FHA Loan Expert Blog

MORTGAGEE LETTER 2008-11

TO: ALL APPROVED MORTGAGEES

SUBJECT: Nontraditional Credit Verification and Evaluation

The Federal Housing Administration (FHA) has long permitted mortgage lenders to establish a borrower’s credit history through nontraditional means, including the compilation of performance on rental payments; utility bills; telephone and cellular phone services; cable television service; payments to local stores, etc. This is further described in handbook HUD-4155.1 REV-5, paragraphs 2-3 and 2-4B.

This practice is appropriate when the borrower has insufficient trade lines with Equifax, Experian, or TransUnion and a credit bureau score cannot be derived. Mortgage lenders also may use nontraditional credit verification to augment “thin-file” credit reports where a credit score was generated but based on only a few trade lines. However, nontraditional credit reports may not be used to enhance any poor credit history on a traditional credit report.

This mortgagee letter provides guidance to lenders and underwriters for establishing and evaluating nontraditional credit histories and also describes FHA’s acceptance of those enterprises that can develop a verifiable credit history, no less than 12 months in duration, for borrowers with limited traditional credit. This guidance is effective immediately but must be considered for borrowers without traditional credit beginning with case numbers assigned 30 or more days after the date of this mortgage letter.

Nontraditional Credit—Basic Guidance

The following provides guidance in establishing that a borrower has sufficient credit references for evaluating bill paying habits, which include: three (3) credit references, including at least one from Group I, covering the most recent 12 months activity from date of application. Group I references should be exhausted prior to considering Group II for eligibility purposes, as Group I is considered more indicative of a borrower’s future housing payment performance. Borrowers with no Group I trade references will be underwritten using the criteria set forth under “insufficient credit” below.

Group I – rental housing payments (subject to independent verification if the borrower is a renter), utility company reference (if not included in the rental housing payment), including gas, electricity, water, land-line home telephone service, cable TV. If the borrower is renting from a family member, request independent documents to prove regularity of payments, such as cancelled checks.

Group II – insurance coverage, i.e., medical, auto, life, renter’s insurance (not payroll deducted); payment to child care providers – made to a business providing such services; school tuition; retail stores – department, furniture, appliance stores, specialty stores; rent to own – i.e., furniture, appliances; payment of that part of medical bills not covered by insurance; Internet/cell phone services; a documented 12 month history of saving by regular deposits (at least quarterly/non-payroll deducted/no NSF checks reflected), resulting in an increasing balance to the account; automobile leases, or a personal loan from an individual with repayment terms in writing and supported by cancelled checks to document the payments.

Verifying Nontraditional Credit

We prefer all nontraditional credit references be verified by a credit bureau and reported back to the lender as a nontraditional mortgage credit report (NTMCR) in the same manner as traditional credit references. A NTMCR is designed to assess the credit history of the borrower without the benefit of institutional trade references and should format as traditional references – including creditor’s name, date of opening, high credit, current status of the account, required payment, unpaid balance, and a payment history in the delinquency categories of 0×30, 0×60 etc. It should not include subjective statements such as “satisfactory, acceptable, etc.”

Only if a NTMCR is impractical or such a service is unavailable may a lender choose to obtain independent verification of trade references. Documents confirming the existence for a nontraditional credit provider may include a public record from the state, county, or city records, or other means providing a similar level of objective confirmation. To verify the credit information, lenders must use a published address or telephone number for that creditor and not rely solely on information provided by the applicant. Rental references from management companies with payment history for the most recent 12 months may be used in lieu of 12 months cancelled checks. Credit references may also be developed via independent verification directly to the creditor. If a method is used to verify credit information or rental references other than NTMCR, all references obtained from individuals should be backed up with the most recent 12 months cancelled checks.

In addition, FHA has no objection to the use of various service providers now operating that are able to develop a bill payment history, as well as a score by obtaining rental payment history, utility trade-lines, and other common recurring non-reporting bill payments. While we do not endorse any particular service provider, FHA approved lenders may use such services to develop a credit history for borrowers with no or little traditional credit.

