Mortgage Brokers and FHA loans (continuation from another thread)

A little wrong, yes.

Some brokers just aren’t as educated as the other guys are when it comes to guidelines and what they think you can’t do. Or they are just too lazy to know the guidelines and do what it takes.

When it comes to FHA lending there are 2 options. Get it approved by an automated underwriting system (fannie mae DU / freddie mac LP), or get it manually underwritten by a Direct Endorsement underwriter. This underwriter is literally putting her signature on the line to endorse this loan and saying it meets FHA standards and qualifications. If more than a few loans they sign off on go delinquent, it’s their job and their license.

The automated systems will only approve to a certain point; when the risk factor is too great for a computer system to sign off on, it refers the loan to a DE underwriter. This is when a loan must be manually underwritten, and you can see some dirty deals done through FHA.

The FHA manual is rather large book and a boring read, so I’ll just try to hit a few of the main guidelines.

Must be 2 years out of chapter 7 bankruptcy discharge.
Must be at least 1 year into a chapter 13 bankruptcy payment plan and have made payments on time (they can refi and buy out of it, or purchase during this).
Must be 3 years out of foreclosure.
No credit score minimum (although many lenders won’t go below 500).
Must show proven ability to repay the loan. DTI max 35/45 (give or take).

A good job history is needed. At least need to show 2 years history, with any gaps in employment explained. To use overtime income to qualify, they must have a history of recieving it, and show reasonable expectation of it to continue (verification of employment will ask this).

Underwriters will mainly be looking at the last 12 months credit history. Any delinquencies will need to be explained and usually won’t get away with more than a handful on revolving accounts. Installment delinquencies will be harder to get away with; and rarely will you ever get by with a mortgage late. The key to getting approved with shakey credit history is a good Letter of Explanation; usually a sickness in the family or something giving a good reason why they got behind on bills is best, not a “we couldn’t pay” or “we forgot”. A good Letter of Explanation will make or break the deal.

If the loan fits the guidelines, and you can explain why the problems came about, and explain that they are now overwith and will not continue, you have a loan.

FHA is key, and will be for a long time to come without subprime lenders around. You have to find a broker who knows how to do this stuff, not someone who just has an FHA license. And also, not very many lenders do manual underwrites as it is risky. Most only take automated approval files.

There you have my FHA secrets in a nutshell. If any of you other brokers who do these loans see something I missed, let me know.

I know it’s a boring subject and most investors don’t want to take the time to understand how loans work because “that’s the mortgage guy’s job”, but THIS IS IMPORTANT KNOWLEDGE so you can help your houses sell. Also, if you never learn some of this, how will you know what broker to send your buyers too. You don’t have to be a mortgage broker, but it helps to know and understand the guidelines and process.

Nice post with some great insights to the “underbelly” of brokering…

…knowledge is Power :beer

Uncle D (A.k.A Mike in FL)

Good synopsis—I have been offering FHA loans since I got into the game and believe that anyone that offered anything other (aka subprime) did the borrower a great disservice.

You might want to go into the FHA 203k program—bar none, the best rehab program available to homeowners on the market.


Scott Miller

Unfortunately when loans were as easy to do (and get) as a cold, anyone who could fog a mirror was going out and getting a mortgage broker license and getting into the biz. In fact, I lost a very good friend (by that I mean we don’t speak to each other anymore) to a mult-level mortgage operation. Horrible company, horrible agents, horrible, horrible!

So, there were a ton of agents out there that really didn’t know what they were doing. Hopefully all those sub-standard agents are back at their day jobs or waiting tables, safely kept away from unwary borrowers.

FHA is undergoing “modernization,” which essentially means that their mortgage insurance products will be expanded to meet the current needs of borrowers. So, lots of things in the loan industry are changing and it really takes an experienced professional to help navigate the loan world these days.

I say, take time and interview potential brokers as carefully as you would a new nanny for your kids.

Great advice—BTW, the MIP (FHA’s equivalent to mortgage insurance) isn’t being altered—what is being tabled is the increase of lending limits…


Scott Miller