These courses are approved for Credit by the California Department of Real Estate. However, this approval does not constitute an endorsement of the views or opinions which are expressed by the course sponsor, instructor, authors, or lecturers. This material is for educational purposes only. In no way should any statements or summaries be used as a substitute for legal or tax advice. It is your responsibility to know and understand DRE rules and regulations concerning licensing and educational requirements. We will be pleased to help answer your questions, but the DRE is the final authority - contact them at 916-227-0931 or visit the DRE’s website at www.dre.ca.gov

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History of the Program

The National Housing Act of 1934 created the Federal Housing Administration, which was established during the Great Depression when the rates of foreclosures and defaults rose sharply.

Defaults

Foreclosures

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History of the Program

This program allowed lower income Americans the ability to afford homes while at the same time being a self supporting government backed loan that allowed banks to lend without the worry of major default

FHA Mission Help people realize the “American Dream” of homeownership

Reduce Defaults/Preserve Neighborhoods Promote Economic Growth

Stabilize and Revitalize Communities

FHA Goals Educate Consumers to make informed choices

Provide homeownership and home retention opportunities to under

deserved, such as: First time homebuyers

Minorities Elderly

Embrace innovative financing: Down Payment Assistance

Silent seconds

Simplify the home buying process: Remove regulatory barriers

Enable individuals to: Own homes

Build equity in their homes

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FHA Myths

Too complicated

Too much paperwork

Too expensive for seller

Higher rates

Mortgage insurance cannot be removed

Takes too long to close

Doesn’t benefit the buyer

Doesn’t benefit the seller

You have to have money to close

Conventional is always a better loan

Buyer can’t understand the loan

Government gets involved

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Conventional vs. FHA Loans Conventional FHA

No reserve requirement Two months reserves

Minimum 3% down with heavy Restrictions on FICO , ratios, reserves

3.5% Down Payment

Heavy restrictions on Gifts Gift funds allowed, encouraged

No non-occupant Co-borrowers Have Higher qualifying standards

Non-occupant co-borrowers allowed (kiddie condo)

Tiered pricing based on FICO Pricing tiered less severely than Conventional

Collections are AUS driven Up to $5k medical collections can be unpaid If AUS does not allow

ARMS with caps of 5%/2%/5% ARMS with caps of 1%/5%

ARMS qualify at 2% above note rate ARMS qualify at note rate

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Conventional vs. FHA Loans

Conventional FHA

Private MI required (over 80% LTV) Government insured

Must have DU/LP approval Loan can be manually approved

2 years after Chapter 7 4 years out of Chapter 7

2 yrs. after payoff on Chapter 13 1 yr. of on-time payments after Chapter 13

7 yrs. after Foreclosure (3 yrs with Extenuating circumstances)

3 yrs. After Foreclosure

Minimum 2 yrs after a short sale Possible to purchase one day After a short sale*

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FHA Flexible Credit Guidelines

Minimum FICO score is 640*

Minimum time after a Chapter 7 Bankruptcy is 2 years (12 Mos minimum with extenuating circumstances-see below)

Minimum time period after a Chapter 13 bankruptcy is one year from creditor settlement date with proof of on time payments for that year

On Short Sale, it is possible to purchase a home one day after closing*

If little credit history is available, alternative credit can be used. Payments on items such a car insurance, Utility bills or Cell phones can be used

to create the credit required

Minimum time period after a foreclosure is 3 years, unless extenuating circumstances:

Death of wage earner

Serious Illness

Consumer Credit Counseling –must have paid payments on time for 12 mo.

*In some exceptional cases, a score lower than 640 may be acceptable

• Borrower must make a 3.5% cash investment*

• Borrower’s documented liquid assets (IRA’s or 401K)

• Gift from Relative

• Gift from Charitable organization, union, public agency, employer or public entity

• Secured Loan

Down Payment Sources

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Gift Funds

Relative

Close friend w/clear interest in borrower

Borrower’s employer or labor union

Charitable or Non-Profit organization

Acceptable Donors (Donor must show evidence of funds):

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Mortgage Insurance

Up Front MI (UFMIP)

Government Insured

Since the Government insures the loan, in a declining market there is less effect on appraisals being chopped than conventional loan insured by a private MI company. FHA only insures mortgages.

To reduce the cost of monthly MI, an upfront cost of 1.0% of the loan amount is added to the cost of the loan. This cost is usually financed*

Example: Purchase price is $200,000

$200k x (.965)=$193,000 (base loan amt.)