Evaluating Nontraditional Credit

The following offers guidance in evaluating borrowers with nontraditional credit histories. A satisfactory credit history, at least 12 months in duration, is to include:

• No history of delinquency on rental housing payments
• No more than one 30-day delinquency on payments due to other creditors
• No collection accounts/court records reporting (other than medical) filed within the past 12 months

Insufficient Credit

The following offers guidance in evaluating borrowers with no credit references, or otherwise having only Group II references. A satisfactory credit history, at least 12 months in duration, is to include:

• No more than one 30-day delinquency on payments due to any Group II reference
• No collection accounts/court records reporting (other than medical) filed within the past 12 months

In addition, for such borrowers, to enhance the likelihood of homeownership sustainability, the following underwriting guidance is being provided:

• Qualifying ratios are to be computed only on those occupying the property and obligated on the loan, and may not exceed 31 percent for the payment-to-income ratio and 43 percent for the total debt-to-income ratio. Compensating factors are not applicable for borrowers with insufficient credit references.
• Borrowers should have two months of cash reserves following mortgage loan settlement from their own funds (no cash gifts from any source should be counted in the cash reserves for borrowers in this category).

If you have any questions regarding this Mortgagee Letter, call 1-800-CALLFHA.

Sincerely,

Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner

MORTGAGEE LETTER 2008-16
TO:  ALL APPROVED MORTGAGEES
SUBJECT: Risk-Based Premiums for FHA Mortgage Insurance

Effective with new FHA case number assignments on or after July 14, 2008, FHA will implement risk-based premiums on one- to four-unit single family mortgages.  The premium matrix is shown below, replacing the premium matrix in Mortgagee Letter 00-38, which identifies the current mortgage insurance premiums for FHA’s single family programs.

FHA Single Family Mortgage Insurance
Upfront and Annual Mortgage Insurance Premiums
 (Loan Terms > 15 years)
Effective as of July 14, 2008
All premiums are specified in basis points (0.01%)

Decision Credit Score  (FICO)          

LTV….850-680….679-640….639-600….599-560….559-500….499-300.NON-TRADITIONAL

<= 90.00..125/50..125/50..125/50....150/50..175/50..175/50..150/50

90.01-95.00..125/50..125/50..150/50....175/50..200/50..n/a..175/50

> 95..125/55..150/55..175/55..200/55….225a/55….n/a…..200/55

a. A first-time homebuyer, with HUD-approved counseling, will pay only 200 basis points for the upfront mortgage insurance premiums.
The premium grid is based solely on the prospective borrower’s credit bureau score and the loan-to-value ratio; both are defined below. 

Future Changes to the Risk-based Premium Schedule

It is FHA’s intent to make any subsequent changes to the risk-based premium schedule only on an annual basis and make them effective at the beginning of the fiscal year.  FHA’s fiscal year begins October 1 and ends September 30.
 
Highlights Regarding FHA’s Risk-Based Premiums

• UFMIP will range from 1.25 percent of the loan amount for lower-risk borrowers to 2.25 percent for riskier borrowers.
• No borrower who qualifies for a FHA-insured mortgage will pay more than 2.25 percent on the upfront mortgage insurance premium (UFMIP) and 55 basis points for the annual premium.
• Borrowers with credit bureau scores must be risk-classified by FHA’s TOTAL Mortgage Scorecard.
• Those in risk categories without a premium shown are not eligible for FHA-insured mortgage financing.
• Borrowers without credit bureau scores will need to be manually underwritten and deemed as eligible based on criteria described in Mortgagee Letter 2008-11; the mortgage insurance premium will be determined by the loan-to-value ratio for the non-traditional column in the premium schedule.

Loan-to-Value

For risk-based premium purposes, the loan-to-value ratio, computed to two decimals (e.g., 95.65), is calculated by dividing the mortgage amount prior to adding on any upfront mortgage insurance premium by the sales price or appraised value, whichever is less.  Please note that for purchase transactions, the loan-to-value will be the percentage of the sales price (or appraised value) that is borrowed, e.g., 97.75 percent, as prescribed by law.  While borrowers must have at least a three percent cash investment into the property, a portion of their closing costs may be used to meet that amount.

