FHA is not a four letter word!

I am writing this post to address the stigma that is out there concerning FHA financing.  In the past, FHA financing posed many challenges to a timely closing (or a closing at all).  Much has changed over the past couple years.  FHA loans have gained popularity quickly in the San Francisco Bay Area…and for good reason.  FHA loans are the only low-down payment option left in today’s mortgage market.   It is a shame to see that sellers have been turning down the highest bid because of FHA financing.  To my surprise, I’ve recently heard that a seller accepted an offer for $10,000 less with a closing for 30 days, solely because the buyer with the conventional offer was putting down 20% for a conventional loan.

There have been many changes with FHA guidelines from the past and with the mortgage industry itself that actually make an offer with FHA financing even more appealing than an offer with conventional financing.

1. Timely closings : When the FHA loan lmits increased in the San Francisco Bay Area recently, lenders were not staffed properly with FHA underwriters.  FHA requires that loans that they insure be underwritten by underwriters who have been approved by HUD.  There was a scramble by lenders in this area to get their underwriters approved by HUD.  This translated into longer turnaround times for loan approvals.  It was not uncommon to wait 10-15 business days to get an approval.  Now the difference is minimal depending on the lender that you choose.  It is not difficult to find a lender with 72 hour turn-around time for approval.

2. Lower credit guidelines: Because FHA will insure loans with higher debt-to-income ratios and lower credit scores than conventional loans, the chance that the FHA loan will close is much higher.  These days, it is difficult to find private mortgage insurance for loans with deb-to-income ratios over 41% and credit scores under 740.  Most FHA lenders will approve loans with credit scores as low as 620 and debt-to-income ratios up to 55%.  This means that there is a larger margin for error with an FHA loan.  If a credit score drops, or if there is a new liability to take into account, there is still a loan for the most part.

3. Appraisal Issues with conventional loans:  Due to some recent, mis-guided legislation, loans with conventional financing may take longer to close because you must order the appraisal from an appraisal management company.  The broker or bank is not allowed to speak to the appraiser, and many times the appraisers are not paid fairly by the management companies.  This results in longer turn around times and poor appraisals.  FHA loans do not have this requirement.  You should be able to lift appraisal and financing contingencies with a good FHA loan officer within 15 days.  I have been conservative by asking for 15 days for appraisal, 20 for fiancing, and 30 for close.  I have a transaction that will be ready to close in 3 more days.  We went into contract 15 days ago.

4. FHA property requirements: FHA has become much more accommodating with regard to property requirements.  In the past, it was not uncommon for an FHA loan approvals to be riddled with conditions for repairs prior-to-close.  This is not the case anymore.  The new FHA loan requirements are very close to the specifications set by fannie mae and freddie mac for conventional financing.

Find out more about FHA financing in the San Francisco Bay Area

Find out more about financing from the Federal Housing Administration (FHA) and what you can buy in the San Francisco Bay Area with as little as 3.5% down!  

We have put this blog-site together in order to provide as much up-to-date information about FHA financing in the San Francisco Bay Area as possible.  Not only will you be able to find out what an FHA loan is, and how it works, but you will also be able to see active listings of properties that you can buy with as little as 3.5%. 

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While we specialize in FHA home financing, it is not the only type of mortgage that we offer.   With over 18 years of combined experience, we have experience with commercial, construction, and conventional financing as well.  Whether you are looking to buy your first home or 101st, refinancing your primary or investment property, we are here to help you find the best possible option.

Jay Sondhi

Sam Lee

Streamline Refinance FAQ

Frequently Asked Questions about the FHA Streamline Refinance Loan

Q:     Are the rates in the FHA Streamline competitive with a regular loan?

A:      They are as low as or lower than most.  The FHA Streamline Refinance Program allows participants to access the best market rates every day regardless of traditional underwriting guidelines.

Q:     Is this program only for people who are having rough times?

A:      No.  The program is open to anyone with a FHA insured mortgage who pays it on time. You must have made at least 6 payments on your current FHA loan. Many lenders now require a minimum credit score of 640

Q:     I have paid my FHA insured mortgage late over the last 12 months, do I still qualify?

