FHA Insurance Denied After Closing

[Christopher Grobbel]

We closed on a property in April. Our lender just reached out and informed us the FHA is refusing to insure the loan. This means our lender is kind of stuck and the loan is going to stay on their books.

They want the loan off their books and have offered to pay refinance costs with another private lending program. The refinance would be slightly beneficial initially on the monthly payment, but we would lose out over the long term because of the FHA structure - you gradually pay less and less PMI over the life of the loan.

I feel like this is a really unique situation as I have researched online and haven't been able to find any relevant information. Here are my questions:

• What happens to the PMI if we don't refinance and keep the initial FHA? We are currently paying a lot in PMI. If the FHA is not insuring the loan, does the PMI fall off?
• What options do we have or what should we use to trying and negotiate a better deal with our lender?  We like the lender and don't want to screw them.  We do however want to get the best deal for ourselves. 

Would really appreciate any informed responses here.  Happy to speak more in direct message or over the phone if it would be helpful. 

Thanks,

Chris 

[Account Closed]

Never heard of that one. I'd keep it financed how it is now. The question is how does it benefit you, minus the little monthly payments today, but long term the lower PMI and everything helps you in the long term.

With what you said I’d tell the bank that I’ll be keeping the loan as is.  Unless there is some legal clause forcing you.  

[Christopher Grobbel]

Eric- no legal clause forcing us. However I am curious what happens to the PMI we are currently paying? We are paying about $860 per month in PMI which will gradually fall off over the life of the loan.

The lender is proposing a payment which will be about $260 less than our current payment.  So it helps now, but eventually we start to lose out. If they could reduce the monthly payment closer to about $400, I think we would ocnsider it.

It's a really odd situation. 

[Wayne Brooks]

@Christopher Grobbel MIP on an fha doesn't gradually fall off, or get reduced.

For loans of greater than 90% the MIP is for the life of the loan.

For loans of 90% ltv or less, the MIP ends after 11 years.

For MIP to be $860/mo your loan would have to be over $1M

[Wayne Brooks]

@Chris Mason ??

[Christopher Grobbel]

Wayne I can show you the payment schedule. PMI falls off gradually each year until it reaches zero. And yes loan is over 1M. And yes it is greater than 90% LTV.

[Chris Mason]

Originally posted by @Wayne Brooks:

@Chris Mason ??

I have no input here, never having encountered this... basically there's a reason OP should never have gotten an FHA loan. The LO didn't catch that reason. The processor didn't catch that reason. The underwriter didn't catch that reason, and so on.

I'd be curious if they are allowed to continue charging OP for the mortgage insurance at all, since there is no insurance policy to speak of.

I'm given to understand that the "bruised and battered" bucket of loans sells for like 80% of principal balance. So if they lent you $100k and are now selling it for $80k, they are out some number greater than $20k. Ouch. Big whoopsie on their part. 

[Russell Brazil]

Originally posted by @Christopher Grobbel:

Wayne I can show you the payment schedule. PMI falls off gradually each year until it reaches zero. And yes loan is over 1M. And yes it is greater than 90% LTV.

Then that amortization schedule is not for an FHA loan. @Wayne Brooks is correct as to how PMI is treated currently on FHA loans.

[Russell Brazil]

Originally posted by @Russell Brazil:

Originally posted by @Christopher Grobbel:

Wayne I can show you the payment schedule. PMI falls off gradually each year until it reaches zero. And yes loan is over 1M. And yes it is greater than 90% LTV.

Then that amortization schedule is not for an FHA loan. @Wayne Brooks is correct as to how PMI is treated currently on FHA loans.

How many units is this property, and what was your down payment percentage....there is a lot here not adding up. 1 unit FHA loan limit in DC is is lik $725k, so even at 10% down, we are talking about $800k property max on FHA.

If its 3/4 units, these properties are not going to meet the FHA self sufficiency test. (this could be why he cant sell the loan) but that still doesnt not explain your amortization schedule with decreasing PMI.

[Wayne Brooks]

@Russell Brazil @Christopher Grobbel I just looked the MIP thing...apparently loans I've $625k start out at an Annual MIP at 1.50/1.55% (ouch, as opposed the norm .85%) and then reduce down to 1.0% over time....but I see nothing about it ever going lower.

[Christopher Grobbel]

@Wayne Brooks @Chris Mason @Russell Brazil

Guys I know you aren't believing it but all the paperwork in the file is for an FHA insured transaction. We closed in April. FHA now refuses to insure the loan despite it meeting every requirement. They are refusing because we own other property apparently and thus we don't meet the spirit of the FHA. Our lender is totally flabbergasted. He has called colleagues who own shops around the country, all of whom have never heard of this.

And yes the PMI is based upon the total amount of principal outstanding. Because the principal outstanding declines every year, so does the PMI.

The other option here is that my lender is sipmly lying to me.  I know him and I don't believe he is, there is no reason to.  He could simply tell me that "HA refuses to insure because of such and such requirement" and it would be no big deal.  Why make it up?  Second, he is offering real money to get me to refinance to another loan.  No reason to do that unless they are legit refusing. 

Also, the loan is on an owner-occupied 4-unit. 

