Is the Utah FHA Mortgage Loan the best fit for you?
The Federal Housing Administration (FHA) was established in 1934, as a way to help increase U.S. homeownership post the ”Great Depression”.
At the time, only 4 in 10 households owned homes and most people were renting. Not a big surprise, since you couldn’t get a loan without a 50% down payment!
In 1965, FHA became a part of the Department of Housing and Urban Development (HUD). FHA is the only government agency that operates entirely from self-generated income, and costs the taxpayers nothing – it is funded by the mortgage insurance premiums paid by FHA homeowners.
Overall, FHA loans are great for either borrowers with credit issues and/or that carry more debt than allowed by a Conventional or USDA loan. The allure of a lower down payment is less of a factor now that we have a Conventional mortgage loan option that will allow a 3% down payment vs the FHA 3.5% down requirement.
How does the Utah FHA Mortgage Loan work?
FHA does not provide the actual funds on your mortgage loan. FHA only guarantees the mortgage in case of borrower default, so that lenders can extend credit with greater confidence, despite not so perfect credit scores, or higher debt to income ratios.
In order to provide this kind of guarantee, Utah FHA loans require two types of mortgage insurance:
- The Up Front Mortgage Insurance Premium is 1.75% of the loan balance
For example, on a $250,000 home, your upfront mortgage insurance would be $4,375.
The good news is that you don’t have to pay this premium up front. It can be rolled into your principal balance – without affecting your loan to value and minimum required downpayment of 3.5%.
The bad news is that there are no refunds on it, except when refinancing into another FHA mortgage. Even then, the more time passes, the less your refund is, and no refund is due after 5 years. See FHA Streamline Refinance for more details and this HUD official link.
- The Annual Mortgage Insurance Premium paid monthly and added to your payment
The fee schedule is as follows for loan amounts lower than $625,500, and it is expressed as a percentage of your base loan amount (without the upfront premium rolled in):
15-year loan terms with loan-to-values over 90%: 0.70%
15-year loan terms with loan-to-values under 90%: 0.45 %
30-year loan terms with loan-to-values over 95%: 0.85%
30-year loan terms with loan-to-values under 95%: 0.80%
For loan amounts higher that $625,500 (allowable in “high-cost areas”), the fee schedule is:
30-year loan terms with loan to values over 95 %: 1.5%
30-year loan terms with loan to values under 95 %: 1%
15-year loan terms with loan to values under 90 %: 0.70%
15-year loan terms with loan to values over 90 %: 0.95%
For all FHA mortgages issued after June 1st, 2013:
- If the loan to value is greater than 90%, then the mortgage insurance is in place for the life of the loan
- If the loan to value is 90% or less than the mortgage insurance is in place for 11 years.
What properties are eligible for the Utah FHA mortgage loan?
- Eligible Properties are attached and detached single family residences (SFRs), 2-4 unit dwellings, PUDs (ex: townhomes) and FHA approved condo projects. Individual condo unit approvals are now possible thanks to a new guideline change, which makes it so more condominiums become eligible – even if the entire complex may not be. Modular Housing is acceptable. Modular housing is prefabricated, panelized or sectional housing that assumes the characteristics of a site built home, meets all local and state building codes, is permanently affixed to the land and is legally classified as real estate. Manufactured housing is allowed, as long as the home was constructed on or after June 15, 1976, in compliance with the Federal Manufactured Home Construction and Safety Standards. Other requirements apply to manufactured homes.
- The maximum acreage for properties in all areas is 40 acres
- Condition of Property: All properties must be habitable and all appliances, plumbing, electrical, etc. must be functional and in good working condition. A stove is not required in the case where a stand-alone appliance can be placed. If the kitchen has built in appliances, a stove/oven must be installed. The lack of a stove or oven cannot pose any health or safety hazard, otherwise installation is required prior to closing. Properties must be in marketable condition at the time of closing. “Marketable” means the property could be sold in its current condition if necessary. Properties with kitchen/bath that are currently being remodeled, or properties missing flooring (bare, unfinished cement floor) are not considered in marketable condition and are not acceptable. These deficiencies must be completed prior to closing
- Occupancy: The borrowers must occupy the property within 60 days after closing and must intend to continuously occupy the property for one year – unless they can document hardship or extenuating circumstances.
- Properties are not FHA eligible if the resale date is less than 90 days following acquisition by the seller, unless certain exemptions are met (such as a title change due to inheritance). Loans with resale dates of 90 days up to 180 days may require an additional appraisal
Regardless of the number of units, the minimum downpayment required by an FHA loan is only 3.5% of your purchase price.
This feature makes the FHA loan extremely attractive for borrowers who wish to produce side income by renting out any additional units. Keep in mind that FHA loans are only allowed on primary residences, so living in one of the units is a must.
Also, if you are looking at purchasing or refinancing a triplex or 4-plex, make sure you have enough funds saved up to cover 3 months of full mortgage payments on the property after the loan closes – your approval will require it.
Can I buy more than one FHA property?
