Nolan Home Loans - FHA Mortgage FAQ

FHA Purchase and Refinance loans – Frequently Asked Questions

If you have a specific question and do not see it addressed send an e-mail to This e-mail address is being protected from spambots. You need JavaScript enabled to view it and your question will be promptly answered.  Questions with broad applicability to all borrowers will be added to the FAQS.  These FHA FAQS are primarily intended for home purchase and home refinance transactions in our market area of Pennsylvania, New Jersey, and Delaware, although the majority of the FAQS are applicable nationwide:

Maximum loan to value ratio (LTV):  The maximum loan to value ratio on an FHA mortgage is 96.5% of the lower of the purchase price or appraised value. The buyer needs a minimum of 3.5% down plus closing costs and prepaids. (see seller assist further down)

Cash out refinances maximum loan to value ratio:  The maximum loan to value ratio allowable on an FHA cash-out refinance is 85%.   Junior liens being paid off as part of the refinance that are more than 12-months old do not count as cash-out as they do on a conventional refinance.

Minimum credit score:  Most FHA lenders require a minimum credit score of 640.  Mortgage lenders pull tri-merge credit reports that merge data and report credit scores from the three credit bureaus, Equifax, Experian, and Transunion. The middle credit score from the three bureaus is the score used as the representative credit score.  If there are two or more borrowers the lowest middle score is the representative credit score used.

FHA and Non-Occupying co-borrowers and co-signors  The FHA does allow the use of non-occupying co-borrowers and co-signors.  A non-occupying co-borrower or co-signor must be related to the primary borrower by blood or marriage.  A non-occupying co-borrower is someone who is in title to the property (a co-owner on the deed) with the primary borrower.  A non-occupying co-signor is someone who is obligated as a borrower on the Note, but is not in title to the property (not on title and does not have an ownership interest)

Note:  The Note is signed at the closing, sets out the terms of the loan, and is the borrower’s personal obligation to repay the loan under the agreed terms.

Mortgage: (or Deed of Trust in some states other than PA, NJ, and DE) The mortgage is signed at the closing and is the document by which the borrower gives the lender a security interest in the property (pledge of collateral) for the loan by the lender to the borrower that was evidenced by the Note.  The mortgage is recorded in the public records in the county courthouse after closing.

Seller Assist: The FHA allows the seller in the transaction to pay nonrecurring closing costs and prepaids (prepaids cover real estate taxes, homeowner’s insurance premiums, and interest to the end of the month of closing) for the borrower subject to the limitation that the maximum amount of seller assist is the lesser of 6% of the sales price or the total dollar amount of closing costs and prepaids.  In other words, the seller assist amount cannot exceed the total amount of closing costs and prepaids even if that number is less than 6% of the purchase price.

FHA MIP (Mortgage Insurance Premiums): The FHA receives mortgage insurance premiums two ways from FHA borrowers:

A)    Upfront MIP – currently the FHA Upfront MIP is equal to 1.00% of the loan amount and can be financed (added to the maximum loan amount) so there is no impact on the cash required to close. Example – A $200,000 purchase price would have a maximum FHA base loan amount of $193,000 (96.5% of the purchase price).  The FHA Upfront MIP would be 1.00% of $193,000 or $1,930.00.  Financed MIP is always even dollar amounts, so the full FHA loan amount including the financed MIP in this example would be $194,930.00.  The .50 cents would be paid in cash at the closing as part of the closing costs.

B)    The second way the FHA receives mortgage insurance premiums is monthly from the borrower in the mortgage payment on top of the principal and interest payment.  The monthly MIP amount and factor used depends upon the loan amortization term and the loan to value ratio (the amount financed divided by the purchase price):

1)     30 year fixed rate mortgage:

-          Greater than a  95% loan to value ratio = .90% annually

-          Equal to or below 95% loan to value ratio = .85% annually

2)     15-year fixed rate mortgage

-          Greater than a 90% loan to value ratio = .25% annually

-          Less than or equal to a 90% loan to value ratio – None

Duration of FHA Monthly MIP:  The borrower continues to pay the monthly FHA MIP until the loan principal balance reaches an 80% loan to value ratio based on the original appraised value / purchase price at which time the borrower can request cancellation of the monthly MIP.  If the borrower does not request cancellation the lender is required to automatically cancel the MIP when the loan to value ratio reaches 78%.

Some differences to bear in mind between FHA MIP and Private MIP are:

a)     The ability to request cancellation of the FHA MIP is the worst case or slower of 80% LTV or 5-years.  EX: If your loan started at an 85% LTV and you made additional principal payments to rapidly pay down the principal balance so that you reached an 80% LTV after 2-years – you would still be required to continue to pay the FHA monthly MIP until the end of 5-years.

b)     Home value appreciation and a new appraisal showing a higher value and therefore a lower loan to value ratio cannot be used to request cancellation of FHA monthly MIP.  It is solely based on the appraised value / purchase price at the inception of the loan.

