Let FHA Loans Help You

US lawmakers have noted the rapidly increasing number of FHA loans, and wonder if it could represent heightened risk to FHA’s dwindling reserves, and ultimately, taxpayers. With the demise of sub-prime lending, FHA has become the primary source of home loans for people with bad credit, and borrowers who have minimal cash for meeting down payment and closing costs. In 2007, FHA home loans accounted for about 6 percent of US home loans, but so far in 2009, FHA home loans account for more than 21 percent of US single family mortgage loans.

Perceived FHA Home Loan Risk Concerns Lawmakers

In addition to FHA’s expanding role in guaranteeing home loans for cash strapped and credit challenged borrowers, lawmakers are concerned about the rising delinquency and foreclosure rate for FHA home loans. The delinquency and foreclosure rate for FHA mortgages has increased from 5.5 percent in early 2006, and increased to about 8 percent at the end of June 2009. Reasons for concern over growing FHA exposure include:

• FHA loans for people with bad credit: FHA offers more lenient credit requirements as compared to underwriting requirements typical of conventional mortgage lenders. Although FHA guidelines have recently been tightened, increasing delinquency and foreclosure rates pose a threat to FHA’s reserves for reimbursing mortgage lenders for losses associated with foreclosure.
• Low down payment requirement: FHA allows a minimum 3.5 percent down payment, this could increase to 5 percent. Conventional mortgage lenders typically don’t accept less than 10 percent down, and may require no less than the traditional 20 percent down payment. Lower down payments allow people of moderate income to achieve home ownership, but critics suggest that homeowners with little investment in their homes may be more inclined to walk away when problems arise. FHA’s growing home loan delinquency rates appear to substantiate this concern.
• Been there, done that Lessons from the sub-prime crisis suggest that owning a home is a financial responsibility that many are not prepared to handle. Homeowners who can still make payments have asked why those in trouble should be bailed out by government sponsored programs. As an agency of the federal government, FHA risks potential public backlash if its lenient lending policies lead to higher foreclosure rates and a cash bailout should its reserves disappear.

As FHA adjusts its lending requirements to achieve optimum risk management it must also consider its niche of providing accessible home financing to people of moderate income, and yes, even people with bad credit. Recent economic conditions render everyone vulnerable to bad credit; many of us are but one layoff or medical emergency away from deciding whether to buy groceries or pay medical bills, credit cards or even our housing payment.

There has been a big to-do during the past week with the announcement that more than 500,000 trial loan modifications in progress under the Making Home Affordable program.

This is good stuff and a huge change from what we had before. What we had before 949 applications under the Hope for Homeowners Program and ONE mortgage approval. As to the FHASecure program, it allowed just 3,794 delinquent conventional borrowers to refinance with FHA loans in fiscal 2008.

In contrast, the Obama Administration reports that 2,484,783 borrowers have sought information under the Home Affordable Modification Program (HAMP) through the end of September. Of this number, 757,955 were offered three-month trial modification and 487,081 trial modifications have begun. If the borrower makes three lower payments during the trial period then the loan is permanently changed to that lower rate and hopefully the home is saved from foreclosure.

The headlines are now filled with dire worries regarding the FHA mortgage program.

___FHA: Another Shoe Dropping — Baltimore City Paper.

___ FHA Could Be Next Up For Bailout — NBC News, Los Angeles

___ FHA mortgage loans stumble — St. Louis Examiner

These items would be interesting if only they got to the major issues.

The Mortgage Bankers Association’s weekly survey of home loan and refinance applications indicates stronger demand that could signal the end of rock bottom mortgage rates. The survey covering the week ending October 2 indicates that applications for home purchase loans were up 16.4 percent, seasonally adjusted to 13.2 percent. This figure remains about 2 percent less than one year ago.  Refinance applications rose to 18.2 percent, also seasonally adjusted, and the highest rate for refinance applications since mid-May.

FHA Providing Home Loan Opportunities for Challenged Borrowers

With the demise of sub prime lending, many homebuyers and homeowners who have little cash or home equity, and/or credit problems cannot qualify for mortgage loans at current mortgage rates. FHA has assumed the lion’s share of this market, as indicated by the MBA survey. For the week ending October 2, FHA home loan applications have risen 14.4 percent, the highest level reported since the survey’s inception in 1990.

