An easy to understand summary of FHA approval requirements for lenders.
FHA has grown rapidly in the past few years, fueled largely by tightening credit. In fact, over 20% of new home purchases are currently through FHA. As the volume of FHA loans increases, more lenders across the country are becoming FHA approved. However, the FHA approval process and paperwork can appear overwhelming, especially to smaller companies. To help lenders understand the guidelines, below is a brief summary of FHA’s approval requirements. (For a detailed list of all requirements, visit www.hud.gov.)
In order to reduce risk, FHA limits its approval to experienced, well-established organizations; the officer in charge of an organization’s FHA operation must have at least three years of mortgage experience. Furthermore, to be considered for FHA approval, an organization cannot be a sole proprietorship. Corporations, partnerships, LLC’s, chartered financial institutions, and government agencies are acceptable. Along the same lines, FHA approved organizations must have at least two full time employees and a commercial office location (not a home office).
Each prospective FHA lender must fill out the HUD 11701 application. FHA also requires certain letters and other documents, depending on the desired type of FHA approval (non-supervised loan correspondent, investing lender, etc.). For example, brokers wanting to become FHA approved must submit a sponsor/funding letter, whereas lenders need a funding program. For a list of all required documents by FHA approval type, see FHA Lender Approval Requirements.
Excluding “Government Mortgagee,” the application fee for all FHA approval types is $1,000. Additionally, lenders must submit audited financial statements with the application. The lender’s financial statements need to show at least $63,000 net worth with 20% liquid assets.
Quality Control Plan
Finally, FHA approval requires organizations to submit a quality control plan, in order to mitigate fraud and errors. Organizations can create a quality control plan themselves, or purchase one from a third party. As part of the quality control plan, lenders must audit 10% of the FHA loans they originate. These audits need to be performed regularly—within 90 days of the end of the month in which the loan closed.
Quality control audits may be performed in-house, if the lender properly trains and establishes a unit solely for quality control. The staff must not be involved in loan production. Alternatively, lenders may have a third party, such as Mortgage Compliance Advisors, LLC, perform the quality control function, as long as it meets HUD’s requirements.
About Mortgage Compliance Advisors (MCA):
MCA has grown to help clients across the country through the FHA approval process, and continues to help them stay compliant with regulations after approval. MCA’s principals have a combined sixty years of experience in the mortgage industry, including thirteen years at the Salt Lake City HUD/FHA office. As a former FHA branch chief, MCA’s principal Bob Warnock can advise clients through every step of the FHA approval process.