BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
FHA Loans – An Update
Whereas FHA loans were previously a small percentage of California mortgage loans, they are becoming more common because of: (1) increased loan limits, and (2) the reduction in the average sale price of California homes. In some areas of California, FHA loans are now a majority of the loans being made.
The loan limits on FHA loans have been raised considerably, to as high as $625,500 in more expensive areas.
For FHA loan limits by county see: https://entp.hud.gov/idapp/html/hicost1.cfm
The criteria for obtaining an FHA loan have been modified to make those loans easier to obtain.
For these reasons, agents should become familiar with how FHA loans now work.
1. BACKGROUND: An FHA loan is a federal assistance mortgage loan insured by the Federal Housing Administration (“FHA”), and which is issued by federally-qualified lenders. So, the FHA does not make loans; it insures loans made by private lenders which meet the FHA guidelines.
2. CRITERIA: Some of the FHA criteria are:
A. Required mortgage insurance can be funded into the loan.
B. Allowable debt ratios are higher than for conventional loans.
C. FHA repair requirements are more reasonable now than in the past
D. Lower credit scores can still qualify.
E. Fully documented loan application – but various FHA lenders may have different application requirements.
F. Various FHA lenders have different criteria – shop around.
These loans allow down payments of as little as 3 percent.
In addition, sellers can credit up to 6% for closing costs, and/or the buyer/borrower can be gifted up to 6% of the sales price.
Also, non-occupying co-borrowers are allowed. This makes these programs suitable for parents helping a child who is working, or even in college, buy a property.
3. REPAIRS TO BE MADE: Before a property can be approved for an FHA guarantee, an FHA-approved appraiser must make a comprehensive survey of the property’s physical condition.
Certain repairs may be required to be made, such as broken windows repaired, heat working, appliances in the property, health and safety issues repaired, etc. Often, whether an item is required to be repaired will depend on which items the individual appraiser chooses to add to the report.
PRACTICE TIPS:
BUYER AGENTS:
1. Many buyers who would not qualify for other loan programs may well qualify for FHA funding. If your buyer is planning to obtain a FHA loan, get the buyer pre-approved for the loan.
2. Work with mortgage brokers experienced in FHA loans. These loans can be complicated, and the various FHA lenders have different criteria for FHA loan underwriting. And, it is important that the appraiser be experienced with the local properties and the FHA appraisal criteria.
3. Use a purchase agreement or addendum that specifies which party will pay for which closing costs, and make sure that the allocation of costs in the purchase agreement reflects the costs for which the buyer wants the seller to be responsible. Be as detailed as possible to avoid confusion later.
(See e.g., California Association of REALTORS® RPA Purchase Agreement paragraph 2.C (2) which allocates these costs.)
LISTING AGENTS:
1. Review each offer on properties that are priced within the FHA guidelines for your area to determine if buyer has specified that buyer will be obtaining a FHA loan. If so, the buyer may have specified that your seller will be obligated to pay some closing costs not normally paid by sellers. This may be in the form of a credit to buyer for closing costs in an amount or in a percentage of the sales price.
2. Discuss with your seller whether seller is willing to be obligated to pay those closing costs, as specified in the offer, which are over and above the normal seller closing costs for this type of property in your area. This may affect your seller’s decision as to the selling price.
3. If seller does agree to ratify the purchase agreement under those circumstances, make sure that the purchase agreement allocation of closing costs accurately reflects the costs that seller is willing to pay.
4. You may wish to state in the contract (counter-offer, e.g.) that this will be the limit of seller’s obligation so as to avoid a misunderstanding later.
Note that the CAR purchase agreement paragraph 2.C (2) contains blanks for caps on the amount that seller may be obligated to pay.
LOAN FRAUD CAUTION: A number of the mortgage brokers who were involved in the last round of mortgage fraud (liar loans, price inflation fraud, money outside of escrow, etc.) are back. Acting either with their former names, or under new broker names, some of these unscrupulous mortgage brokers are now jumping on the FHA loans (with their low down payments, lower qualifying criteria, and loosening underwriting requirements) to perpetrate yet another round of mortgage fraud.
Be on the look-out for any transactions where there is cash or credits to a buyer outside of escrow, as this is a clear indicator of mortgage fraud.
Do not participate in any mortgage fraud schemes. When in doubt, question the transaction and seek advice before proceeding.
This Weekly Practice Tip is attorney-client privileged and for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2008 11-26-08
