Future Earnings: Hud's Mortgage Assessment

The US Department of Housing and Urban Development (HUD) was created to help the federal government manage the country's housing needs, and to prevent housing discrimination. The Federal Housing Administration (FHA) is an agency within HUD that provides mortgage insurance on FHA loans. This insurance encourages lenders to offer mortgages to buyers with lower credit scores, limited savings, or past credit issues. HUD also offers a range of initiatives and assistance programs to help buyers, including the Housing Choice Voucher program (also known as Section 8), which provides safe and sanitary housing to lower-income households, older adults, and people with disabilities. In this context, it is important to understand how HUD views a borrower's future earnings when assessing their eligibility for a mortgage.

FHA Adjustable Rate Mortgage

An FHA Adjustable-Rate Mortgage (ARM) is a type of home loan with an interest rate that changes over time. It has a lower fixed rate at the start of the repayment period, usually lasting 3, 5, 7, or 10 years. FHA loans are insured by the Federal Housing Administration and are offered by FHA-approved mortgage lenders. These loans are ideal for lower-credit score borrowers, including first-time homebuyers, who often can't qualify for conventional loans.

The initial interest rate of an ARM is lower than that of a fixed-rate mortgage. This lower rate can provide financial flexibility if you expect an increase in future earnings. After the initial period, the interest rate will adjust annually or at predetermined intervals, such as every six months or one year, up to a certain percentage limit. This means your monthly mortgage payment could increase or decrease over the remaining loan term. The adjusted rate will depend on current economic conditions and prevailing interest rates.

There are two types of interest rate caps that provide protection from large interest rate swings: annual and life-of-the-loan. The annual cap restricts how much the interest rate can change in a given year, while the life-of-the-loan cap sets the maximum and minimum interest rates you can pay for the duration of the mortgage. FHA offers a standard 1-year ARM and four "hybrid" ARM products with different interest rate cap structures. For example, 1- and 3-year ARMs may increase by one percentage point annually after the initial fixed-rate period, with a maximum increase of five percentage points over the life of the mortgage.

Before considering an FHA Adjustable-Rate Mortgage, it's important to understand how these loans work and the potential risks involved. While the initial low interest rates and monthly payments can be attractive, there is a risk that payments could increase when the interest rate adjusts. Lenders typically qualify ARM borrowers based on their ability to repay a higher amount to mitigate this risk. Additionally, FHA loans have specific qualifications and requirements, including borrowing limits, credit score, debt-to-income ratio, down payment, employment history, and mortgage insurance premiums.

HUD-1 Settlement Statement

The HUD-1 Settlement Statement is a standardised mortgage lending document that itemises all charges and credits to the buyer and seller in a real estate settlement or mortgage refinance transaction. The form is typically used for reverse mortgages and mortgage refinance transactions.

The HUD-1 Settlement Statement is meant to be reviewed from the reverse side first. The reverse side is split into two columns: the left column itemises the borrower's charges, and the right column itemises the seller's charges. The borrower's list includes charges related to the mortgage, such as a loan origination fee, discount points, payment for a credit report, and fees for the appraisal and flood certification. It may also include any prepaid interest charges, homeowner's insurance fees, property taxes, owner's and lender's title insurance, and the closing agent's fees. The itemised seller list may include the real estate commission, any contractually agreed-upon credit to the buyer, and mortgage pay-off information. The seller's itemised charges are typically lower than the buyer's charges. The figures on the back page are then added up, and the totals are carried to the front side of the form.

The HUD-1 form is given to all parties involved in a transaction and must be reviewed by the borrower before closing to prevent errors or unplanned expenses. Federal law requires the form to be used as a standard real estate settlement form in reverse mortgage and mortgage refinance transactions.

If you applied for a mortgage on or before 3 October 2015, or if you are applying for a reverse mortgage, you will receive a HUD-1 form. For applications after this date, most mortgage loans now receive a Closing Disclosure form instead.

Reverse Mortgages

With a reverse mortgage, the amount of money you can borrow is based on how much equity you have in your home. Unlike a traditional mortgage, borrowers do not make monthly payments. Instead, interest and fees are added to the loan balance each month, and the loan is repaid when the borrower no longer lives in the home. The loan balance increases over time, leading to a decrease in home equity. The money received through a reverse mortgage is typically tax-free and does not affect Social Security or Medicare benefits.

In the US, the Department of Housing and Urban Development (HUD) provides resources for those interested in reverse mortgages, including a list of approved counselors and lenders. It is important to be aware of potential scams and always review the relevant forms, such as the HUD-1 form, to prevent errors and surprises.

Mortgage Lending Discrimination

Overt discrimination in lending is illegal, as are certain types of more indirect discrimination. However, lending discrimination is common and can be a barrier to homeownership. It can occur when you are applying for a loan, during home appraisals, in homeowners insurance policies, and in mortgage loan modification. For example, a lender may refuse to consider your income because it comes from part-time work, Social Security, pensions, annuities, alimony, child support, or public assistance. They may also count your income differently from your spouse's because of your sex or charge you more for an appraisal because you live in a predominantly non-white neighbourhood.

Disparate treatment is another form of discrimination, where a lender takes longer to approve female applicants or fails to provide Black applicants with the same options as white applicants. Disparate impact is more subtle, such as when a lender has a policy not to underwrite mortgages for less than $150,000, which effectively excludes non-white borrowers in an area where it is uncommon to find homes requiring loans larger than this amount.

If you believe you have experienced mortgage lending discrimination, you can file a complaint with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD). It is important to pay attention to potential warning signs, as discrimination by a creditor can be hidden or unintentional, making it hard to spot. The Equal Credit Opportunity Act (ECOA) also makes it illegal for a creditor to discriminate against you when applying for credit, including a home mortgage, because of receiving income from any public assistance program.

HUD Homes

When it comes to future earnings, investing in a HUD home can offer potential in the market. It is important to conduct due diligence on similar homes and local market conditions to understand the marketplace and its dynamics. This includes researching local rental rates to gauge expected income and analyzing recent sales of comparable properties in the area.

For resale value, consider long-term appreciation trends and the property's proximity to desirable features, such as schools, shopping centers, and transit hubs. Online valuation tools can be a helpful starting point for these assessments. The biggest factor in a property's future value is often the neighborhood, so it is important to analyze demographic data, crime rates, and school quality, as these can be major drivers of desirability.

When buying a HUD home, finding the right financing options is essential. Bidding on a HUD home can be competitive, and it is important to be aware of the tight bid periods and potential costs like extension fees. An experienced real estate agent can help guide you through the process and provide valuable insights into the marketplace.

Frequently asked questions