For refinance transactions, which often include closing costs in the loan amount, the LTV is determined by dividing the loan amount prior to adding on any upfront mortgage insurance premium by the appraiser’s estimate of value.

“Decision Credit Score” Defined 
 
If a credit score is available, it must be used to determine the decision credit score for the application and the premium to be charged.  A “decision credit score” is determined for each applicant according to the following rule: when three scores are available (one from each repository), the median (middle) value is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.

Multiple Borrowers.  If more than one individual is applying for the same mortgage, the lender must determine the decision credit score for each individual borrower and then select the lower (or lowest if more than two borrowers). That “decision” credit score is then used to determine the appropriate insurance premium in conjunction with the LTV ratio. 
 

Multiple Borrowers/One Without Credit Score(s).  The borrower representing the greatest risk to the Department will determine the premium charged.  For example, if the decision credit score for one borrower is between 559-500 and the other borrower is in the non-traditional credit category, the decision credit score between 559-500 is used to determine the premium.  However, if the decision credit score for one borrower is between 639-600, and the other borrower is in the non-traditional credit category, the non-traditional credit category is used to determine the premium.

Multiple Borrowers/Ineligible Score.  Borrowers who fall into a cell with no premium price shown are not eligible for FHA-insured financing.  Lenders may consider reducing the loan-to-value ratio to 90 percent or removing the borrower from the loan to proceed with the application.

Borrower Disputes Credit Score.  If the mortgage applicant(s) disputes the accuracy of the credit report and, thus, the credit scores:

• The borrower may delay the transaction and work to repair his/her credit, or
• The borrower may pay the mortgage insurance premium based on the credit score generated (and LTV)
 
Non-Traditional Credit

For premium purposes, the borrower representing the greatest risk to the Department will determine the premium to be charged (see Multiple Borrowers/One Without Credit Score(s)).  For underwriting purposes, borrowers with non-traditional credit (or insufficient credit) must qualify based on the underwriting guidance described in Mortgagee Letter 2008-11.

To clarify the guidance in Mortgagee Letter 2008-11 regarding ‘thin-file’ credit reports, the intention was to give lenders the option to also use non-traditional credit sources should they have a minimum trade line requirement to use a credit bureau score.  While the premium charged is based on the borrower representing the greatest risk to the Department, for underwriting purposes lenders may use non-traditional credit methodology to make their determination on the borrower’s willingness to repay the new FHA-insured mortgage.

Refinancing Delinquent Loans into FHASecure

For borrowers refinancing delinquent non-FHA ARMs the Upfront mortgage insurance premiums (UFMIP) is set at 2.25 percent of the base loan amount (loan amount excluding UFMIP) regardless of the loan-to-value (LTV) ratio. 

Automated underwriting systems will provide lenders with a feedback message that will inform them of the premium to be charged without recognizing that the loan being refinanced is delinquent. Therefore, the feedback message providing the premium message will caution lenders that if the loan being refinanced is delinquent, then the premium is 2.25 percent for the UFMIP and .55 percent for annual premium when LTV ratio greater than 95 percent; if the LTV ratio is equal to or less than 95 percent, the annual premium is .50 percent.
 

Borrowers who refinance their delinquent non-FHA ARM loan into FHASecure and subsequently wish to refinance to another FHA-insured mortgage must use a refinance product that requires full qualifying, e.g., a rate and term refinance.  Once the FHA-to-FHA full qualifying refinance is insured, these borrowers will be able to take advantage of FHA’s Streamline Refinance program.

Underwriting Rules When Using FHA’s TOTAL Mortgage Scorecard

If TOTAL renders a refer risk classification or triggers a review rule, the mortgagee’s Direct Endorsement underwriter must determine whether the borrower qualifies for the mortgage using the basic underwriting and eligibility requirements outlined in Mortgagee Letter 2004-47 (TOTAL Mortgage Scorecard User Guide) and handbook HUD-4155.1 REV-5.  However, once determined as eligible for a FHA-insured mortgage, the insurance premium charged is as shown in the matrix above.   

