FHA Compliance
The Federal Housing Administration has insured more than 37 million home mortgages in the U.S. since inception in 1934. Borrowers must meet certain requirements established by FHA to qualify for the insurance, according to the Department of Housing and Urban Development. Underwriters ensure compliance with FHA standards.
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Significance
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FHA relies on underwriting to determine whether a borrower is able and willing to repay a mortgage loan. Because FHA must repay the lender if the homeowner defaults, ensuring compliance with FHA's eligibility rules and policies for insurance is a priority in managing risk.
Function
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The purpose of underwriting is to analyze borrower and property eligibility to ensure compliance with FHA standards. Underwriting examines financial documentation of the borrower's credit, income and assets and examines the property's condition and value to determine whether it is sufficient collateral for the loan.
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Types
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FHA evaluates the four Cs to determine the borrower's credit compliance. They include credit history; capacity to repay the loan (debt-to-income ratios); cash assets to close the loan; and collateral (real estate that secures the debt). Underwriting considers the type of income used, the borrower's liabilities and any compensating factors for compliance.
Time Frame
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All documentation used for compliance must be no more than 120 days old at the time of loan closing or 180 days for new construction. "Updated, written verifications must be obtained when the age of the documents exceed these limits," according to the FHA Handbook.
Considerations
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In general, FHA compliance is the same for all borrowers throughout the country, however, FHA does impose varying loan limits depending on the location of the property. Loan caps differ by county and area. For instance, higher loan limits tend to apply in metropolitan areas with high median incomes. Lower loan caps mostly apply in non-metro, low- to moderate-income areas.
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References
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