[Russell Brazil]

Originally posted by @Christopher Grobbel:

@Wayne Brooks @Chris Mason @Russell Brazil

Guys I know you aren't believing it but all the paperwork in the file is for an FHA insured transaction. We closed in April. FHA now refuses to insure the loan despite it meeting every requirement. They are refusing because we own other property apparently and thus we don't meet the spirit of the FHA. Our lender is totally flabbergasted. He has called colleagues who own shops around the country, all of whom have never heard of this.

And yes the PMI is based upon the total amount of principal outstanding. Because the principal outstanding declines every year, so does the PMI.

The other option here is that my lender is sipmly lying to me.  I know him and I don't believe he is, there is no reason to.  He could simply tell me that "HA refuses to insure because of such and such requirement" and it would be no big deal.  Why make it up?  Second, he is offering real money to get me to refinance to another loan.  No reason to do that unless they are legit refusing. 

Also, the loan is on an owner-occupied 4-unit. 

 We are not saying we do not believe that youve been told these things, we are saying the information being conveyed to you is wrong.

The information you are providing does not align with FHA underwriting guidelines.

Whats the price point of the property, your down payment and how many units is the property, and what city is it located in? Is this owner occupied?

[Christopher Grobbel]

Hi @Russell Brazil,

As I mentioned earlier, the property is an owner-occupied 4 unit with a purchase price over $1M (1.15). Located in DC area. I mentioned previously the LTV was over 90, it is 96.5%.

[Russell Brazil]

Originally posted by @Christopher Grobbel:

Hi @Russell Brazil,

As I mentioned earlier, the property is an owner-occupied 4 unit with a purchase price over $1M (1.15). Located in DC area. I mentioned previously the LTV was over 90, it is 96.5%.

 Missed the last post where you said it was a 4 unit.

At that LTV, you wont find a 4 unit in DC that meets the FHA self sufficiency test.(Only applicable to 3/4 unit properties) I suspect this is the problem with the loan.

@Chris Mason would it possible for the LO, underwriters, etc to go through a whole loan on a 4 unit, miss the self sufficency test then not be able to sell/insure the loan do to that? I know from experience that properties in DC do not exist that meet the self sufficiency test with high LTVs.

[Russell Brazil]

@Christopher Grobbel What reason did he say they wont insure the loan? You said because you own other property? This is a fascinating case study, thats why Im so curious. (and because I sell lots of multis in DC)

[Chris Mason]

Originally posted by @Russell Brazil:

Originally posted by @Christopher Grobbel:

Hi @Russell Brazil,

As I mentioned earlier, the property is an owner-occupied 4 unit with a purchase price over $1M (1.15). Located in DC area. I mentioned previously the LTV was over 90, it is 96.5%.

 Missed the last post where you said it was a 4 unit.

At that LTV, you wont find a 4 unit in DC that meets the FHA self sufficiency test.(Only applicable to 3/4 unit properties) I suspect this is the problem with the loan.

@Chris Mason would it possible for the LO, underwriters, etc to go through a whole loan on a 4 unit, miss the self sufficency test then not be able to sell/insure the loan do to that? I know from experience that properties in DC do not exist that meet the self sufficiency test with high LTVs.

3/4 units in the Bay Area also don't pass FHA 3.5% down self sufficiency...

Is it possible? Yes.

Is it common or plausible or something to bet on? No.

In this case I wouldn't be shocked if the implausible happened.

I also wouldn't be shocked if this was one where the LO/processor/UW/etc overlooked the FHA requirements to count departing/former primary residence rental income. That whole 100 mile thing, which has very rare exceptions. It's possible that they thought they had one of those exceptions, and now HUD is pushing back.

If any lurkers (tagging my area, Oakland) wonder why it seems like underwriters give you the 3rd degree, this is why. That lender is looking at a loss of no less than 20% of the loan amount (negating all net profit from 30 or so other loans...), and the underwriter might lose their DE/HUD authority to underwrite FHA loans... that's a significant career hindrance, as DE/HUD underwriters get the big bucks.

[John Nachtigall]

i am not an expert in any of the loan stuff, but it seems like a math problem to me.

At some point the savings in the payment will cross over to the gradually "not decreasing" PMI. You could sit down with a spreadsheet and the amortization table and figure that out. Then make a decision

Does it cross over at 2 years...probably not a good deal

Does it cross over at 20 years?    Probably want to take them up on the deal

Just my $0.02

[Christopher Grobbel]

@John Nachtigall I think you're right and I agree. We are trying to figure out at what point it makes sense for us to say yes. It's exponential similar to the interest, so the "halfway" point of the PMI does not occur at year 15, but a bit later on at year 19, if that makes sense.

[Wendy N.]

@Christopher Grobbel I'm a curious about this - what was the outcome here? Did you refinance or stay with the FHA loan? Was the issue about you owning another property or meeting the self-sufficiency test as Russell Brazil pointed out?

[Christopher Grobbel]

Hi @Wendy N., the long and short of it is the FHA refused to accept the loan. Our lender helped us refinance into a different program so they could get the loan of their books. The lender did this at their own expense, which we were grateful for as we ultimately ended up with more equity and a lower payment.

[Wendy N.]

@Christopher Grobbel That’s great. Glad it worked out favorably.