Review Rules for FHA’s TOTAL Mortgage Scorecard include excessive payment-to-income ratios and debt-to-income ratios; and from the credit files, a previous mortgage foreclosure within 3 years, a bankruptcy discharged within 2 years and late mortgage payments.  TOTAL will refer the application for underwriting analysis if any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months shows:

• 3 or more late payments of greater than 30 days; or
• 1 or more late payments of 60 days plus one or more 30-day late payments; or
• 1 payment greater than 90 days late

Although FHA will be charging a slightly higher mortgage insurance premium for certain categories of riskier transactions (e.g., borrowers with low credit bureau scores and high LTVs), those transactions referred by TOTAL are to be fully and properly underwritten.  The increased premiums compensate FHA somewhat for the risk represented by the combination of LTV and credit bureau score, but are not themselves grounds for underwriter approval of a mortgage. The Refer decision from TOTAL suggests that, absent additional factors that can be documented by the underwriter, the credit risk of the loan may be too great FHA to insure. Such mortgages, which may exhibit other risk-layering characteristics beyond credit bureau score and LTV, are to be approved solely on the underwriter’s judgment of the likelihood of successful and sustained homeownership, not on the insurance premium collected. 

If the underwriter approves a loan for which non-credit review rules are triggered, i.e., excessive payment-to-income ratios and debt-to-income ratios, the borrower will pay the mortgage insurance premium based on the decision credit score and LTV ratio. 

First-Time Homebuyer with HUD-Approved Pre-Purchase Counseling

First-time homebuyers (as defined below) who will be obtaining a mortgage with an LTV greater than 95 percent and whose decision credit score is in the 559-500 range are entitled to a reduction of their upfront mortgage insurance premium from 2.25 percent to 2.00 percent provided the homebuyer completes HUD-approved pre-purchase counseling. 
 
A first-time homebuyer is an individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase (closing date) of the property.  A first-time homebuyer includes any individual that has only owned with a former spouse while married and also includes an individual who has only owned a principal residence not permanently affixed to a permanent foundation, or a property that was not in compliance with State, local, or model building codes and cannot be brought into compliance for less than the cost of constructing a permanent structure.  If any of the occupant-owners on the mortgage meet this definition, then the mortgage is considered as having been made to a first-time homebuyer.

Pre-purchase counseling must be obtained from a HUD-approved housing counseling agency, a participating agency of a HUD-approved housing counseling intermediary or a state Housing Finance Agency receiving HUD housing counseling grant funds, and the counseling must occur prior to execution of the sales agreement.  With this requirement, it is FHA’s intent to encourage borrowers to participate in meaningful counseling prior to the decision to purchase a home, not to create an incentive or burden for lenders to have borrowers re-execute the sales contract in order to receive a reduced premium.

The counseling may be completed up to one year before the homebuyer signs a purchase agreement (executes a sales contract) for the subject property. It must be one-on-one, face-to-face counseling unless a hardship can be demonstrated, and then the counseling may be conducted one-on-one over the telephone.  The counseling must consist of, but is not limited to: 

• Budgeting and credit, including an analysis of the household’s unique financial/credit situation;
• Assessing homeownership readiness, including an evaluation of home and monthly payment affordability;
• Development of a written action plan outlining the steps the household and the counselor will take to help the household meet their goals;
• Financing a home, including a discussion of alternative types of mortgage loans/features and special financing products, common lending documents, and steps in the loan application, approval, and closing processes;
• Shopping for a home, including understanding the professionals involved in the process; and
• Maintaining a home, including preventive maintenance, taxes, and insurance;   

Even if group sessions or homebuyer education classes cover the topics above, they do not meet the level of one-on-one counseling needed to receive the reduced mortgage insurance premium.  To find a list of housing counseling agencies, please visit the Department’s website at hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.

