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FHA Underwriting Guidelines, Does Your Loan Officer Know Them?

Apr 28, 2008
Tom is from New York and was approved for an FHA home loan on a single family house. The banker told him he would need two months reserves in a savings account before closing or the mortgage would not close. He was concerned by this late requirement and called me for help.

Unlike conventional loans, an FHA mortgage does not have a requirement for reserves on a single family home. If however, a buyer is purchasing a 3-4 family unit the reserves required would be three months.

The answer here was very simple and is actually available on the HUD website. There is however, a really big issue here. Bear with me, here is another example.

Another couple was approved for an FHA loan in March of 08 and the company they were working with said the couple had to pay their 2007 taxes before the lender would close the loan. Hello, 2007 taxes aren't due until April 2008. This couple asked if there was a law stating this. Well, NO! There is not even an underwriting guideline that calls for it.

This is only two examples. What is going on here?

I answer mortgage questions from home buyers, sellers, real estate agents, loan officers, and yes, even underwriters. The underwriters and loan officers are from some well know companies. I get this type of question every day from all over our country, India, and other countries in the middle east.

I see several issues with this information so far but I'm only going to cover two.

First, Why don't Loan Officers and Underwriters know basic FHA underwriting guidelines? Simple, they have no experience or training on FHA! FHA loans are and always have been a terrific option for people that didn't quite fit into conventional guidelines. Best of all the interest rate is considerably lower compared to a sub-prime loan and as I write this today FHA rates are equal to par on a Fannie Mae. It doesn't get any better than that, right?

FHA loans are vary complicated to put together and they used to have unusual appraisal and inspection requirements. So in the past if a borrower didn't fit into Fannie or Freddie it was just easier and quicker to slap him into a sub-prime loan. It was a slam dunk and like, ... so what if the rates were higher on a sub-prime, few consumers understood their options anyway. That mentality is why I built my site in 2002.

Another reason companies didn't do FHA loans was because they had to be HUD approved which meant they had to have a minimum net worth and pass a costly Audit every year. So again, why bother when sub-prime was so easy and available.

The sub-prime days are almost a thing of the past or at least not as available as they use to be. The savior? ... FHA Loans of course. The problem is that very few mortgage professionals, including underwriters have much experience with FHA or understand the differences between FHA and Fannie. Thus, in the two examples above, underwriters and LOs are just making stuff up or worse case, running scared because of all the flack in the industry right now.

In defense of the underwriter (as in example two) I will say that they have the authority to require what ever they deem necessary to improve a portfolio. Many of the questions I have received from underwriters seem to reveal that it is really a case of inexperience and over caution.

Mortgage industry professionals are struggling to learn FHA guidelines. If you are a consumer you must be very careful to find someone that has been HUD approved for at least two years. And Do Check, seriously. Some companies are doing FHA loans and they are not HUD approved. They are under the disillusionment that HUD will allow a non-HUD approved broker, to broker, to another HUD approved broker! Sounds a little flaky, no?

How did we ever get in this mortgage mess? We can give some of the blame to the politicians and presidential candidates that are hyping it up for their own agenda. It is not as bad as they say but they are speaking so loudly that the rest of the world is now listening. Did you read what is going on in the UK's market today? Good grief.

I'm not sure we should be bailing out our large lending companies and here is why. Back in this article I mentioned getting questions from India and other countries in the middle east. I have to ask myself, why would a mortgage underwriter in India, who I can hardly understand due to "no speaking good English", be calling me on the telephone at 3:00am about a loan in Texas?

Does that make you stop and think?
About the Author
Connie Sanders has several sites that help teach the consumer about FHA underwriting guidelines. This is teachation everyone needs before they apply for a mortgage anywhere. Find out what you qualify for at: http://www.mortgageunderwriters.com
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