Does FHA require collections to be paid off for a borrower to be eligible for FHA financing?
A Collection Account refers to a Borrower’s loan or debt that has been submitted to a collection agency by a creditor.
If the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the lender must:
- verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds;
verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s Debt-to-Income ratio (DTI); or
- if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI.
Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless excluded by state law.
Unless the lender uses 5 percent of the outstanding balance, the lender must provide the following documentation:
• evidence of payment in full, if paid prior to settlement;
• the payoff statement, if paid at settlement; or
• the payment arrangement with creditor, if not paid prior to or at settlement.
For manually underwritten loans, the lender must determine if collection accounts were a result of:
• the Borrower’s disregard for financial obligations;
• the Borrower’s inability to manage debt; or
• extenuating circumstances.
The lender must document reasons for approving a mortgage when the Borrower has any collection accounts. The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file.
Extension of HECM Foreclosure Timelines for Properties Impacted by Hurricane Maria in Affected Areas in Puerto Rico and the U.S. Virgin Islands
The Federal Housing Administration (FHA) announced that due to the extensive damage caused by Hurricane Maria in Puerto Rico and the U.S. Virgin Islands, the U.S. Department of Housing and Urban Development (HUD) has exercised its authority to extend foreclosure timelines through August 16, 2018, for Home Equity Conversion Mortgages (HECM) on impacted properties in those Presidentially-Declared Major Disaster Areas (PDMDAs).
This extension is applicable only to those counties declared eligible for Individual Assistance by the Federal Emergency Management Agency (FEMA). It applies to both the initiation of foreclosures and foreclosures already in process on HECMs that become due and payable for reasons other than the death of the last surviving borrower and eligible non-borrowing spouse.
This guidance is effective immediately and is applicable to all homeowners with FHA-insured HECM mortgages whose property or place of employment is in the PDMDAs for Puerto Rico’s Hurricane Maria (FEMA-DR-4339) and U.S. Virgin Islands’ Hurricane Maria (FEMA-DR-4340).
Does FHA have a Prohibition on Property Flipping?
Property Flipping is indicative of a practice whereby recently acquired property is resold for a considerable profit with an artificially inflated value.
The term Property Flipping refers to the purchase and subsequent resale of a property in a short period of time. The eligibility of a property for a Mortgage insured by FHA is determined by the time that has elapsed between the date the seller acquired title to the property and the date of execution of the sales contract that will result in the FHA-insured Mortgage. FHA defines the seller’s date of acquisition as the date the seller acquired legal ownership of that property. FHA defines the resale date as the date of execution of the sales contract by all parties intending to finance the Property with an FHA-insured Mortgage.
Resales Occurring within 90 Days or Fewer After Acquisition:
A property that is being resold within 90 days or fewer following the current owner’s date of acquisition is not eligible for an FHA-insured Mortgage.
Resales Occurring Between 91-180 Days After Acquisition:
A Mortgagee must obtain a second appraisal by another appraiser if:
- the resale date of a property is between 91 and 180 days following the acquisition of the property by the seller's; and
- the re-sale price is 100 percent “over the purchase price” paid by the seller to acquire the property.
The required second appraisal from a different appraiser must include documentation to support the increased value.
If the second appraisal supports a value of the property that is more than 5 percent lower than the value of the first appraisal, the lower value must be used as the property value in determining the adjusted value. The cost of the second appraisal may not be charged to the borrower. The Mortgagee must obtain a 12-month chain of title documenting compliance with time restrictions on resales.
Exceptions to FHA property flipping restrictions are made for:
- properties acquired by an employer or relocation agency in connection with the relocation of an employee;
- resales by HUD under its real estate owned (REO) program;
- sales by other U.S. government agencies of Single Family Properties pursuant to programs operated by these agencies;
- sales of properties by nonprofits approved to purchase HUD-owned Single Family properties at a discount with resale restrictions;
- sales of properties that are acquired by the seller by inheritance;
- sales of properties by state and federally-chartered financial institutions and Government-Sponsored Enterprises (GSE);
- sales of properties by local and state government agencies; and
- sales of properties within Presidentially Declared Major Disaster Areas (PDMDA), only upon issuance of a notice of an exception from HUD.