Programs Covered by Risk-Based Premiums

Risk-based premiums and the requirements described in this mortgagee letter apply to those forward mortgages insured under FHA’s Mutual Mortgage Insurance (MMI) fund, the Section 203(k) rehabilitation mortgage insurance program, and individual condominium units insured under Section 234(c).  Risk-based premiums do not apply to mortgages insured under Title I of the National Housing Act, nor to reverse mortgages under FHA’s Home Equity Conversion Mortgage (HECM).  Risk-based premiums also do not apply to Section 223(e)(declining neighborhoods), Section 238(c)(Military Impact areas in Georgia and New York), Section 247 (Hawaiian Homelands), and Section 248 (Indian Reservations).
 
Refinance Transactions

The mortgage insurance premium for refinance transactions will depend on several variables.  These include whether the refinance is of a FHA-insured mortgage to another FHA-insured mortgage, as under FHA’s streamlined refinance options, is a rate-and-term refinance or is a refinance under the FHASecure initiative.  Except for streamlined refinances and mortgage refinancing under the FHASecure initiative, the new LTV and new decision credit score determine the mortgage insurance premiums. Additional information is provided below:

Full Qualifying Refinances (e.g., rate-and-term; FHASecure refinance of a conventional mortgage not presently delinquent; cash-out refinances; any that require complete underwriting).  These refinances are subject to the mortgage insurance premiums based on the LTV and decision credit score for the refinance application.

Streamline Refinances.  The mortgage insurance premiums charged are subject to whether the existing FHA-insured loan being streamline refinanced was charged premiums based on A) the pre-July 14, 2008 premium structure of 150/50 basis points or B) the post July 14, 2008  LTV/decision credit score premium schedule.  The following examples illustrate the appropriate premiums that will be charged for streamline refinances.

A. FHA-insured loans pre-July 14, 2008/Borrower paid 150/50 basis points

• Borrowers with an existing FHA-insured loan where the case number for the streamline refinance transaction was assigned before July 14, 2008, will be charged 150 basis points upfront and 50 basis points annually.  On subsequent streamline refinances where the case number is assigned on or after July 14, 2008 borrowers will be charged 100 basis points upfront and 50 basis points annually. 

• Borrowers with an existing FHA-insured mortgage where the case number for the streamline refinance transaction was assigned on or after July 14, 2008, will be charged 100 basis points upfront and 50 basis points annually.  On subsequent streamline refinances borrowers will be charged 100 basis points upfront and 50 basis points annually.

B. FHA-insured loans On or After July 14, 2008/Borrower paid Risk-based Premium

• Borrowers with an existing FHA-insured mortgage (purchase or full qualifying refinance transaction) where the case number for that existing mortgage was assigned on or after July 14, 2008, will be charged premiums on the subsequent streamline refinance transaction using the decision credit score and LTV for the existing mortgage being refinanced. 

• If the streamline refinance transaction is “credit qualifying” (with or without an appraisal) premiums are based on the new decision credit score and the LTV from the existing mortgage being refinanced.

Borrowers who refinanced their delinquent non-FHA ARM into an FHASecure mortgage are not eligible to streamline refinance their FHASecure mortgage.  The refinance transaction subsequent to the FHASecure mortgage must be a full qualifying refinance.
Previous Case Number.  To determine the case number of the loan being refinanced, lenders may use the Case Query screen in FHA Connection using the borrower’s name, address and/or social security number. 

Premium Feedback.  The Case Number Assignment screen in FHA Connection will provide a feedback message with the appropriate premium to be charged for refinance transactions.

Refund of Upfront Premiums.  Refunds of upfront premiums are available to borrowers refinancing to another FHA-insured mortgage within a three-year time period, as shown below. 

      Upfront Mortgage Insurance Premium Refund Percentages
 Month of Year
Year 1 2 3 4 5 6 7 8 9 10 11 12
1 80 78 76 74 72 70 68 66 64 62 60 58
2 56 54 52 50 48 46 44 42 40 38 36 34
3 32 30 28 26 24 22 20 18 16 14 12 10

On any refinance where the MIP refund exceeds the Upfront MIP required on the new loan, the overage will be refunded directly to the borrower from HUD.  The lesser of the MIP refund or the new upfront MIP should be subtracted from the unpaid principal balance before calculating the new mortgage amount.

