Potential changes to FHA loans

If the changes in limits for loans through FHA do change instead of being extended it may make it hard on home buyers.

If Congress does not extend the expiration deadline, FHA loan limits will end starting on October 1, which will result in changes that can affect potential borrowers and the housing market. FHA loans provide borrowers competitive rates along with terms, and only require a 3.5% down payment.

Allowable debt ratios are higher than the normal debt ratio limits seen with conventional loans. Additionally, there are not any income limit qualifications, which allow more individuals to qualify for the loans.

In an effort to help the home buying market, Congress raised the loan limit until September 30. Lawmakers at this time have not come to an agreement when it comes to extending the loan limit. If this loan limit is dropped several California home buyers looking for larger mortgage will need to apply for jumbo or conventional loans. This may cause these individuals to have to put up larger down payments and pay higher interest rates.

Potential home buyers should keep an eye on the following if the loan limits are decreased.

• Lower loan limits – The conforming loan limit decides the maximum mortgage amount that FHA, Fannie Mae, and Freddie Mac can buy or guarantee.

• Decreases by county – Under the new FHA loan limits, some counties in California will see major drops in their loan limits. Santa Clara County will see a $104,250 drop.

• Jumbo loans – The current FHA loan limit is $729,750. After October 1, that limit may decrease to $625,500. All mortgage loans higher than this amount will be known as nonconforming jumbo loans, which normally have rates that are 0.875% to 1.5% higher than conforming rates and require higher down payments.

• More stringent requirements – FHA loan requirements may permit lower credit scores.

 

FHA Releases New MAP Guide

The Federal Housing Administration has released their new version of the Multifamily Accelerated Processing guide better known as MAP centered on improving the time it takes to process.

The new guides combine all of the multifamily program changes along with guidance such as FAQ, mortgagee letters, and notices all in one document. This information was at times hard for lenders to collect and even staff members at HUD had trouble finding. The guide will also provide precise clarity around affordable housing transactions, which is an area that has been neglected in other versions or guides.

In theory, the time it takes to process could improve via using the new guide due to the fact that lenders and HUD staff will not have to spend as much time debating on what is allowed along with saving time on research. On the other hand, do not expect this to be a fast answer to the problem as the business that has flooded in over the last year still has to be gone through which will take some time.

Phil Melton, managing director at New York–based MAP lender Centerline Capital Group stated, “The long-term effect of the MAP changes will be really beneficial,” and went on to say, “But you still have a short-term issue that’s going to take some time to play itself out. You still have to get through the current logjam.”

Turn around times are seeing improvements, however, they are still not quick. A new construction loan via a Sec. 221(d) (4) program can still take up to a year, while a refinance or acquisition loan via a Sec. 223(f) program can take between seven to nine months.

Of course, the timeline will vary according to the program as well as the HUD office you are using. A few offices such as the one in Columbus, Ohio states their turn around for Sec. 223(f) applications is 60 days.

This can be confusing once again as the definition of days was also changed in the new guide. The agency now guarantees a pre-application review of 45 days for Sec. 221(d) (4) loans with another 45-day review of the firm commitment application. Prior to this new guide, calendar days were used but now they are measured in business days, which make the time line longer.

Even with these days outlined in the new guide, the idea is of course the best practice but they are not reality.

Ed Tellings, FHA chief underwriter at Columbus, Ohio–based MAP lender Red Mortgage Capital stated, “To be honest, I don’t think many offices at this point, given their staffing and resources, can meet the time frames that are established,” and went on to say, “It’s a little better now than it was six months ago, and that has a lot to do with HUD getting through that volume of business they received last September.”

The current loans being processed are from last September. The loan changes by the FHA were changed in July of 2001 to make them less generous for market-rate deals while debt service coverage went up, and leverage went down. The deals were sent prior to September 1, 2010, which was placed in under the previous generous terms, which buried the agency in more paperwork and of course more volume.

What this did was cause the FHA to become a victim of their own guidelines. During the last fiscal year, the FHA processed a record $10.4 billion in multifamily deals, which surpassed in August, with more than a month left to go in the 2011 fiscal year.