Appraisal:  The lender will order and obtain an appraisal from a real estate appraiser approved to do FHA appraisals.   Some property conditions if noted as existing at the property at the time of the appraisal may affect the health and safety of the occupants (peeling paint, missing hand rails on steps etc..) and may be required to be repaired and re-inspected by the FHA appraiser prior to closing.

Self-employed FHA borrowers:  The borrowers income for underwriting purposes will be derived by averaging income from the two previous years filed income tax returns.

IRS Form 4506-T:  Self-employed FHA borrowers and FHA borrowers who receive commission income will be required to sign a 4506-T as part of the application process authorizing the lender to obtain transcript copies of the borrowers two most recently filed federal income tax returns.  The underwriter uses the transcripts provided by the IRS to confirm that the borrower provided tax return copies match what was reported by the borrower to the IRS.

Direct Endorsement Underwriter: Mortgage underwriter authorized by the FHA to sign off on FHA loan files and obligate the FHA on the mortgage insurance.

Automated Underwriting:  The vast majority of FHA loan files are underwritten through automated systems using the FHA Total Scorecard System.  The two most commonly used automated underwriting systems (AUS) are Fannie Mae’s (Federal National Mortgage Association) Desktop Underwriter and Freddie Mac’s (Federal Home Loan Mortgage Corporation) Loan Prospector.  The loan file data is securely uploaded to either AUS for almost instant decisioning.   Loan files that are approved through an automated system are still reviewed by an FHA Direct Endorsement Underwriter for accuracy of data submitted and compliance with HUD/FHA requirements.

Manual Underwriting: A loan file that does not receive approval through automated underwriting may still be approved by an FHA Direct Endorsement Underwriter through a manual underwriting process.  Typically a loan file being reviewed after being referred by the automated system would need one or more positive compensating factors to lead  a DE underwriter to believe the loan warranted approval.

Gift Funds: The FHA allows 100% of the funds needed for down payment and closing costs to come from gift funds.  The donor must be a relative by blood or marriage or have a documentable close relationship to the borrower, such as a someone the borrower is engaged to be married.

Gift Funds Process of Documentation: The usual documentation required on a loan file involving the use of gift funds are:

a)     Standard form gift letter (provided by the lender) signed by the borrower and the donor attesting the funds are a gift and no repayment is expected.

b)     A copy of the front and back of the cancelled gift check when available from the donor’s bank

c)      Proof of deposit of the gift check in the borrower’s accounts

d)     Proof of the donor’s ability to provide the gift through an account statement or the donor providing written authorization for the lender to obtain a standard form verification of deposits from the donor’s financial institution.   Essentially the underwriter is looking for documentation to evidence the fact that the donor had the funds available and did not borrower the money to make the gift, thus calling into doubt the validity of the claim that no repayment of the gift is expected or required.

FHA mortgage loans are “fully documented” loans:  All income and assets used in underwriting FHA loan files must be fully documented.  Usual and customary income and asset documentation required from FHA borrowers consists of:

a)     Previous two years W-2’s

b)     Previous two years complete federal income tax returns for self-employed borrowers and borrowers who earn commission income.

c)      30-days of recent employer issued paystubs showing year to date (YTD) income

d)     60-days of asset account statements

Paper trail or sourcing funds:  When the borrower’s asset account statements (checking, savings, money market accounts etc..) show large unexplained deposits within the 60-days of account statements that are not identified as payroll direct deposits the borrower will be required to document the source of the funds to determine usability of the funds as documented funds available for the closing.   In all most all instances deposits in the form of cash cannot be sourced and therefore will not be counted by the underwriter as documented funds available to meet the total amount of cash required for closing.  

Non-borrower spouse or significant other:   The FHA does not allow a spouse or significant other that is not a borrower on the Note to be on the title to the property at the time of the closing.   This practice is generally not an issue on conventional loans, but is not allowed by the FHA.

FHA Quick FAQS are brought to you by Patrick J. Nolan of Atlantic Pacific Mortgage Corp.  Pat has 10-years of experience as a loan originator, and is currently the branch manager of the Holicong, PA branch office of Atlantic Pacific Mortgage, a multi-state mortgage banking firm headquartered in Mount Laurel, NJ.

Your questions, comments, or scenarios are welcomed. 

Pat Nolan

Atlantic Pacific Mortgage Corp.

5230 York Road

P.O. Box 740

Holicong, PA 18928

Phone: 215-794-0102 ext. 101

Fax:      215-794-0506

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(Holicong, PA is located in scenic Bucks County and is between Doylestown and New Hope, PA. on York Road – Route 202/263).