How Do FHA Direct Endorsements Work?
The Department of Housing and Urban Development operates the Federal Housing Authority’s mortgage insurance program. The FHA was created in the 1930s to promote home ownership. Its programs allow lenders to take risks on borrowers with lesser credit so more people have the opportunity to purchase a home. If a borrower defaults, the lender may claim reimbursement from HUD to recover its losses.
A lender funds a new home loan after reviewing the borrower’s application and determining the risk is acceptable. Once the lender is finished with the file, it sends the information to HUD for review and approval. HUD will return the file to the lender if it is incomplete, deny the endorsement due to fraud, or approve the request and endorse the loan. If the request for endorsement is approved, HUD will issue a Mortgage Insurance Certificate to the lender.
The direct endorsement underwriter takes on the duties of HUD prior to the loan’s approval if applicable. This includes the initial inspection and appraisal of the property. To qualify for an FHA loan, the property’s appraised value must be equal or greater than the total loan amount. FHA does not endorse loans with variable interest rates. The borrower must meet FHA’s minimum qualifications with regard to credit, income and employment. When dealing with FHA direct endorsers the borrower’s down payment must be at least 5% (instead of the typical 3.5% FHA loan minimum) of the property’s value.
To obtain HUD direct endorsement privileges, a lender must have at least five years of experience as an originator of single-family mortgages and demonstrate professional expertise in the industry. The underwriter who will be analyzing applications must go through a HUD training course, work for the lender full-time and have at least three years recent experience appraising property and evaluating credit applications.
HUD may deny an insurance endorsement request if it finds fraud or misrepresentation by the lender or borrower. If lender fraud or misrepresentation is found after the loan is endorsed, HUD may revoke the insurance at a later date. This leaves the lender unprotected if the borrower defaults on the loan. HUD will not pay out any claims related to that loan in the future.
HUD also reviews the loan history of direct endorsement lenders to evaluate their performance. The lender may lose its authorization if there is a pattern of defaults or other complications with the loans originating from this particular source. HUD can also review past loans for compliance issues if it discovers problems with the current loans.