- The restrictions listed above and those in 24 CFR 203.37a do not apply to a builder selling a newly built house or building a house for a borrower planning to use FHA-insured financing.
Is there any rule specifying the distance between a well and septic tank?
The following provides the minimum distance required between wells and sources of pollution:
- Property Line – 10 feet
- Septic Tank – 50 feet
- Drain field – 100 feet
- Septic tank drain field reduced to 75 feet if allowed by local authority
- If the subject Property line is adjacent to residential Property then local well distance requirements prevail.
- If the subject Property is adjacent to non-residential Property or roadway, there needs to be a separation distance of at least 10 feet from the property line.
NOTE: Distance requirements of local authority prevail if greater than stated above.
- Property Line – 10 feet
- Septic Tank – 50 feet
- Absorption Field – 100 feet
- Seepage pit or cesspool – 100 feet
- Sewer lines with permanent water tight joints – 10 feet
- Other sewer lines – 50 feet
- Chemically poisoned soil – 25 feet (reduced to 15 feet where ground surface is protected by impervious strata or clay, hardpan or rock)
- Dry well – 50 feet
- Other – refer to local health authority minimums
NOTE: Distance requirements of local authority prevail if greater than stated above.
How do I obtain a payoff or subordination of a second lien held by HUD?
Contact HUD’s Servicing contractor, Novad Management Consulting (Novad) to request a payoff or subordination of a second lien held by HUD. Novad is also responsible for FHA Single Family Secretary-Held Assets including:
- Partial Claims subordinate mortgages
- Good Neighbor Next Door (GNND) second mortgages
- Secretary-Held Title II mortgages
- Section 235 subordinate mortgages
- Nehemiah subordinate mortgages
- Hope for Homeowners (H4H)
- Emergency Home Loan Program (EHLP)
- Purchase Money Mortgage
How can FHA help me buy a home?
FHA insured mortgages offer many benefits and protections that only come with FHA:
Easier mortage: Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify.
Less than Perfect Credit: You don't have to have a perfect credit score to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan.
Low Down Payment: FHA loans have a low 3.5% downpayment and that money can come from a family member, employer or charitable organization as a gift. Other loan programs don't allow this.
Costs Less: FHA loans have competitive interest rates because the Federal government insures the loans. Always compare an FHA loan with other loan types.
Helps You Keep Your Home: The FHA has been around since 1934 and will continue to be here to protect you. Should you encounter hard times after buying your home, FHA has many options to help keep you in your home and avoid foreclosure.
FHA does not provide direct financing nor does it set the interest rates on the mortgages it insures. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. In order to initiate the loan application process, please contact an FHA approved lender.
An FHA insured mortgage may be used to purchase or refinance a new or existing 1-4 family home, a condominium unit or a manufactured housing unit (provided the manufactured housing unit is on a permanent foundation.)
Can a person have more than one FHA loan?
FHA will not insure more than one Property as a Principal Residence for any Borrower, except as noted below. FHA will not insure a Mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining Investment Properties, even if the Property to be insured will be the only one owned using FHA mortgage insurance.
Properties previously acquired as Investment Properties are not subject to these restrictions.
Listed below are the only circumstances in which a Borrower with an existing FHA-insured Mortgage for a Principal Residence may obtain an additional FHA-insured Mortgage on a new Principal Residence:
- A Borrower may be eligible to obtain another FHA-insured Mortgage without being required to sell an existing Property covered by an FHA-insured Mortgage if the Borrower is:
- relocating or has relocated for an employment-related reason; and
- establishing or has established a new Principal Residence in an area more than 100 miles from the Borrower’s current Principal Residence.
If the Borrower moves back to the original area, the Borrower is not required to live in the original house and may obtain a new FHA-insured Mortgage on a new Principal Residence provided the relocation meets the two requirements above.