Current Mortgage Rates and Lenient FHA Guidelines: Is the Party Ending?

This may be great news for homebuyers and homeowners wishing to refinance, but as FHA assumes more risk by insuring growing numbers of loans,  it may be forced to further tighten its lending requirements in an effort to avoid heightened risk. Recent concerns about FHA reserves falling near the 2 percent minimum required by Congress have led to raising the minimum down payment for FHA home loans from 3.5 to 5 percent, and reducing loan amounts for cash out refinances and cash payouts for reverse mortgages. If FHA guidelines are tightened further, first time buyers and others may be out of luck, especially if mortgage rates start rising.

FHA Resources for Homeowners and Homebuyers

If you’re buying for a home, or refinancing your current home loan, get quotes for FHA home loans from our lenders. If you need information about preparing to buy a home, paying off debt or learning about local housing programs in your area, please contact a HUD approved housing counselor for assistance.  

To Buy or Not to Buy: Are You Ready to Buy a Home?

Home ownership is traditionally viewed as a sign of achievement and financial stability, but it is also likely to be the largest financial obligation you’ll ever have. Don’t be pushed into buying a home you’re not ready to own. Taking time to save for a down payment, establish or improve your credit, or stabilize your career can be worthwhile, particularly if you have doubts about buying a home right now. Attending a first time homebuyer class can help you understand the cost and responsibilities of home ownership. Don’t allow pressure from family or others to influence your decision about buying a home. When you’re ready, you’ll know.

There’s a lot of concern regarding FHA reserves and with good reason — you sure would like them to be larger.

The Wall Street Journal, in it’s latest anti-FHA blast, notes that “the agency acknowledged this month that a new but still undisclosed HUD audit has found that FHA’s cash reserve fund is rapidly depleting and may drop below its Congressionally mandated 2% of insurance liabilities by the end of the year.

“At a 50 to 1 leverage ratio, the FHA will soon have a smaller capital cushion than did investment bank Bear Stearns on the eve of its crash. Its loan delinquency rate (more than 30 days late in payments) is now above 14%, or from two to three times higher than on conventional mortgages. Its cash reserve ratio has fallen by more than two-thirds in three years.”

Of course, looking at loans that are at least 30 days late is absurd. The more important issue is not whether loans are late, it’s whether they are being foreclosed. As we pointed out earlier this week:

In a move to address an estimated shortfall of $798 million within the next fiscal year, FHA Commissioner David H. Stevens has announced cuts in the amounts seniors can receive under FHA’s popular reverse mortgage program. Effective with applications received on and after October 1, 2009, the FHA Home Equity Conversion Mortgage (HECM) loans will provide 10 percent less cash to seniors.

How Revised FHA Guidelines Affect HECM Borrowers

A reverse mortgage loan is an option for borrowers aged 62 and above who want to convert home equity to cash and eliminate monthly mortgage payments. Falling property values have led to narrower margins between home value and home equity, and FHA guidelines reducing the amounts seniors can receive with a HECM loan may put reverse mortgage loans beyond the reach of some borrowers. Reduced FHA loan limits can make it more difficult to cover the cost of paying off an existing mortgage, meeting closing costs on the new HECM mortgage. Seniors who need to use the proceeds of a HECM loan for living expenses may find that there’s not much cash left  after paying off their existing mortgage and costs of their reverse mortgage loan.

Borrowers on Fixed Income: Reverse Mortgage as Life Raft

Homeowners who live on a fixed income or otherwise have limited resources may find their existing  mortgage payments too high. Taking out a reverse mortgage can help these homeowners by eliminating monthly mortgage payments and possibly providing extra cash for paying taxes and hazard insurance and meeting living expenses. Borrowers with reverse mortgage loans are guaranteed the right to remain in their homes as long as they wish, and do not have to repay their mortgage loans unless they vacate the property securing the reverse mortgage loan. The change in FHA loan limits for  reverse mortgage payouts may result in some borrowers losing the opportunity to improve their finances with an FHA reverse mortgage loan.