Generally, FHA will not insure more than one mortgage loan per borrower. But there are exceptions:
- RELOCATION – If you are relocating in an area, not within reasonable commuting distance from your current residence, you may obtain another FHA insured mortgage – without needing to sell your current FHA insured property. Reasonable commuting distance is generally regarded as 50 miles or more
- FAMILY SIZE INCREASE – You may be permitted to obtain another FHA insured mortgage loan if the number of legal dependents has increased to where your present home no longer meets your family’s needs. However, the outstanding balance on your current FHA insured property must be at 75% loan to value or less (excluding the upfront mortgage insurance premium that was rolled in
- VACATING JOINTLY OWNED PROPERTY – for example, in the case of a divorce
- NON-OCCUPYING CO-BORROWER – if you co-signed an FHA loan for a family member, but you do not reside on that property, you can obtain your own FHA insured loan.
Who is eligible to apply for a Utah FHA mortgage loan?
In this section, I will address some important issues, such as: derogatory credit, qualifying ratios, gift funds and interested party contributions. Feedback and questions are highly encouraged, so please send your e-mails with comments or questions to [email protected]
Please do not apply for a mortgage loan if you currently have delinquent accounts. A clean, on time 12 months payment history is required to show creditworthiness. Reach out to me by email and I’ll advise on the best course of action
Foreclosure / Deed-in-lieu of foreclosure
A 3 year waiting period must be met at the date of the application.
- If the foreclosed property was a Conventional mortgage, the seasoning period begins the date the foreclosure deed was signed and notarized removing the owner from title.
- If the foreclosed property was Government Insured (FHA, VA or USDA), the seasoning requirement begins on the date that the claim was actually paid (the search is done through the CAIVRS system not directly available to the public, but I can help with that)
Chapter 7 Bankruptcy – eligible 24 months after the discharge date, on the condition that good credit has been re-established. Less than 24 months, but no less than 12 is also acceptable if extreme circumstances can be proven, and not likely to re-occur.
You can find your bankruptcy discharge date and even obtain a copy of the paperwork you filed by using visiting the Utah Court PACER system.
Chapter 13 Bankruptcy – eligible after 12 months of on-time payments on the plan, and with bankruptcy court approval.
* A history of Foreclosure or Bankruptcy within the past 7 years will cause a denial when applying for any high balance FHA mortgage loan. High balance is anything over the conforming loan limits – see my article on Utah Conventional Loans.
There is a 3 year waiting period if the borrower was in default on the mortgage payments at the time of the short sale – unless extreme circumstances can be documented and unlikely to re-occur. See the FHA Back to Work loan program.
The eligibility if instant if the borrower was current on the mortgage payments and installment agreements at the time of the short sale (12 month history prior to short sale will be analyzed). This is highly unlikely, since most lenders won’t agree to a short sale unless there is a default on the mortgage payments, but there are a small number of cases that fit this exception.
A borrower is not eligible to purchase an FHA insured mortgage if the short sale was pursued simply to take advantage of declining market conditions, or to purchase a similar or superior property within commuting distance (at a reduced price compared to current market values).
Modified / Restructured Loans
A rate/term refinance of a modified/restructured loan is eligible provided that the loan is not currently delinquent and there is no history of late payments in the past 12 months. The current lender must also provide a letter stating they will not file a deficiency judgement.
Collections / Charge-Offs
All medical collections and charge off accounts are excluded and do not require resolution (yay!).
Collection accounts with balances adding up to more than $2,000 may be required to be paid at closing, or be in a repayment plan. If a repayment plan is in place, the minimum payment will be included in the debt-to-income ratios (an underwriter may calculate the monthly payment due using 5% of the outstanding loan balance, or the actual documented payment).
Must be paid off unless the borrower has an installment repayment agreement in place with the creditor. Documentation showing 3 months of on-time payments must be provided, along with a letter of explanation for the judgment.
Federal tax liens may remain unpaid provided any IRS tax lien on the property is subordinated to the FHA-insured mortgage. Any payments made under a repayment plan with the IRS must also be included in the debt to income ratios.
Late mortgage payments/rent payments
Current mortgages must have a history of on-time payments for the past 12 months. 12 months rental payment history verification is often required for credit scores under 640.
Re-entering the workplace:
If a borrower has an employment gap larger than 6 months in the past two years, then they must be at their current job for at least 6 months.
If the borrower is returning to work after an extended absence, his/her income is considered effective if they have been employed at that job for more than 6 months prior, or if the prolonged absence was due to raising children.
If the property was acquired since the last tax return filing, a current lease or rental agreement must be provided, and 75% of that amount will be used for qualifying. The appraiser can also perform a rental market analysis and include it in the appraisal report.
If the rental income source is from additional units on a multi-unit property where the borrowers reside in one of the units – net rental income may be added to the effective income, but cannot be used to offset the actual mortgage payment.
If rental income is reflected on the prior two-year tax returns (Schedule E), the effective income will be calculated by adding back any depreciation, mortgage interest, taxes, insurance and any HOA dues to the net income or loss. The result is divided by 24 months, or by the actual number of months since the property was purchased (if less than 2 years have passed).