A:      Maybe.  Depending on the circumstances of your late payments you may qualify for an exception.  Please call to discuss your situation.

Q:     Do I qualify if my home value is below my loan amount?

A:      Yes. The FHA Streamline program does not lend on home value.  There is no appraisal required in the program. There is a maximum combined loan-to-value ratio of 125%.

Q:     Can I qualify with a bankruptcy on my credit?

A:      Usually.  Depending upon what point you are at in the bankruptcy process.  Call to discuss your situation.

Q:     Can I get cash out of my home with a Streamline?

A:      No

Q:     I’ve heard that FHA refunds some of my mortgage insurance premium.  Is this true?

A:      Yes.  When you got your current FHA home loan you were charged an Upfront Mortgage Insurance Premium (UFMIP).  FHA refunds a portion of the initial premium starting at 80% and dropping by 2% for every month since you got your FHA insured home loan.  So if you bought your home 6 months ago FHA would refund about 70% of the initial premium if you closed this month.

Q:     Another lender has pulled my credit and I am worried that pulling it again will lower it.  Is this true?

A:      No.  The credit score system counts all the mortgage credit score pulls in a 30 day period as a single pull.  Go to MyFICO.com and search “inquiries” for detailed information about multiple pulls.

Understanding Zillow “Zestimates”

Many of you have been researching property values in order to decide whether to refinance your home or to decide how much to offer for your prospective new home.  Whether you are buying a new home or refinancing your current home, the value will be very important for the success of your transaction. 

This video was recently circulated by Zillow.  It does a great job explaining how Zillow arrives at their “zestimates”.  There is no substitute to an actual appraisal though.  Although Zillow states that their accuracy in the San Francisco Metro area to be 91%, I have witnessed some huge divergences myself.

Remember that FHA loans are not subject to the new HVCC (Home Valuation Code of Conduct) rules that have recently gone into effect.  HVCC is a recently-passed regulation that prohibits mortgage brokers and banks from ordering an appraisal themselves.  For conventional freddie/fannie loans, the mortgage professional must order an appraisal through an Appraisal Management Company (AMC) which can take anywhere from 4-15 business days to complete.  This is a huge barrier to completing your close of escrow with conventional financing these days.  It is important to note that FHA loans are not subject to this regulation.  You are free to order your own appraisal from a local, knowledgable, FHA certified appraiser.  This is an important detail to note for buyer’s agents and listing agents alike.

How to qualify for an FHA loan

How do I qualify for an FHA loan?

It is very important to note that the Federal Housing Administration has provided guidelines for what they will insure, but banks will often put their own guidelines on top of those set by the FHA to ensure that they can sell the loan in the secondary market.  It is best to check in with an FHA-approved mortgage professional with any questions about your unique situation.  Generally, there are 4 main elements that an FHA underwriter will analyze for an FHA loan approval.  These are referred to as the “4 C’s”.

  1. Credit
  2. Capacity/Income
  3. Capital/Assets
  4. Collateral/Property

Credit

While perfect credit is not a requirement, your credit history must demonstrate a willingness to pay all of your obligations in a timely manner.  While the FHA does not have specific guidelines as to minimum credit scores, 620 seems to be what the lenders are setting their floors at lately. 

  • Collection accounts are not required to be paid off by the FHA, but depending on the circumstance and overall picture, an underwriter may require that they are paid off prior to close.
  • Court ordered judgments must be paid, unless there has been at least a 6 month history of regular and timely payments on a repayment plan.
  • In California, a non-purchasing spouse’s obligations must be included in a borrower’s qualifying ratios.
  • Your representative credit score is the middle of the three that are provided on your credit report.   On applications with more than one borrower, the underwriter will use the lowest middle score of all borrowers.

Capacity/Income

The underwriter will verify that the borrower has a “capacity to re-pay” the loan.  This means that the underwriter will be documenting that the borrower’s income is stable, reliable, and sufficient to make the monthly payments.  You will need to verify your employment for the most recent 2 years with tax returns and/ W2 forms along with your most recent paystubs.