Using a Reverse Mortgage Calculator

You can use a mortgage calculator to estimate potential benefits of getting a reverse mortgage loan. Although the calculations provided don’t take into account regional variables and individual cirmstances, they can help in determining if a reverse mortgage loan may work for you.

FHA Cautions Homeowners Against Reverse Mortgage Scams

Although reverse mortgage loans are also available through conventional mortgage lenders, borrowers are cautioned to avoid “too good to be true” offers made through the mail or online. AARP provides consumer information about reverse mortgage loans here. FHA reverse mortgage counselors can also answer questions and provide information about FHA guidelines and reverse mortgage loans.

Rep. Scott Garrett (R-NJ) has a new bill that would cut off FHA mortgages from large numbers of borrowers.

Under the grossly miss-named FHA Taxpayer Protection Act of 2009 (HR. 3706), Garrett would increase the minimum FHA mortgage down payment from 3.5 percent to 5 percent AND prohibit the financing of closing costs under such mortgages.

In a recent letter to the New York Times, FHA commissioner David H. Stevens responds to allegations that FHA loans are taking the place of the sub-prime loans that were largely responsible for record foreclosure rates. Concerns about heightened risk prompted a proposal to increase down payments for FHA loans to five percent from the current minimum of 3.5 percent.

Commissioner: FHA Loans are Profitable, Borrower Credit Scores Increasing

There are several good reasons for getting an FHA loan; FHA is an agency of the federal government, overseen by the US Department of Housing and Urban Development (HUD). Unlike here-today-gone tomorrow sub-prime lenders, FHA insures home loans made by its approved mortgage lenders. This creates an alliance between mortgage industry lending and loan servicing  expertise and more than $30 billion in reserves held by FHA for reimbursing lenders for foreclosed FHA loans.

FHA: Dedicated to Protecting Lenders and  Assisting Homeowners

FHA offers support for lenders and homeowners wanting to avoid foreclosure. It works with community housing services, credit counselors and other financial professionals to assist distressed homeowners before foreclosure becomes necessary.

Getting an FHA loan may be the only affordable way for many homebuyers to get the mortgage they need for buying a home. As credit standards have tightened, FHA loans have become a predominant resource for those who have less than a 20 percent down payment. Although borrowers pay an up front mortgage insurance premium (UFMIP) and continue to pay annual mortgage insurance premiums until certain conditions are met, an FHA home loan can provide a gateway to the benefits of owning a home.

Credit Challenged Borrowers May Qualify for FHA Home Loans

Conventional mortgage lenders may not lend to borrowers who have a foreclosure or bankruptcy on their credit reports. FHA guidelines permit both, provided that a foreclosure occurred at least three years prior to the borrowers’ loan application, and a bankruptcy occurred at least two years prior to applying for an FHA mortgage loan. FHA guidelines also provide borrowers without traditional credit an opportunity to document their credit using rent receipts, utility payments and other “non-traditional” proof of creditworthiness. As financial institutions are cutting credit lines and refusing to issue consumer credit, it seems that FHA’s willingness to consider alternative credit documentation may become more important for homebuyers who have not established traditional credit lines. Although FHA is tightening some credit requirements, such as requiring lenders to certify verification of income and employment, FHA loan requirements provide those with little cash and less than perfect  credit an opportunity for owning a home.

With FHA mortgage rates holding steady, first time homebuyers can potentially take advantage of lower home prices and mortgage rates to qualify for affordable FHA home loans.

In a move intended to reduce taxpayers’ exposure to losses associated with defaulted FHA loans, legislation is being proposed that would tighten FHA loan requirements:

• The minimum down payment would increase from 3.5% to 5% of the loan amount.
• Closing costs would no longer be permitted to be “rolled into” the loan amount.

This would mean that potential homebuyers would need to have more cash available for cover these costs. The principle concern behind these proposed changes is that lenient lending requirements can encourage people to take out home loans they are not prepared to pay over the long term.

