Many people who are shopping for Arizona homes have found that many of the properties available for sale are either bank owned properties (lots of Phoenix banks have lots of inventory) or short sales. One person I spoke with recently was shopping for Tempe homes for sale that needed a little work. When buying a bank owned property or a short sale, chances are that the home is going to be in need of at least a few repairs — and many times, the most popular loan option for this scenario is the FHA 203k loan.

FHA 203k Program Highlights

The FHA 203k streamline loan has become in demand with the slowdown in the housing market. When a property is owned by the bank, chances are that the property may be in need of a little work and the FHA 203k streamline program is a great option. Some of the frequently asked questions we see about the FHA 203k loan include:

What is the FHA 203k mortgage?

The FHA 203k mortgage loan is a rehabilitation loan that works much like a development loan. The one who is buying the home is able to buy a home that is in need of repairs and is able to mortgage the repair work in the mortgage to fix items in the house. The FHA 203k loan consists of the purchase price of the home plus the construction costs for the work to be performed after close.

An FHA 203k Example Situation:
$100,000 purchase price of home
$20,000 Repairs Needed (see a list of the most common FHA 203k repairs)
$120,000 Total Loan Amount

The offer is the purchase price of the house only. You don’t need to include the cost of repairs anywhere in the sales contract or offer. In the above example, the purchase price on the sales agreement or offer would be $100,000.

Is the FHA 203k loan harder to qualify for than a traditional FHA loan?

Getting an FHA 203k loan is roughly the same as getting a regular FHA loan. What does it take to qualify for an FHA loan? Generally speaking, a credit score above 620, a good job and a down payment of 3.5%. Of course there are more details to being able to qualify, but those are the general highlights.

How do I find a contractor to do the repairs?

It is suggested that you work with a general contractor that can perform all needed repair work. Your loan officer can easily help recommend one they will need to know at least one good contractor. It is also vital that the contractor be practiced in FHA guidelines so that they can include any FHA required items in their contract.

Related Posts

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Every now and then, someone will ask me “is it okay if I ______________ to pay for my closing costs?” So I thought I would outline what most lenders will accept as an acceptable source of funds for closing costs and/or down payment when getting an FHA loan.

Remember: no matter what funds you plan on using, they are going to have to be documented as to the source of the funds.

Acceptable Sources of Funds For FHA Loans

• Checking/Savings Accounts/CDs
• Lease to Own/Rent Credit with Option to Purchase
• Interested Party Contributions (subject to limitations)
• Loan Repayment Proceeds (with appropriate and acceptable paper trail)
• Corporate Relocation Buyout
• Relocation Benefits
• Use of Business Funds (as per policy and if allowed by underwriter)
• Disaster Relief Grant or Loan
• Non-Traditional Savings Plan/IDA Accounts
• Employer Assistance
• Gifts
• Gifts-Pooled Funds
• Gifts of Equity
• Gifts/Grants from Non-Profit
• Gifts – Wedding
• Retirement Accounts
• Proceeds from Sale of Home
• Sale of Assets
• Government Bonds
• Stocks/Securities
• Inheritance
• Trade Equity
• Land Equity
• Trust Account
• Life Insurance Net Cash Value
• Bridge/Swing Loans
• Income Tax Refunds
• Saving Funds to Close
• Gambling or Lottery Winnings (this is my favorite one)
• Lawsuits or Insurance Settlements
• Borrowed Funds Secured by an Asset
• Financing Concessions
• Cash-on-Hand

Whew. Sure, there might be more places that you could possibly come up with for a down payment / closing costs – but there are probably about 99% of all of the ones I have seen. Have questions about where your down payment can come from when getting an FHA loan? Be sure to ask your loan officer.

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Today, it seems to be somewhat common for someone to have a family trust set up for estate planning purposes. Family trusts are great, but when it comes to financing a home with an FHA loan, there are a few things that need to happen in order to have everything go smoothly and as it was intended.

FHA Financing For Trusts

Generally speaking, in order to be eligible for FHA financing using a trust, the borrower remains the beneficiary and occupies the property as a principal residence. Trust agreements are typically going to be required to be seen by the underwriting department and usually they will get the lenders attorneys to also review the trust (so be ready for it to take longer to close).

Eligible borrowers include:
One or more borrowers with one living trust, or Two or more borrowers with separate living trusts, or Multiple borrowers with one or more holding title as an individual and one or more holding title as a living trust.

Eligible properties include:

• 1-4 unit primary residences
• 1-2 unit second homes

FHA Financing With A Trust: What Documentation Is Required?

Although each lender may be slightly different when it comes to required documentation, at least one item that you can reasonably expect will be required is an Attorney’s opinion letter from the borrower’s attorney to the lender’s attorney verifying that:

1. The trust is revocable,
2. The borrower is the settler of the trust and the beneficiary of the trust,
3. The trust assets may be used as collateral for a loan,
4. The trustee is duly qualified under applicable law to serve as trustee and is the borrower,

Of course there are other requirements when it comes to FHA financing with a Family Trust – and because of the complex nature of these loans, you will want to be sure that you talk with a loan officer who has experience closing these.