Type of Refinance Risk-Based Premium Information
Cash-Out Refinances Premiums based on new LTV and credit bureau score/see premium matrix
Rate-and-Term Refinance
(no cash out) Premiums based on new LTV and credit bureau score/see premium matrix
FHA Secure/Not Delinquent Premiums based on new LTV and credit bureau score/see premium matrix
FHA Secure/Delinquent Premium is 2.25% upfront.  Annual premium is 55 basis points if LTV > 95%; otherwise, 50 basis points
Streamlined Refinance of RBP Loan
  Premiums based on previous LTV and previous credit bureau score/FHA will provide feedback with initial values/Any refund to be applied to new upfront premium
“Credit qualifying” Streamlined Refinance Premiums based on new credit bureau score and previous LTV/FHA will provide feedback with initial values/ Any refund to be applied to new upfront premium
Streamline Refinance with new case number assigned prior to July 14, 2008 Premium is 1.50 percent upfront and .50 percent annually/ Any refund to be applied to new upfront premium
Streamline Refinance with new case number assigned on or after July 14, 2008 Premium is 1.00 percent upfront and .50 percent annually/ Any refund to be applied to new upfront premium
15 Year and Shorter-Term Mortgages

Mortgages with terms of 15 years or fewer have a slightly different upfront and annual premium structure due to the risk shorter-term mortgages represent.  The mortgage insurance premium matrix is shown below:

 

FHA Single Family Mortgage Insurance
Upfront Mortgage and Annual Mortgage Insurance Premiums
Loan Terms of 15 Years or Fewer

Effective as of July 14, 2008
All premiums are specified in basis points (0.01%)

Decision Credit Score (FICO)
LTV 850-680 679-640 639-600 599-560 559-500 499-300 NON-TRADITIONAL

= 90.00 
100/0
 
100/0 
125/0 
150/0 
175/0 
175/0 
150/0

90.01-95.00 
100/25
 
125/25 
150/25 
175/25 
200/25 
n/a 
175/25

> 95 
125/25
 
150/25 
175/25 
200/25 
200/25 
n/a 
200/25

Systems

Lenders are reminded of the importance of data integrity to ensure that the appropriate premium is charged and that the data submitted to TOTAL and FHA Connection is accurate.  Also, system edits will prevent lenders from Streamline Refinancing FHASecure loans that were previously delinquent non-FHA ARM loans.

Additional Information about FHA’s Risk-Based Premiums

• Except for streamline refinances, premiums are the same for purchase and refinance transactions, i.e., based solely on the decision credit bureau score and the loan-to-value ratio
• There are no “add-ons” to the premiums or other adjustments to the mortgage insurance premiums for property type, e.g., multiple unit properties and mortgages on manufactured housing
• The source of the downpayment is not a factor in determining the mortgage insurance premium

If you should have any questions concerning this Mortgagee Letter, call 1-800-CALLFHA.

    Sincerely,

 

    Brian D. Montgomery
    Assistant Secretary for Housing-
         Federal Housing Commissioner

The Bush Administration renews its efforts to address risky government-backed seller-funded downpayment assistance loans that are significantly more likely to lead to foreclosure.  HUD’s Federal Housing Administration (FHA) will reopen the public comment period on a proposed rule that would ban seller-funded downpayment assistance on mortgage transactions insured by the FHA.  The proposed rule will be re-published in the Federal Register and comments will be accepted for 60 days following publication. The rule can also be viewed on FHA’s website. 

In a speech to the National Press Club, HUD’s Assistant Secretary for Housing-Federal Housing Commissioner Brian D. Montgomery warned FHA must take action because these loans, which now make up one third of FHA’s portfolio, are causing substantial losses.  This year, as a result of its annual re-estimate, FHA had to book an additional of $4.6 billion in unanticipated long-term losses, mostly due to the increased number of certain types of seller-funded loans in the FHA portfolio. 