Demise of “Sub-Prime” Lending Increases FHA Market Share

As mortgage lenders have restricted sub-prime lending and ceased offering mortgage loans with exotic terms including negative amortization and interest only payments, more and more homebuyers are turning to FHA for affordable mortgage loans. Low down payment requirements and the ability to roll closing costs into the mortgage amount can help cash-poor homebuyers purchase a home. Critics argue that creditworthiness is in part determined by meeting higher down payment requirements; borrowers who have little investment in their homes may be more inclined to walk away during hard times.  As FHA’s reserves decrease as the result of paying mortgage insurance claims resulting from mortgage foreclosures, Congress may be required to act if reserves fall below minimum required amounts.

During 2008, FHA insured home loans accounted for about 21 percent of the market as compared to less than 5 percent of the market during 3005 and 2006, when sub prime home loans were widely available. As mortgage credit requirements have become increasingly stringent, homebuyers are turning to FHA for home loans. Congress is concerned that if increasing numbers of FHA loans “go south,” taxpayers will be footing the bill for paying mortgage insurance claims filed by lenders.

Federal Reserve Chairman Ben Bernanke noted at a recent hearing that FHA remains the primary source of mortgage loans requiring less than a 20 percent down payment, and is assisting people who would not otherwise be able to buy homes. It appears that FHA could be caught between a rock and a hard place in terms of weighing the risk of making riskier home loans against serving those who want to buy a home, but can’t meet conventional lending requirements.

FHA is awaiting the results of an actuarial study that is expected to shed light on potentially increasing risk due to insuring more lenders against foreclosure losses. In the meantime, if you’re sitting on the fence, this could be a good time to find out if you’re eligible for an FHA home loan. Interest rates remain low and FHA guidelines have not yet changed.

Beginning next year FHA mortgage appraisals will become portable.

At first this may not seem like a profound idea, but it’s actually a big advance for borrowers.

The FHA requires full-blown appraisals for all new and refinanced loans, except when there’s a streamline refinance of an existing FHA mortgage. Because FHA appraisals require a licensed appraiser to physically examine the inside and outside of the property, such valuations are expensive, typically a few hundred dollars.

Traditionally it has been very difficult to get an appraisal and then decide to get a better loan with another lender. Lenders have no incentive to encourage such thinking even though borrowers have no obligation to use a given loan source. So, to lock in borrowers, lenders typically have charged “application fees” and made it difficult or impossible to transfer appraisals from one lender to another.

Imagine that you have an FHA loan and would like to get a loan modification. You’re nearby happy lender offers you a rate which is less than what you are paying today, so your monthly costs will go down and that sounds pretty good. However, the problem here is that while monthly costs go down, they may not go down as much as they could given current loan rates. In other words, the lender is selling a loan at an above-market price.

In the heyday of the real estate bubble, FHA loans accounted for about 3 percent of residential mortgage loans. Now, they’re about 15 percent of the market. The demise of sub prime lending, Tight credit standards, and cash challenged homebuyers and homeowners contribute to the recent surge in FHA mortgage loans.

FHA Mortgage Provides Flexible Guidelines

• Low down payment: Conventional lenders rarely approve financing for homebuyers with less than a 10 percent down payment; FHA insures mortgage loans of up to 96.5 percent of home value. Borrowers should be aware that FHA loans come with a price in the form of mortgage insurance premiums. If you want to take advantage of current low mortgage rates, but don’t have enough cash to cover 10 percent down, an FHA mortgage loan can help.
• No specific income requirements: If you’re self employed, work seasonally, or cannot otherwise qualify for conventional mortgage loans due to your income, an FHA loan may be the mortgage loan for you. FHA places no dollar limits on qualifying income, which means that you can potentially qualify with any amount of income as long as you can document your ability to make mortgage payments.
• FHA loan limits accommodate many housing markets: FHA loan limits vary according to regional market conditions, with maximum loan limits ranging from $271,050 to $729,750.
• Thorough appraisal requirements = homebuyer protection: Although FHA has loosened some standards for minor cosmetic repairs, its appraisal guidelines require sellers to make recommended repairs prior to closing. Although this can seem troublesome for homebuyers anxious to close, it can save money and help prevent home repairs later.
• No income requirements (either high or low): Unlike convention lending requirements, FHA guidelines are based on a borrower’s ability to pay instead of arbitrary income requirements. There is no minimum or maximum income requirements for qualifying for an FHA mortgage. FHA lenders will verify income and employment.
• Flexible guidelines for source of down payment: Your down payment may come from a family member or friend, your employer, or a government and/or non-profit agency. (State and local first time homebuyer programs may provide down payment assistance for first time buyers.) If any part of your down payment is financed, you’ll have to demonstrate the ability to make payments on your FHA mortgage and the down payment financing.