No rental income received from an accessory unit may be used to qualify
Boarder/roommate income is allowed as effective income if there is a 2-year history of such income being received and reported on the past two years of tax returns. The lesser of the tax return income or actual lease amount is used. The border/roommate will need to prove a written letter of intent to continue boarding with the borrower on new purchases.
For rental income from a property being vacated by the borrower, a signed lease agreement with at least a 1 year term will be needed, as well of evidence of the first month’s payment or security deposit. The new residence must be more than 100 miles from the old. The effective rental income used will be 75% of the lesser of the rent amount on the lease or the fair market rent reported by the appraiser.
Income from overtime, commission, bonuses, and tips
The borrower must have a two-year history of receiving this type of income. Overtime income can be used if it was received for at least 1 year, and the verification of employment indicates it is likely to continue.
A two-year history of receiving it is required to show stability. If seasonal income, a two-year history will be needed, plus documentation that the borrower reasonably expects to be rehired next season (usually provided by his/her employer).
Part-time income can get complicated when borrowers have multiple part-time jobs and no full-time employment. It is common for nurses to work part-time for two different hospitals for example, in which case having at least a 1-year history with each employer helps show stability, and a recent job change can be a deal breaker.
Must be supported by at least two years of tax returns, and the net income will be averaged out.
*Because income guidelines are often subject to the underwriter’s discretion, I will not go into details in this article. Please contact me at [email protected] if you have questions on specific situations.
Qualifying FHA debt to income ratios
FHA qualifying ratios are generally 31/43 but most lenders will follow the findings of the automated underwriting system, which I’ve seen approve up to 50% on a regular basis, and up to 56.99% in certain circumstances.
31% is known as the “front end”, and it represents the percentage of your gross monthly income that should be allocated to the new mortgage payment(including the escrow for property taxes, homeowner’s insurance, and any mortgage insurance). 43% is known as the “back end”, and it is the percentage of total debt reported on your credit (new house payment included).
If compensating factors are present, your total amount of debt can be as high as 56.99% and you will still get approval. Compensating factors can be multiple things. A few examples are a demonstrated ability to save and be conservative in using credit, having a larger downpayment, or having significant assets. A minimal increase from current housing expenses can also be a compensating factor.
Residual income guidelines can also be used to justify a higher debt to income ratio. VA loans are already successfully using this method in getting borrowers approved – see my article on Utah VA loans for more information on the residual income.
Non-occupant co-borrowers are allowed on FHA purchase and rate/term refinance transactions on 1 unit properties. If the property has more than 1 unit, then the maximum loan to value is 75% (meaning a 25% down payment is required) unless the non-occupant co-borrower is related by blood, marriage or law.
Non-occupant co-borrowers or co-signers cannot be added on a cash-out transaction. They also cannot be an interested party to the transaction, such as the seller, builder or real-estate agent.
Gift funds are allowed as long as proper documentation can be provided, and the funds are sourced as legal. The entire borrower downpayment can come from a gift.
Gifted equity is allowed only from family members, on a non-arms length transaction.
Non-arms length transactions
A non-arms length transaction or Identity of Interest transaction is defined as a direct relationship between any of the parties to the transaction, including: buyer, seller, employer, lender, broker, appraiser etc.
Under no circumstance will a non-arms length transaction be allowed on a short sale.
Otherwise, the maximum loan to value is 85% with the minimum downpayment coming from the borrowers own funds. Maximum financing is allowed with the following exceptions:
- The subject property is currently occupied by a family member of the borrower
- The borrower has been renting the subject property from the family member for at least 6 months and can provide written evidence
- An employee of the builder is purchasing a new home or model home as a principal residence
- Corporate transfer (involving the employer-provided housing).
* Note that if the only relationship between the seller and the buyer is a landlord/tenant relationship, the transaction would not be considered identity of interest, and maximum financing is permitted.
A non-arms length transaction may not be used to bail out a family member or any other owner with an established relationship to the borrower from a delinquent mortgage.
Interested party contributions
Seller/Interested party contributions exceeding 6% must be subtracted from the sales price.
Is the Utah FHA mortgage loan right for you?
If you have less then perfect credit, need to exceed the 45% debt to income ratio, or want to purchase a multi-unit property with a low 3.5% down payment, then the answer is yes. Credit scores under 680 might benefit from a lower monthly mortgage insurance payment with an FHA loan, vs a Conventional loan with private mortgage insurance.
Great alternatives to an FHA mortgage loan:
FHA mortgage loans have other good things going for them, such as the lower interest rate and easy streamline refinance option. While the FHA adds the cost of the upfront mortgage insurance to the bill, the cost of the monthly mortgage insurance will usually favor borrowers with credit scores under 680.
Weight your options carefully. Analyze if you should act now, or if you’re better off improving your financial and credit situation first (which will, in turn, open up new opportunities). If you decide to wait, please contact me for free credit analysis, so I can advise on the best course of action.
Please send all FHA mortgage loan program questions to [email protected], or contact me by phone/text at (801) 473-3154.
Apply online to get started with a secure application, and find out how much home you can qualify for.
I can issue a same-day Pre-Qualification letter, and I am (usually) available on the weekends should you fall in love with a home, and need to make an offer right away.