“Given these concerns, we cannot just stand by.  No private mortgage insurance companies back these types of loans.  We are concerned about this business because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans,” Montgomery stressed.

Stressing that FHA is still solvent with reserves of about $21 billion, Montgomery also noted:  “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate.  That, I think, would have a far-reaching impact on the economy: it would severely reduce the number of new homeowners each year; and it would also sharply reduce the need for the services required to build and maintain homes.  In other words, the negative impact goes far beyond the individuals who would not be able to purchase homes, and would likely be felt across the entire economy.”

The primary focus of HUD’s rule is to establish appropriate standards for downpayment assistance that is categorized as a gift.   Specifically, it would prohibit downpayment assistance provided before, during, or after closing of the sale by the seller, any other person or entity that financially benefits from the transaction, or any third party or entity that is reimbursed directly or indirectly by any of the parties benefiting from the sale. 

The rule would clarify that downpayment funds for FHA-insured mortgages cannot be derived from sellers - directly or indirectly - or any other party that stands to benefit from the transaction financially.  “The IRS, GAO and our own Inspector General have previously expressed concerns with these circular financing schemes.  Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments,” noted Montgomery.

“In its entire 74-year history, FHA has been self-sustaining.  That means that our income has exceeded our costs and we have not needed an appropriation of taxpayer dollars to cover FHA’s operations. That’s pretty unique for a federal program,” Montgomery said.

Permissible sources of gifts as a source of the homebuyer’s investment include a family member, a governmental or public agency, the borrower’s employer or labor union, and a charitable organization that qualifies as a tax-exempt charitable or educational organization.  

In these cases, there is a clear quid pro quo between the homebuyer’s purchase of the property and the seller’s “contribution” or payment to the charitable organization.  Often, these contributions function as an inducement to purchase the home.  One of FHA’s primary concerns with these transactions is that the sales price may be increased to ensure that the seller’s net proceeds are not diminished, and such increase in sales price is often to the detriment of the borrower and FHA.  

Discussing the Bush Administration’s effort to help families stay in their homes, Montgomery also called on Congress to pass legislation that modernizes FHA, which includes addressing the risks associated with seller-funded downpayment assistance.  “Frankly, we need reasonable solutions to the housing crisis.  And I think there is considerable common ground on confronting it.  There is surely a consensus on a number of actions.  But some in Congress are advancing legislation that, while well intentioned, could be problematic for the economy and the country.  Some of the proposed Congressional actions could actually weaken FHA and endanger the housing market by turning FHA into a less stable, less solvent, more bureaucratic entity,” stressed Montgomery.

Clearly, this matter remains an area of significant concern for FHA, and HUD looks forward to receiving and reviewing public comments on the proposed rule.  Commissioner Montgomery’s full remarks can be found on HUD’s website.

>> UPDATE: WAIVER OF 90 DAY REQUIREMENT SIGNED BY BRIAN D. MONTGOMERY  

The Bush administration is temporarily suspending a 5-year-old rule intended to deter property flippers, as part of an effort to help speed the sale of foreclosed properties.

For one year, the Federal Housing Administration will no longer impose a 90-day waiting period before foreclosed properties can be sold to receive government-backed loans.

The policy was put in place in 2003 to deter property “flipping” schemes, in which buyers are overcharged for foreclosures or other distressed properties. But the surge in vacant properties resulting from borrowers who were unable to afford their mortgages has become a far more pressing concern.

“A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery,” FHA commissioner Brian Montgomery said in a prepared statement.

The new policy “will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes,” Montgomery said.

Are you looking for an FHA loan with a credit score under 580?  It is possible to obtain an FHA mortgage loan with a credit score under 580.  To locate an FHA lender to approve a mortgage loan with a credit score (or FICO) below 580 you can search our database.  Sorry to be repetitive here, but we are talking about an FHA score below 580 after all and it is relatively important to know where the FHA lenders below 580 can be found.

FHA Mortgage Under 580 FICO