Assessing FHA Loan Cost

You may have heard that FHA loans are expensive; this is a criticism of the mortgage insurance premiums charged to borrowers. 1.75 percent of your mortgage loan amount is paid up front, with .50 percent of your mortgage balance paid each year for up to five years, and/or or until your loan to value ratio (LTV) reaches 78 percent of its appraised value. Conventional mortgage loans also require mortgage insurance and many require down payments of 10 percent of your home’s value. Don’t let affordable home ownership slip by before home prices and mortgage rates start rising.

FHA offers a simplified refinance program for homeowners wishing to refinance their existing FHA mortgages. This refinance program provides easy qualifying requirements, and quick closing, but changing FHA guidelines reflect tighter credit requirements across the mortgage lending industry. For all streamline refinance transactions with FHA case numbers issued on or after November 17, 2009  changes in FHA’s streamline refinance program include:

At the time of application, borrowers must demonstrate a satisfactory payment history: FHA Applicants for streamline refinancing must have made at least six payments on the mortgage being refinanced. For mortgage loans less than 12 months old, all payments must have been made within 30 days of their due dates. For mortgage loans greater than 12 months old, borrowers must have no more than one payment more than 30 days late, and must have made the immediately preceding three payments on time.

Tangible net benefit to borrowers: The new mortgage under the streamline refinance program must provide a “tangible net benefit” to the homeowners. FHA defines “tangible net benefit” as:

• Reduction in the total mortgage payment (principle, interest, taxes and insurance, HOA dues, etc ) by five percent or more. If your total payment for your existing mortgage is $1200, your streamline refinance must have a total monthly payment of $1140 or less.
• Refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM)
• Reducing the repayment term of the mortgage; converting from a 30 year FRM to a 15 year FRM is a typical example. Cash-out refinancing is not permitted when refinancing to a shorter repayment term.

Verification of income and assets: Mortgage lenders must verify employment, income, and the source of assets needed to close your streamline refinance.

Credit scores: All borrower credit scores are required.

Maximum Loan-to-Value (LTV): Fore refinance mortgages with subordinate financing remaining in place, the maximum combined LTV is 125 percent. The original appraised value of the home will be used for determining LTV in streamline refinances where no appraisal is required.

These are highlights of changes in the streamline refinance program,; FHA mortgage lenders can provide full details. Shopping online for FHA approved mortgage lenders can help you find streamline refinancing terms matching your needs, and these lenders can also provide additional information about the FHA streamline refinance program and FHA guidelines in general. Knowing what to expect when applying for your streamline refinance can help you get approved and complete your refinance faster.

The government is out with its latest home price statistics and there’s both good news and bad: The Federal Housing Finance Agency says home prices in July rose 0.3 percent when compared to June — but values remain 10.5 percent below the highs seen during April 2007.

Combine lower home values with rising unemployment rates and the result for any organization that insures home mortgages is fairly obvious — there will be losses. Thus it hardly comes as a shock that FHA reserves are falling and might dip below 2 percent.

Since May there’s been a debate within the real estate industry regarding whether or not it’s okay to pressure lenders to come up with the “right” appraisal number — you known, the magic number that will make the deal work, assure lender fees and not mess too much with loan officer profits. And if that means a buyer overpays for a property, well, is that really such a big deal….

Fannie Mae and Freddie Mac adopted the Home Valuation Code of Conduct last May and the real estate industry has been mooing since then. It will take longer to do appraisals, they claim, but they never quite say why many people need to close a real estate transaction in just a few days. There are not as many qualified appraisers, they say, not mentioning that under HVCC appraisers must actually be state licensed or certified under the program.