$193,000 x (1.01) = $194,930

This is the final loan amount, including financed, up front MI.

Monthly MI

The monthly Mi amount to be paid is calculated by taking the base loan amount and multiplying it by .0090

$193,000 x (.00115)/12 - $184.96 per month.*

*UFMIP changed to 1.0% and monthly MI.115% 4-18-2011

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Additional Concerns

30 year Fixed

15 year Fixed

1,3,5,7 and 10 year ARM’s

3-2-1 Buydown

2-1 Buydown

Available products-203(b) & 234 (c)

Property must be owner occupied only! No 2nd homes or investment properties

Borrower must be a legal resident and must have a valid SS# (T.I.N acceptable)

Except for certain circumstances, only one FHA Loan is allowed per family

Title can be held in inter vivos trust

Loan Limit – In San Diego County – $546,250

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Additional Concerns

Relocation

Increase in family size

Vacating a jointly owned property

Non-occupying co-borrower

Can only have one FHA loan at any time with the following exceptions:

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Condominiums 234 (c)

Subdivision must be FHA approved

Spot approval no longer available

Do NOT trust MLS data-verify approval with a reputable Loan Officer

Underwriting

• 4155.1 – Mortgage Credit Analysis

• 4155.2 – Lender’s Guide

• 4060 –Mortgage Approval Handbook

• National Reference Guide www.hud.gov./offices/hsg/sfh/ref/fhaintro.cfm

• 245 CFR – Parts 200-499 (Code of Federal Regulations)

• Mortgagee Letters

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Underwriting

• HVCC

• Not Credit Score dependent

• Derogs in last 12 months, with poor credit

• Cash saved at home

• Commissions from Sale- Family member or Realtor/borrower

• Secondary Financing

Investor Overlays

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Underwriting Essential Qualities of an FHA Borrower:

A demonstrated ability to repay their debts and obligations

Documentation of income to meet the debts and obligations

The ability to close the transaction

Sound and acceptable assets

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Underwriting

• Character (credit)

• Capacity (income)

• Capital (reserves)

• Collateral (value)

Criteria: FHA’s four C’s

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2 Years employment/self employment

Must be stable

Must continue for at least 3 years (Alien Visa)

Other verified income may be

Qualifying Notes

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Guidelines for Converting Principal Residence to Rental

Implemented to avoid “Buy and Bail”:

Both current and new payments will be

counted against the borrower’s debt ratios,

and;

Transaction must clearly illustrate purchase is NOT for investment purposes

Relocation – employer

Downsizing or upgrading

Location

Borrower can document 75% LTV or lower in Current

Principal Residence

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Credit obligations of the spouse must be included and will be factored in with borrowers credit obligations (debt ratio) and used to determine the financial capabilities of the borrower. Non-Purchasing spouse disclaims

Non-Purchasing Spouse

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Appraisal Valuation Conditions

These Valuation Conditions and protocol help the appraiser evaluate the standards required by the General Acceptability Criteria. The criteria are described below. It is helpful & facilitates the process if the following items are addressed prior to the appraiser viewing the property.

Manufactured Housing

Must have HUD ID tag (s)

Must have been manufactured >June 15, 1976

Can only have been moved from factory to subject home site once; or factory to dealership lot to home site once (cannot be moved from one home site to another)

Must be taxed as real property Must have engineer’s certification

that permanent foundation meets FHA guidelines

Can purchase land and home with one loan

Refinancing

Streamline Refi without an appraisal:

Maximum loan amount based on :

1. Current principal balance. This is a change that is effective November 1, 2009, and makes it much harder to accomplish a streamlined refinance with costs built in. A very significant recent change.

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Refinancing

95% Cash out Refi, reduced to 85% after 4-1-09

Must own house >12 months

Cash out for any purpose

Co-borrower can be added for qualifying (must occupy)

Limited to 1-2 unit properties, including Manufactured

Streamline Refi

No credit required

Can be with or without an appraisal

Restrictions on loan amounts

Refund partial old MIP and finance new MIP

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• Forbearance

• Loan Modification

• Partial Claim

• Short Sale-FHA PFS

• Deed in Lieu

Options for the distressed FHA Homeowner

Loss Mitigation/Foreclosure Prevention Tools:

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Known as Rehabilitation/Renovation Mortgage. Less Common – Much more comprehensive

construction project

$5k minimum for repairs, but allows for all but one foot of the foundation

to be torn down.

