As seen in Scotsman Guide Magazine, Titled
4 Keys to FHA Approval
It has been about 4 years since FHA became a major part of the mortgage market. Many mortgage companies that do not have FHA Approval are finding it difficult to survive. So what is required to get an FHA License?
There are 4 major requirements that must be met. Everything else is just paperwork. These 4 requirements are audited financials, commercial space, 3 years origination experience, and decent credit. Let’s explain these items in detail.
Audited Financials are usually the largest barrier for most companies. Lenders must have $1,000,000 in net worth and starting May 2013 lenders must have $1,000,000 in net worth plus 1% of your the lenders total annual loan volume over $25 million up to a maximum of $2.5 million. Review the new requirements here: HUD Mortgagee Letter 10-20
For lenders, 20% of the total net worth must be liquid. Liquid assets include cash, cash equivalents or marketable securities. According to HUD Handbook 4060.1, chapter 2, paragraphs 2-6 B and C, lines of credit and loans held for sale are not considered liquid assets. Cash includes cash on hand, checking accounts, savings accounts, and certificates of deposit. Cash equivalents are readily marketable investments; e.g., securities readily convertible into cash. To be considered a liquid asset, the cash or cash equivalent must not be restricted or otherwise reserved for any purpose other than the payment of a current liability.
See page 7-26: HUD Audit Guide
Many people confuse this to mean that the owners of the company need to have this net worth. It’s actually the company not the individual owners. So, often owners will invest cash, cars, investment properties into the company to show as net worth on the financial statement. The even more difficult part about this requirement is that the financial statement must be audited. If you have ever had your taxes done, you know that can be a lot of work, but for your taxes, the account does not verify every assett and liability or every income or expense. For an auidted financial statement, the CPA has to verify every number on it. Most CPAs will charge $7,000 to $10,000 for this type of financial statement. Some CPAs that specialize in these types of audits have made the process very efficient and charge as little as $2,500 to $3,500, but that is still a lot of money, especially with the way the market is.
Most companies work out of a commercial space, but with the market the way it is and often for convenience some companies have chosen to start working out of their homes. HUD will not allow that. There are a few exceptions if the home is commercially zoned, or if it is near a commercialy zoned area and has easy access to the public, but in most cases, a residence will not work. Another issue with the commercial space is that it has to be separate from all other companies, except for possibly a shared receptionist. A good way to determine if your office is separate is to walk from your car to your office. If you have to pass by employees in cubicles for other companies then you are not separate.
Three Years Origination Experience
One of the senior officers must have 3 years of origination experience. This requirement is usually no problem, but is worth mentioning. If your company does not have anyone working for it that has been in the mortgage origination field for over 3 years, then you can not get approved. You will either need to hire someone or check with all of your employees to see if you can make one of them a senior officer if they have the 3 years of experience.
All senior officers and all owners of 25% or more of the company will need to provide their credit reports. If any of these credit reports show major derogatory items in the last two to three years, then you will have a problem getting approved. HUD uses FHA Underwriting guidelines to determie if the owners and officers of the mortgage company are financially fit. If any of these individuals have had a recent foreclosure, bankruptcy, tax liens, or numerous lates, they will need to be removed as senior officers and have their ownership reduced to below 25% before you can apply.
If you meet all of these requirements, then you should have no problem getting approved. The paperwork is difficult and I recommend getting some assistance putting it together. You will also need to find a CPA that is not too expensive, but like I said, everything else is just paperwork if you meet these 4 major requirements.