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• FHA HECM for Purchase Program: The Best Loan Ever?
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From time to time we get an inquiry from someone who wants to have an FHA loan on a property that they also want to have a small business run out of.

For example, someone wants to buy a home and also run a day care facility from their home.

When it comes to FHA loans, you want to be sure to follow the rules when it comes to mixed use properties — otherwise, it could pose a problem.

FHA Guidelines on Mixed-Use Properties

A mixed-use property is a property has been modified to accommodate a small business, such as

• a day care facility
• a hair care salon
• a professional service office like a medical or financial office
• a photography studio

in addition to having the residents live in the property.  Anytime a property is going to be used for business and residential purposes, the appraiser must specify that the property is being used for that purpose.

Mixed-Use Properties Allowed For FHA Loans With Conditions

Mixed-used properties are allowed with the following restrictions:

• Must be single family detached owner-occupied dwelling;
• Must represent a legal, permissible use of the property under the local zoning requirements;
• Borrower must be both the owner and the operator of the business.
• Property must be primarily residential in nature;
• There may not be any structural changes that affect the marketability of the property;
• Market value of the property must be primarily a function of its residential characteristics rather than the business use of any special-use modifications that were made.

Just a couple more notes on getting an FHA loan for mixed-use properties:

1. Mixed-use properties in urban areas where the business is at street level and the living quarters are either upstairs or behind the business are also acceptable. The appraisal should illustrate through use of similar and approximate comparable sales that this type of residential/business use is common to the area.
2. Also eligible: condominium projects that do not have more than 20% of the floor space of the common areas devoted to commercial retail space, subject to credit policy verification that the investors will still accept this type of project.

Have more questions about mixed use properties and FHA loans? Be sure to contact one of our experts.

Other Interesting Posts

• FHA Mortgage Facts From FHA Outlook
• FHA 203k Streamline: Are Interest Rates For The FHA 203k Streamline Higher?
• FHA Refinance Streamline: More Information
• FHA Less Than 90 Day Financing Still Available in Arizona

When thinking about getting an FHA loan in Arizona, there are several things to consider – one of which is the maximum loan-to-value that you can finance.  In other words, how much money you have to put down for an FHA loan (or how much equity you need to have).

Maximum LTV on FHA Purchase Transaction

• 96.50% of the lesser of the appraised value or adjusted sales price.
• 90.00% of the lesser of the appraised value or adjusted sales price when buying new construction property that does not meet all HUD new construction requirements.

FHA No Cash-Out Refinance

Lesser of:

• 97.75 % of the appraised value if the property was acquired > 12 mos. prior to loan application;
• The sum of the loan payoff and all allowable costs or
• If the property was acquired 12 mos. prior to application date the original purchase price, plus allowable costs.

FHA Streamline Refinance With An Appraisal

Lesser of:

• The sum of the existing 1st mortgage outstanding principal balance, closing costs, prepaids, and up to a maximum of 30 days interest accrued for current month on old loan and subtract any refund of upfront MIP, if any. (May not include delinquent interest, discount points, escrow shortages or late charges); OR
• Appropriate LTV ratio of 97.75% of the appraised value, plus the new MIP that will be charged on the refinance.

FHA Streamline Refinance Without An Appraisal

• Primary Residence: Limited to unpaid principal balance, maximum 30 days of interest accrued on old loan, minus any refund of UFMIP, if any.
• Investment Property & Second Homes: Limited to unpaid principal balance, minus any refund of UFMIP.

When getting an FHA loan, the exact loan-to-value that you can qualify for financing for is only one of the important things to know — be sure to speak with your loan officer about this in as much detail as you need to be comfortable with the guidelines.

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Another week, another change in underwriting guidelines – but this time it just got easier to get a mortgage if your credit score is 630.

Effective immediately, the minimum credit score for an FHA purchase mortgage is now 620.

A few conditions that must be present for these loans include:

1. Maximum PITIA may not exceed 33% of total qualifying income
2. Maximum total monthly obligations including PITIA may not exceed 45% of total qualifying income
3. Rescoring borrower to raise FICO to meet parameters is not acceptable and not allowed
4. 2 months of reserves will be required covering 2 full months of PITIA for subject property
5. Gift funds are not allowed for down payment, closing costs, prepaids, reserves or any other purpose (i.e. debt pay offs)
6. Price hits for this FICO range will be administered and disclosed by Secondary on the rate sheet.
7. Not eligible for Refinance transactions
8. Not eligible for ARM’s
9. Not eligible for non-occupant co-borrowers
10. Not eligible for the FHA 203K loan programs
11. Not eligible for flips that fall into the 0-90 day time frames
12. Not eligible on 2, 3 or 4 unit properties (only eligible property is 1 Unit primary residence)

If you are in a situation where you have a credit score that is between 620 and 639 and other lenders have told you that their minimum credit score is 640, then now is the time to pick up the phone and speak with one of our Arizona loan officers.