The underwriter will be asking themselves the following questions:

  • Is the income dependable? How long has it been received?
  • Is the amount constant? (overtime? bonus?)
  • Is it expected to continue for at least 3 years?
  • Is it enough to meet all monthly debts and obligations?

Capital/Assets

The underwriter will use the most recent two months bank statements to verify that the borrower has enough cash to close the loan.  There are many acceptable sources to verify assets:

  • Checking, savings, money market accounts, stocks, bonds, or other investment accounts
  • 401k, IRA or other retirement accounts.  (The underwriter will use 60% of these balances)
  • Cash value on life insurance policies is generally not acceptable.
  • Gifts or loans are also acceptable.  They can be from relatives, close friends, employers, labor unions, charitable organization, governmental agency or public entities (non-profit organization)

Secondary Financing

Downpayment assistance is acceptable from:

  • Government agencies
  • Federal
  • State
  • Local Government
  • Approved non-profit agencies

Collateral/Property

The property that you are buying must be sufficient for the mortgage amount.  The remaining economic life of the property must be sufficient for the term of the mortgage.   FHA loans require more due diligence on the property than is required on other loans, but in general this is all for the protection of the consumer.  There is more on the subject of property conditions on the property conditions page.

FHA-approved condos in San Francisco

Here is a list of condos that are approved for FHA loans in San Francisco.  You can find this list (and lists for other cities/zip codes) here: https://entp.hud.gov/idapp/html/condlook.cfm.  Remember, just because a condo is not on the “approved list” does not mean that you cannot get an FHA loan done.  You can also opt for a “spot” condo approval.

This property is a great example of a property that is not on the FHA “approved” list, but can be financed wtih a “spot condo approval”

ARTERRA
BAYCREST
CANDLESTICK POINT – THE COVE
CANDLESTICK VIEW CONDOMINIUM
DIAMOND HEIGHTS VILLAGE
DIAMOND RIDGE CONDO
DOLORES PLAZA #1 & #2
GOLDMINE HILL
MCALLISTER MEWS
MORGAN HEIGHTS
MOSAICA 601
MUSEUM PLAZA RESIDENTIAL CONDO
PAGE CONVERSION
PARKVIEW COMMONS
PINE STREET
SYMPHONY TOWERS
THE MONTGOMERY

Working with a broker vs. working for a bank

Broker vs Bank: How banks gouge you for your mortgage

Its simple… banks can sell you whatever rate they want and do not have to disclose what they are making… brokers are required to do this.

By Federal law brokers are required to disclose what they are being paid by the bank for selling you a rate.  Failure to do so is a crime.

To understand how this works look at an example of how brokers get payments from the bank to sell you a higher rate.

Rate      What Banks Pay Brokers per $100,000 in loan amount (aka: REBATE)
6.00%    $3000 to broker
5.75%    $2250 to broker
5.50%    $1875 to broker
5.25%    $500 to broker
5.00%    $0.00
4.75%    ($1875) the borrower must PAY this to get this rate

(Source: July 24th 2009 FHA 30 Year Fixed Opening Rates)

As you can see the banks have created a system that pays the broker to sell you a higher rate.  Unscrupulous brokers sell much higher rates and pocket extra cash for selling it to you.  Unscrupulous banks happily take these higher rates and you become a great investment for them.

There is a trick to beat this system:

Federal law requires brokers to disclose REBATE to you on a Federal form.  The problem is that it is disclosed on a Federal form, meaning unless you know what you are looking for, you will probably never find the amount.

We teach our clients where to find this disclosed amount and how to read the Federal forms.  This allows our clients to be in control of the process.

So how do banks always screw their clients when working direct?  Federal law exempts them from the disclosure brokers are required to make.  There is NO WAY for you to find out what a bank is making when you work direct.  The bank may freely sell you the higher rate and you might never be the wiser.

2008 has shown you that banks are bad businesses with bad judgment and have no regard for you or the nation.  Don’t be a victim, learn how to read the Federal form and take control of the mortgage process.

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