Requires a consultant

Maximum mortgage is lesser of:

1.Maximum FHA limit, or;

2.As-Is Value plus cost of rehab, or:

3.110% of “after improved” appraised value

Most common

Intended to facilitate uncomplicated improvements

Allows up to $35,000 to be used after closing for repairs, which can be part of

the improved value (no minimum threshold)

No General Contractor or drawings required

Does not allow for structural improvements and must use licensed and bonded

Sub-contractors*

*Subs must take ½ draw, finish the job, then get the other 1/2.

Streamlined

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2 Types of 203(k) Loans

Standard

Controlling the elements of the 203(k) process leads to a successful closing.

1.Roofs, gutters, downspouts

2.Heating, ventilation

3.Plumbing, electrical systems

4.Flooring

203(k) Streamline

Examples of eligible work under 203(k)

streamline:

Repair/Replace:

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203(k) Streamline

Examples of ineligible work under 203(k) streamline:

For more information on the 203(k) program visit:http://www.hud.gov./offices/hsg/sfh/203k/203k--df.cfm

1. Pool & equipment

2. Structural improvements requiring drawings, a general contractor or layered work

3. Relocation of a load bearing wall

4. New construction

5. Room additions

6. Repair of structural damage

7. Work not deemed easily completed in 6 months

8. Additional living units (if allowed by zoning)

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• Underwriting Renovation Loans is a two part process:

Expect conditions from both the credit underwriter and the Renovation Lending Dept. And not necessarily at the same

time. This product is not for everyone.

203 (k)

Setting Expectations

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• Prepare ALL parties involved:

Inform Realtors that you are applying for renovation financing

Be aware of the close of escrow date

Inform contractors of the 10% holdback of draws

Manage your borrowers (buyers)

Allow for longer closing

203 (k)

Setting Expectations

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VA Loans

Also known as “Government”, but quite a bit different than FHA

100% financing with no monthly MI to $700,000

Funding Fee (per Circular 26-11-12, as of October 1, 2011, with less than 5% down payment):

1.40% - Active or first time use

1.65% - Active Reserve or Guard Duty

2.80% - Subsequent Use (until October 1, 2012)

Appraisal must be performed by VA approved appraiser

VA Loans

1. Lender's appraisals (reviews)

2. Lender's inspections, except in construction loan cases

3. Loan closing or settlement fees

4. Document preparation fees

5. Preparing loan papers or conveyance fees

6. Attorney's services other than for title work

7. Photographs

8. Interest rate lock-in fees

9. Postage and other mailing charges, stationery, telephone calls, and other overhead

10.Amortization schedules, pass books, and membership or entrance fees

11.Escrow fees or charges a.k.a. Loan closing or settlement fees

12. Notary fees

13. Commitment fees or marketing fees of any secondary purchaser of the mortgage and preparation and recording of assignment of mortgage to such purchaser

14. Trustee's fees or charges

15. Loan application or processing fees

16. Fees for preparation of truth in lending disclosure statement

17. Fees charged by loan brokers, finders or other third parties whether affiliated with the lender or not

18. Tax service fees

19. The veteran cannot pay for appraisals requested by parties other than the veteran or lender.

What Fees can the Veteran NOT pay? The following list provides examples of items that cannot be charged to the veteran as "itemized fees and charges."

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1. ONLINE

http://www.fhaoutreach.gov/FHAFAQ/

FHA’s online resource center, open 24/7

2. E-MAIL

Info@fhaoutreach.com

3. PHONE

(800) CALLFHA – (800) 255-5342

TDD: (877) TDD2HUD – (877) 833-2483

Open Monday-Friday, 8am to 8pm ET

Where to Get More Information

3 ways to get the facts:

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• HUD Approved Counseling Agencies (800) 569-4287

• Loss Mitigation (888) 297-8685

Where to Get More Information

Other Important Phone Numbers:

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• HUD Home Page

http://www.hud.gov or, http://www.espanol.hud.gov

• HUD Knowledge Base

http://answers.hud.gov

• Real Estate Broker/Agent Page

http://www.hud.gov/groups/brokers.cfm

• HUD Contractor Page

http://www.hud.gov/offices/hsg/sfh/reo/mm/mminfo.cfm

• HUD Forms, Handbooks, Mortgagee Letters, etc.

http://www.hudclips.org

Where to Get More Information

Other Websites with information:

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