This is a follow-up to my earlier article (January '08) on the FHA 203(k) mortgage as a viable alternative for people who would otherwise be locked out of the mortgage financing market, especially in view of all that has happened in the industry.
There are several built-in safeguards featured in the section 203(b) mortgage financing program. As a matter of fact, there are safeguards built into every FHA program except the old Title 1 programs which are almost extinct these days, but we’ll discuss Title 1 at a later date, if necessary. The primary safe guard- feature is a requirement for the applicant to provide documented proof of sufficient income to repay the loan. There is no such thing as “no income verification” or “stated income/stated asset” processing of a FHA application.
In order for us to understand the viability of FHA mortgages as “safe” mortgages we must first point to what is unsafe with regard to the likelihood of default on payment obligation when compared to other mortgage programs. Let’s take a look.
Beginning with the term “no income verification” as mentioned in the previous paragraph, there are similar terms that existed in the Sub-Prime lending arena which projected a lot of “easy money” lending policies and tended to be very good for business from the mid-nineties up to 2006. “No Income verification” by definition should signify easier-than-usual- money”. Therein lies the problem. Take a look at the following descriptions and see if you can determine their meanings:
“No Income/No Asset”
“No Income/Stated Asset”
“No Income/Full Asset”
“Stated Income/No Asset”
“Stated Income/Stated Asset”
“Stated Income/Full Asset”
“Full Income/Full Asset”
“Full Income/No Asset”
“Full Income/Stated Asset”
There would probably have been other exotic combinations of income-asset requirements, or lack thereof, if it meant that business would’ve been done and house buyers would get the money they needed in order to complete their “Owner Occupied”, primary residences, “Secondary Homes” or “Non-Owner Occupied” residential properties (Investor Properties). Thus far, none of the descriptions mentioned apply to the FHA program except description # 7. Full Income/Full Asset means that a prospective borrower must provide documents that support the income and asset information that is reflected on the mortgage application. In other words, if you want to purchase a home and you calculated the amount needed to pay the mortgage (including taxes and insurance) and how much your down payment is going to be, then you should present your paystubs (the most recent30 days worth), your W2 forms (the most recent two years worth) and your bank statements (the most recent 60 days worth). The other requirement for the FHA application is a tri-merged (three bureaus combined) “Credit Report”.
First and foremost, let’s dispel with any notion that there is such a thing as a “No credit” mortgage loan because there is not. The credit report is the document most lenders rely upon to determine a borrow’s likelihood of repaying the loan and therefore is used in combination with the house value to loan amount ratio (LTV) to rate the loan in terms of interest rate and points charged to a particular borrower. One important feature of the credit report that helps the lender in this process is the credit scores (FICO) obtained from the three bureaus by a local credit agency. These reports are usually ordered by the lender at the beginning of the mortgage application process.
It was once the belief of many mortgage loan applicants that FHA mortgages are more problematic and harder to get approved for because of the paperwork involved and all the other requirements that were involved in the process, especially the strict appraisal standards, but a lot of those restrictions were recently removed (within the last couple of years) and the process has become more streamlined. The point is that any home buying mortgage applicant who is employed for two consecutive years, has at least three percent of the purchase price of the home and a decent credit background can be a FHA-approvable borrower because the credit report does not present as big a problem as a conventional application would. In the case are some blemishes on the credit report, a reasonable explanation is acceptable along with any supporting documents and that buyer will most likely be approved and permitted to close and move into the new home. The FHA program is insured by the federal government and should be around for quite quite a while, so people wanting to purchase a home or refinance the one they presenly own can be confident in applying for a FHA-Insured mortgage through their local mortgage lenders/brokers. There is absolutely nothing to worry about, there are built-in safeguards for the borrower’s protection. These safeguards are written directly into the rules and regulations of the FHA program.