The capital markets are improving and more lending options are slowly becoming available, several borrowers still think waiting on FHA is the best way to go. Sec. 221(d) (4) deals are quoted under 5 percent, which is an awesome rate for a 40-year, non-recourse money that can go up to 83.3 percent leverage on market-rate deals. While a Sec. 223(f) deal for a refinance or acquisition are currently being quoted in the low–4 percent range.

The FHA has made other improvements to keep it all moving. The FHA will refund the fee for an application that has not been gotten to yet while some of its overwhelmed offices, like in San Francisco, are sending their workload to less-overwhelmed offices, like Phoenix, Arizona. The FHA also overhauled its loan closing a document that has not been done in the last 20 years, regulating underwriting and narrative templates and streamlining the process.

Lenders are delighted with how the new MAP guide turned out and congratulate the HUD multifamily team, in particular Chris Tawa, Dan Sullivan, and Janet Golrick, for delivering on their promise.

Tellings stated, “By providing clear guidance, it should allow people to move quicker on those issues where HUD offices and lenders get hung up,” and went on to say, “HUD’s done a really good job of taking a lot of questions and issues and putting them all in one place.”

Low Mortgage Rates & Compliant Loan Limits Extended

Good News! Mortgage rates are considerably low right now. What this means is if you are considering refinancing, now is the time. With rates this low, you can save a huge amount of money each month by reducing your monthly mortgage payment.

This will allow you to have extra money to put away in your child’s college fund or your own retirement fund, home repairs, home improvements, or for that brand new car. If you wait, you may miss the chance to save hundreds of dollars. The market changes at a blink of an eye and you do not want to miss the opportunity while mortgage rates are low. Let me help you get started today on that refinancing loan.

More good news! Congress has extended higher conforming loan limits that are backed by FHA, Fannie Mae, and Freddie Mac until September 30, 2011. The higher loan limits were established by the Housing and Recovery Act in 2008.

Before this time, the conforming loan limit was $417,000 in the high-cost areas. After the Housing and Recovery Act was signed, the conforming loan limit has been $729,750 in most high-cost areas.

This conforming loan limit is very helpful in high cost areas across the nation such as in New York and California where the average housing costs trends are quite a bit higher than other areas around the US. With housing prices down, many homebuyers in these high-cost areas have discovered they are eligible for refinancing with a high balance conforming loan. Do not wait if you wish to refinance as you only have until September 30 to close the contract.

You can contact me today and I will provide you with all the information about these new great developments and how they can save you money.

Additional FHA Funds on the way

FHA recently launched short refinance opportunities for homeowners “underwater” in an effort to encourage principal write-downs for borrowers that are responsible.

This effort to aid homeowners that owe more on their home loan than the value of the property, the Department of Housing and Urban Development explained details on the adjustment for these homeowners to utilize the new refinance program that was released earlier in 2010 with options for homeowners that owe more than the property is actually worth.

Beginning on September 7, 2010 FHA will offer specific underwater for non-FHA borrowers that are up to date on their home loans and whose lending companies agree to write down at least ten percent of the principal balance left on their first mortgage, the chance to qualify for a new FHA insured loan.

The program known as “The FHA Short Refinance” option aims to help those that owe more on their mortgage than their property is worth, which is referred to as “underwater” due to local markets that recently saw declines in the values of homes. The new program was introduced in March and with these changes along with other financial programs that are in place with the aid of the Administration to meet the goal to stabilize the housing market via a second chance to up to three to four million homeowners that are struggling through December of 2012.

FHA Commissioner David H. Stevens stated, “We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” and went on to say, “this is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”

Lenders can read over the mortgagee letter provided by the FHA to learn how to implement the new program. Participation in any of the programs is voluntary and does require all lien holders to agree to the conditions.