INCREASE IN FAMILY SIZE
- A Borrower may be eligible for another house with an FHA-insured Mortgage if the Borrower provides satisfactory evidence that:
- the Borrower has had an increase in legal dependents and the Property now fails to meet family needs; and
- the Loan-to-Value (LTV) ratio on the current Principal Residence is equal to or less than 75% or is paid down to that amount, based on the outstanding Mortgage balance and a current residential appraisal.
VACATING A JOINTLY-OWNED PROPERTY
- A Borrower may be eligible for another FHA-insured Mortgage if the Borrower is vacating (with no intent to return) the Principal Residence which will remain occupied by an existing co-Borrower.
- A non-occupying co-Borrower on an existing FHA-insured Mortgage may qualify for an FHA-insured Mortgage on a new Property to be their own Principal Residence.
What are the guidelines for borrowers with a previous foreclosure or deed-in-lieu of foreclosure?
A Borrower is generally not eligible for a new FHA-insured mortgage if the Borrower had a foreclosure or a deed-in-lieu of foreclosure in the three-year period prior to the date of case number assignment.
This three-year period begins on the date in which title transferred from the Borrower.
If the credit report does not indicate the date of the foreclosure or deed-in-lieu of foreclosure, the Mortgagee must obtain the Settlement Statement, deed or other legal documents evidencing the date of property transfer.
If the foreclosure or deed-in-lieu of foreclosure was the result of a circumstance beyond the Borrower’s control, the Mortgagee must obtain an explanation of the circumstance and document that the circumstance was beyond the Borrower’s control.
The Mortgagee may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the Borrower, such as a serious illness or death of a wage earner, and the Borrower has re-established good credit since the foreclosure.
Divorce is not considered an extenuating circumstance, however, an exception may be granted where a Borrower’s mortgage was current at the time of the Borrower’s divorce, the ex-spouse received the property, and the mortgage was later foreclosed.
The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.
Where can I find the guidelines regarding gift funds?
Gifts refer to the contributions of cash or equity with no expectation of repayment. Gift Funds may be provided by:
• the Borrower’s Family Member;
• the Borrower’s employer or labor union;
• a close friend with a clearly defined and documented interest in the Borrower;
• a charitable organization;
• a governmental agency or public Entity that has a program providing homeownership assistance to low or moderate income families or first-time homebuyers.
Cash on Hand is not an acceptable source of donor gift funds.
Only Family Members may provide equity credit as a gift on property being sold to other Family Members.
Are loan amounts restricted when the purchase involves an identity of interest?
The maximum loan-to-value (LTV) percentage for Identity-of-Interest transactions on principal residences, including transactions where a tenant-landlord relationship exists at the time of contract execution, is restricted to 85 percent. An Identity-of-Interest transaction is a sale between parties with an existing business relationship or between family members as defined in Handbook 4000.1 II.A.2.b.ii.(A).
The 85 percent maximum LTV restriction does not apply for Identity-of-Interest transactions under the following circumstances:
FAMILY MEMBER TRANSACTIONS
• the principal residence of another family member; or
• a property owned by another family member in which the borrower has been a tenant for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.
• A corporation transfers an employee to another location, purchases the employee’s house, and sells the house to another employee.
• the current tenant purchases the property where the tenant has rented the property for at least six months immediately predating the sales contract. A lease or other written evidence to verify occupancy is required.
BUILDER’S EMPLOYEE PURCHASE
• An employee of a builder, who is not a family member, purchases one of the builder’s new houses or models as a principal residence.
How does a Mortgagee determine the monthly payment on a student loan?
The Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.
Student Loan refers to liabilities incurred for educational purposes.
If the payment used for the monthly obligation is:
- less than 1 percent of the outstanding balance reported on the Borrower’s credit report, and
- less than the monthly payment reported on the Borrower’s credit report;
the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor.
Regardless of the payment status, the Mortgagee must use either:
- the greater of:
- 1 percent of the outstanding balance on the loan; or
- the monthly payment reported on the Borrower’s credit report; or
- the actual documented payment, provided the payment will fully amortize the loan over its term.
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