Any property that the borrower does not occupy either as a principal residence or secondary residence is considered an investment property. Private investors, including certain non-profit organizations, can obtain an FHA-insured mortgage, provided they are approved by the appropriate Housing Opportunities Commission (HOC) and fit one of the following scenarios:

• The purchase of HUD Real Estate Owned (REO) properties
• Streamline refinancing without appraisals

Individual investors can take up mortgages made on investment properties if they qualify on credit.

Adjustable-rate mortgages (ARMs) and graduated payment mortgages (GPMs) are not allowed on these properties.

The FHA does not insure loans that are made in the name of a corporation, business partnership, sole proprietorship or trust. (Streamline refinances for mortgages originally insured in the name of businesses are the exception.)

An analysis for credit risk must be undertaken on one or more individuals together with the business entity or trust. The name of each individual plus the business entity or trust must be on the mortgage note. These parties may also appear on the property deed or title, in which case they must also be on the security instrument (the mortgage, security deed or deed or trust).

Secondary financing is any financing that results in a lien against the property apart from the FHA-insured first mortgage. This financing is not considered a gift, even if it comes without any provisions for monthly repayment (known as a “soft” or “silent” second), or includes measures for debt forgiveness. The amount of the secondary financing must be documented by the provider and indicate all transactions of funds given to the borrower. Copies of the loan instruments must also be added to the endorsement binder.

If a borrower participates in a down payment assistance secondary financing program, the costs from participation may only be included in the second lien amount. The FHA may reject a secondary financing if it does not serve the borrower’s needs, or if the costs to the participants are believed to be greater than the benefits to the homebuyer.

The Real Estate Settlement Procedures Act (RESPA) places limits on how much money a lender can mandate a borrower to keep in an escrow account for paying taxes and insurance. The act also requires the lender to present the borrower with initial and annual escrow statements.

RESPA does not require borrowers to have an escrow account. The lender may choose to have the borrower maintain such an account, but the lender cannot require the borrower to hold an amount greater than the limit imposed by HUD regulations.

About Escrow Account Cushions

Gifts from charitable organizations will not be recognized by HUD to constitute down payment assistance programs. A charitable organization is understood as any organization with an IRS 501(c)3 status.

Since gifts are, by definition, given voluntarily and with no conditions or compensation in return, the term “gift” does not apply to anything that is given on condition.

The FHA must comply with limits on the sizes of the mortgages it insures. Before 2008, FHA mortgage limits had to be 95% of the median home price in a given area in accordance with the National Housing Act. However, where government-sponsored enterprises (GSEs) had their own established mortgage limits, FHA loan limits had to be no greater than 87% nor lower than 48% of the GSEs’ limit. Also, for homes located in the high-cost states and territories (Alaska, Hawaii, Guam and the Virgin Islands), the National Housing Act permitted limits up to 150% of the national ceiling.

A HUD home is a residential property consisting of one to four units that HUD now owns following a foreclosure on a mortgage insured by the FHA. To recover losses on the foreclosure claim, HUD is offering the property for sale.

Who can purchase a HUD Home?
It’s easy for anyone to qualify for a purchase. Typically, if you have cash or meet the requirements for a loan, you will be able to buy a HUD home. 

Owner occupants (who will live in the home as primary residence) are first given a special priority period to buy HUD homes. Once this period has ended, HUD properties that remain unsold may be acquired by anyone, investors included.

HUD homes can be made available at discounted rates to people who have been displaced by Hurricanes Katrina, Rita or Wilma.

How the homes are sold ?

For every mortgage transaction, the lender is responsible for the estimation of the FHA Settlement Requirements to arrive at the cash amount needed for closing. At settlement, the borrower provide this amount, which also includes the following expenses:

Closing Costs

These include the appraisal fee, inspection fees, loan origination fee, the cost of the credit report, settlement fee, deposit verification fees, and other non-recurring costs approved by the FHA.

Prepaid Items

Section 203(b) of the National Housing Act was amended to allow more down payment assistance options and protections for home buyers who have their mortgages insured by the Federal Housing Administration.

There are several loan transactions that can affect how the maximum mortgage amount is determined.

Identity-of-Interest Transactions

The term “identity-of-interest” applies to a sales transaction between two parties that have a familial or business relationship. Transactions of this type on principal residences are limited to an 85% maximum loan-to-value ratio. Financing above this threshold is allowable in the following cases:

1. If the home is sold by one family member to another family member as a principal residence
2. If a builder sells a new home to an employee as a principal residence
3. If a current tenant who has rented for at least six months before the sales contract buys the property he or she is occupying
4. If a corporation purchases the home of an employee who has been relocated and sells that home to another employee.

What is the FHA TOTAL Scorecard?

The FHA TOTAL Scorecard is a tool for measuring any credit risks of FHA loans that get submitted to an automated underwriting system. This system is the basis of electronic underwriting, which the mortgagee uses to process requests. When the request is sent, the underwriting system will contact the FHA TOTAL Scorecard for a recommendation.