Understanding FHA and VA Loan Guidelines
confused about loan guidelines?
I often have borrowers approach me after being turned down by a previous lender for not meeting the ‘guidelines.’ These borrowers are usually told they couldn’t qualify for a loan because “FHA or VA doesn’t allow” whatever circumstances they are trying to get approved for. And the loan officer probably believes what they’re saying is true. But when I listen to their story, I find that sometimes the information they were given was incorrect. It’s never easy to tell someone that they are indeed eligible for the loan they want, especially if the wasted time has meant they’ve missed their chance at the home they wanted.
There are many sticky layers of guidelines that must be sifted through to get a mortgage loan in this financial climate. As you see, I’m calling them guidelines as opposed to rules, because they aren’t all set in stone. Exceptions are made and loans are approved depending upon each specific situation. Here are the main guidelines you should familiarize yourself with:
1) FHA/VA/Fannie Mae Guidelines
These, for the most part, are publicly available. When changes come, they’re usually announced to lenders, realtors, and even the general public. For example, recent FHA changes state there is now a waiver for buying properties within 90 days of when the seller had taken possession of the property.
This waiver is for FHA’s ‘flipping rule’. HUD had probably realized it was a good idea to let investors penetrate the h0using market and turn a profit in order to eliminate some of the extra foreclosure inventory. As long the FHA buyer is getting a house at an appropriate value and in adequate condition, all the while taking excess properties off the market, everyone comes out a winner. FHA also has a new guideline that states with credit scores less than 580, an FHA loan is possible with a 10% down-payment. It’s a great option for buyers with lower credit scores who have the cash to put down. Technically, VA and FHA do not even require a credit score at all, as long as the buyer can provide enough alternative sources of credit to establish credit-worthiness.
I can go on and on here with a variety of Agencies guidelines, but beware. These rules don’t always apply as advertised. OK, here’s the next layer of guidelines to wade through.
2) Investor/Lender Guidelines
Irregardless of what FHA or VA or Fannie Mae mandates, the banks (who ultimately are in charge of lending the money) have their own unique set of rules as well. They can take cues from the agency mandates, but they are not bound to follow them to the letter, or at all. It’s also not surprising that these guidelines/rules differ from bank to bank, making it even more difficult to know the difference between what are bank rules and what are FHA/VA/Fannie guidelines.
For example, some banks have not instituted the FHA ‘waiver of the ‘flip rule’. They do not want to finance properties bought and sold within 90 days at all. There are some banks that will honor the new FHA guidelines as long as the mark-up is not over 20%. Others have embraced the waiver of the ‘flip’ rule only if the seller is a government entity or bank (which is rare in a ‘flipping’ situation). Never forget that banks are businesses, and they are more reluctant to jump into riskier deals than they used to be.
As far as 580 being the base credit score to get a loan, that’s all well and good – on paper and in the PR department. But truth be told, very few banks accept loans with credit scores less than 620. Some require 660. (See what I mean about backing away from risk?) I also can’t think of any bank taking a loan without a credit score for potential borrowers relying on alternative credit, other than some state bond programs. So now, a borrower hearing they do not qualify for a loan has to wonder…Is it because I don’t meet FHA/VA guidelines, or is it just this particular bank’s guidelines’?
3) Private Mortgage Insurance guidelines
As far as Conventional loans go, borrowers putting less than 20% down will likely need private mortgage insurance, which brings another layer of guidelines. For example, Fannie Mae allows a borrower to put 5% down on a property. But until recently, there was no mortgage insurance available for a 95% loan in ‘declining’ or depreciating markets (in which D.C. and surrounding areas were considered until earlier this year – some MI companies still have us ‘flagged’). So in these cases, the borrower had to put an extra 5% down, even though Fannie Mae/Freddie Max allowed less.
Also, without a 660 score or higher, you’d be hard pressed to get any mortgage insurance at all. The loan may be approved/eligible through DU automated underwriting system (Fannie’s automated underwriting engine), but there is no loan at all without the mortgage insurance. Again, this is an example of the agencies allowing one thing, but overlaying guidelines dictating another. The MI companies are starting to soften lately, but there’s still overlaying guidelines to consider when private mortgage insurance is in play.
First Home Mortgage is a Correspondent Bank , which gives me many options. We underwrite and fund our own loans, but we sell each loan to one of multiple investors. So that allows me to see when the proverbial shoe drops with one bank, there’s other banks that may have options. If you are turned down for a loan and want a second opinion, please don’t hesitate to call. I’ve saved many a loan after borrowers have been turned down, and its due to constantly educating myself to all these guidelines changes, and pretty much keeping my head on a swivel.
Jeff Halbert, Senior Loan Officer
7701 Greenbelt Road #215
Greenbelt, MD 20770
Office: (877) 220-0999/ Direct: (240) 965-8135
e-Fax: (443) 725-0472
Mobile: (301) 802-1944
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Jon Benya Keller Williams of Southern Maryland
tel (301) 653-8113
fax (301) 632-5481
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