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Academy Mortgage Branch Manager Kevin Kosisky sits down and discusses how lenders are changing their guidelines to require a minimum of a 640 credit score with an FHA loan here in Arizona.

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Your FICO score or credit score is involved in determining if you can qualify for a FHA loan. There are three major credit bureaus in the US — Experian, Equifax, and TransUnion — and lenders require that your credit report be pulled at all three bureaus when you apply for a loan. A credit report that includes all three bureaus is called a tri-merge credit report. The FHA officially adopted a minimum credit score of 500 but that rarely comes into play as many lenders have adopted higher credit scores of say 580, 620 or even 640.

There are some credit issues that will disqualify you from getting a regular FHA Loan. These include: a chapter 7 bankruptcy in the last two years, a foreclosure in the last three years, a chapter 13 bankruptcy in the last 12 months, unpaid tax liens, judgments, or non-medical collections and recent 30-day+ late payments on mortgages, credit cards, or other obligations (if it looks like you are living beyond your means currently you likely won’t qualify for an FHA loan until you can get 6+ months of on time payments on your obligations).

If it is just the number that is the problem and none of these above items apply to you then there are ways to go about changing your credit score.

• Pay down your credit cards is an easy way to raise credit scores. Simply bring your credit card balances down to less than 30% of the credit limit and your scores will shoot right up.
• Document incorrect information. Credit reports often have incorrect information. If you can document that a reported outstanding collection has already been paid or that other derogatory line items are incorrect we can often get the information deleted or ignored.
• Pay off outstanding tax liens, collections or judgments. In many cases debt collectors will accept 40% of an outstanding debt as payment in full. When the number and size of collections aren’t overwhelming simply settling with the collector and getting paperwork to prove it is often the best approach.
• Work with credit specialists. When someone’s credit history is especially beat up with old late payments, collections, bankruptcies, etc. being reported, the fastest way to get qualified for an FHA loan is often to work with a credit optimization specialist. There is a fee associated with this service, but it is worth it if it can clean up your credit.
• Work with a credit counseling company. If you are dealing with a loss in income and are currently behind on your monthly mortgage or other obligations sometimes a credit counseling company is the best bet. In such cases we refer people to an especially effective and reputable credit counseling firm that focuses on helping people slowly pay back all of the principle they owe while paying dramatically reduced interest rates.

If you would like to find out more about your qualifying for an FHA loan please contact us – we get documents to title in 10 days – Guaranteed!

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Corbin Olsen from Academy Mortgage covers the most recent FHA Insurance changes and what they mean to consumers who are interested in getting an FHA loan.

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FHA Loans: Things To Consider

First review the requirements and common fees for FHA loans. The requirements can be broken down into three ideas.  The first is capacity. Are you making enough money to pay for the new loan without difficulty? In order to qualify for an FHA loan the combined gross monthly income of borrowers should normally be at least three times greater than the projected monthly mortgage payment (including taxes and insurance).

The second is collateral. Do you have equity in your home to get a traditional FHA loan? Through the traditional FHA program one can refinance up to 97% of the current appraised value of a home. Through the new Homeowner Affordability and Stability Plan you can finance up to 105% of of the current value of the home.

The final is character. This is the credit score required for traditional FHA loans. Your credit history comes into play with any home loan application. Lenders insist that borrowers show that they are accountable and that they assiduously seek to meet their financial obligations. The minimum credit score needed for an FHA loan is now 640.

As with any mortgage there are fees associated with government-backed loans. Some people assume the government is the lender with FHA loans but that is not the case. FHA loans are simply loans that are backed or insured by the federal government. In other words regular banks lend the money but with an FHA loan it is like having Uncle Sam co-sign with you.

What are the fees involved with an FHA loan?

Depending on the size of the loan and the terms, bank fees will usually range between about $1100 to $5000.

There are fixed fees that usually amount to about $1100 and then it is common for there to be a loan origination fee of at least 1% of the loan amount. Title and escrow fees are fees charged by the title company and vary from state to state. It is common for these fees to tally $1000-2000. The larger the loan, the larger the title and escrow fees. Another cost are pre-paid items which are pre-payments on property taxes and homeowners insurance.

FHA insists that taxes and insurance be included in the escrow account and paid monthly. While these aren’t fees (since you are simply paying ahead on taxes and insurance) they do need to be added to the loan amount or otherwise paid in advance.

Finally, there is a 1.75% mortgage insurance premium that Uncle Sam requires in exchange for essentially co-signing on your FHA loan. This mortgage insurance premium (along with the mandatory monthly mortgage insurance fees) helps keep the FHA solvent and able to pay the banks back when FHA borrowers default on their loans. This fee does not apply to conforming loans refinanced under the Homeowner Affordability and Stability Plan. Some other items you will need as you go through the process include: your last two years W2′s and recent pay stubs for income verification, plus two months of recent bank statements for asset verification. Other verifications are occasionally needed as well.

Now what? Contact someone who can help you get started in the process and can get FHA loans done in as little as Ten Days!

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