately. Because the seller is making this contribution directly to the program they can in return “gift” your customers their down payment and closing costs. You can print the forms online and will need to have all parties sign before full loan approval can be granted (most of the time). You will also need to inform your title company/escrow company that you will be using this program because the funds will come directly from this foundation and will be wired directly to them on the day of closing. Typically 2 days prior to closing I confirm the gift online. This will ensure your funds are there the day of closing.
At some point you will need to make sure the home can appraise at what the seller needs to net on his sale before this can even be an option. You’re probably asking yourself since the seller typically gets his asking price or close to it, does the cost of this program mean the home is overpriced? The answer is definitely not. The homes are priced according to Fair Market Value and must be supported by an independent URAR appraisal. It would be up to the listing and selling agent to negotiate the amount to be used.
**For FHA Training Classes Visit http://www.FHAtraining.org.
About the Writer. As one of NAMP's volunteer writers, Misty Nixon is currently a NAMP member in good standing. Feel free to email Misty at: misty@mortgageprocessor.org. Or, if you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.
Misty Nixon
NAMP Volunteer Writer
FHA is the NEW sub-prime and is becoming more frequent than VA or Conventional. Out of 30 loans I process more than half are FHA. One of the great features of FHA is that someone with less than perfect credit can purchase a home if your borrower is willing to document all income and assets. You might find that they are also a bit more cumbersome to process than your typical borrower with much better credit.
While analyzing your file, the first place I start is the credit. You will want to look and see if they have had any recent collections in the last 2 years other than medical collection’s as those will be required to be paid off (more on credit issues to come). If they own a home do they have any late mortgage payments? Have they paid what credit they do have on time? If you have a borrower without any open trade lines you will want to ask them to provide you with 3 alternate credit letters from their electric, phone or cable company showing they have not missed any payments in the last 12 months. You are trying to show your DE Underwriter that this person has had a “hiccup” in their credit and have overcome that bad situation and can pay for this new home on time and without missing a payment. To build a good file you should have them write a very detailed chronological letter of explanation for all of their derogatory credit and have a very good reason and that it is not likely to happen again.
Your ratios need to be in line at about 31/43 to be safe. If you want to run your loan through the automated underwriting system known as LP you will find they need above a 580 mid score to be approved. IF you do not get an ACCEPT on your findings you will be heading for a manual underwrite which you will want to prepare your file well (more to come on that in the future).
Most of my loan officers like to use the YTD income on a pay stub but if that includes a bonus and/or overtime in that YTD and you do NOT have a two-year history of receiving that income your underwriter will reduce your income to the wage without the bonus and overtime. If you can document the borrower has received that income for 2 years (by getting a full written VOE completely filled out) you will need to average it over 24 months, not the actual YTD as it all fluctuates (more to come on the self-employed borrower).
If you find your borrower has good credit but not enough funds for the down payment and/or closing costs, you might want to try Down Payment Assistance, if the seller is willing to participate in the program. The seller will contribute to the non-profit charitable organization called the PreferredProgram (http://www.preferredprogram.org/) provided by the Genesis Foundation. The funds for the down payment come from the pool of funds in the program along with a service fee. The buyer does not need to repay this money and it is NOT tax deductible for the seller. This is one of the organizations I use quite frequently and have had no problems using it thus far and it has been acceptable to most of the lenders I have been using. To be on the safe side you might want to check if this program is on their preferred list (9 times out of 10 it is). You can create an account online and will be able to start using the program immediately. Because the seller is making this contribution directly to the program they can in return “gift” your customers their down payment and closing costs. You can print the forms online and will need to have all parties sign before full loan approval can be granted (most of the time). You will also need to inform your title company/escrow company that you will be using this program because the funds will come directly from this foundation and will be wired directly to them on the day of closing. Typically 2 days prior to closing I confirm the gift online. This will ensure your funds are there the day of closing.
At some point you will need to make sure the home can appraise at what the seller needs to net on his sale before this can even be an option. You’re probably asking yourself since the seller typically gets his asking price or close to it, does the cost of this program mean the home is overpriced? The answer is definitely not. The homes are priced according to Fair Market Value and must be supported by an independent URAR appraisal. It would be up to the listing and selling agent to negotiate the amount to be used.
**For FHA Training Classes Visit http://www.FHAtraining.org.
About the Writer. As one of NAMP's volunteer writers, Misty Nixon is currently a NAMP member in good standing. Feel free to email Misty at: misty@mortgageprocessor.org. Or, if you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.
posted by Editor in Chief at 4:25 PM
1 Comments:
Thanks for your comments, Misty, I am the National Contract Processing Relationship Manager for the Preferred Program, and if you have any questions, you can reach me at 866-485-7171. You can e-mail me at shawnk@preferredprogram.org.
Thanks,
Shawn King
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