To be eligible for a new FHA loan, the homeowner must:
• be in a negative equity position- owe more than the property is worth
• be up to date on existing home loan
• live in the home as the primary residence
• qualify under the FHA underwriting requirements
• possess a FICO based credit score equal or higher than 500
• the current home loan cannot be a FHA insured loan
• the existing lending company must write down at least 10% of the principal
• the new FHA insured loan must have a loan to value ratio not greater than 97.75%
• all non extinguished subordinate loans must be re-subordinated and a new loan may not be great once combined to 115% loan to value ratio
• loans that get  refer risk classification from the total mortgage scorecard or are manually underwritten, the total mortgage payment which includes all mortgages first and subordinate cannot be higher than 31% of the gross income and total debt which does include all recurring debt which cannot be larger than 50% of the gross income received monthly
• FHA mortgagees cannot use premium pricing to pay off any existing debt in order to qualify the borrower for a new loan.
• FHA mortgagees cannot pay the mortgages payments for the borrower or bring the current loan up to date in order to qualify for the FHA loan
• The current loan that is to be refinanced cannot be made current by the first lien holder unless via an acceptable permanent loan modification loan.

To be eligible, servicer’s must perform a Servicer Participation Agreement through Fannie Mae on or before October 3, 2010.

FHA Loan Changes and The Effect On Consumers

FHA is proposing cutting allowable seller compromises in half by capping them at 3% of the home price instead of the 6% it is at now.

The reason FHA is wishing to cut compromises is that the analyses the company performed showed a strong correlation between high seller concessions and high default rates probably due to compromises that can ultimately lead to home prices that are inflated. The concept is that a few sellers might make a few compromises but then add cost to the price of the house. 

What does this mean to the consumer? The perks that many buyers enjoy will not be as great. This new proposal will not stop compromises over 3%, but any compromises that do exceed 3% would result in a dollar to dollar reduction in the sale price of the home and will reduce the amount of allowed for the loan.

FHA will also be imposing a minimum credit scores requirement of 500. For anyone looking to purchase a home with a credit score of 580 or less will need at least a 10% instead of the normal 3.5% minimum.

The main reason the proposal is being implemented is that borrowers with a low credit score have a high rate of default on loans than those with a higher credit score. In January of 2010, more FHA borrowers with credit scores under 580 were delinquent three times higher than those with higher credit scores.

For consumers these tougher credit score requirements make it harder for borrowers with low scores to obtain loans. As a matter of fact, only 1% of FHA borrowers have a score lower than 580.

High-risk borrowers that were at one time flagged by the automated system may receive a very in-depth review by the underwriting staff of the lending company. FHA states this issue will help to reduce their exposure to risk by limiting lenders in the loans they approve.

Consumers can expect to have cash reserves that are equal to one month mortgage payment and for those with a score below 620, they would be reviewed even more so and overall debt could not exceed 43% of the borrowers income.

Short refinancing is a new program that will allow borrowers to refinance into a FHA loan if they are current on their mortgage and owe more on their loan than the home is actually worth.

What this means is that homeowners that have no equity will be able to refinance into a FHA loan. The loan will refinance the first mortgage only; however if a second mortgage is on the home, both loans together cannot exceed the value of the home more than 15% after the first loan has been refinanced.

The reason FHA is implementing this new loan is that home values have drastically decreases and many homeowners are unable to refinance or sell their homes, this new program is there to help.

What this means for consumers is that if you do refinance under this new program, you will more than likely hurt your credit and you will have a tough time qualifying for the program. The lending company that you have your mortgage through will have to agree to reduce the amount that you owe by around 10%. In addition, you must have around 31% or above of your pretax income on hand for the new monthly payment of the mortgages on the home.

Importance of Being a FHA Approved Lender

There is more and more evidence that our society is shifting from conventional mortgages to Government Insured mortgages, so for lenders there is a question whether they should become a FHA approved lender.

Look at the past activity. In July 2008, 29.1 percent of loan applications were for government issued loans. In just one year, the share of loans that are government issued has tripled. Since July 2007, we have seen an increase of 317 percent from conventional to FHA refinance applications, 260.8 percent conventional to FHA refinance endorsements, 133.9 percent applications for government-insured loans, and a 502 percent decrease in conventional loan applications.

Looking through more data it can be surmised that FHA is fast becoming the wave of the future for many wanting to purchase a new home. In January of 2007, FHA loans were only a mere 1% while Fannie Mae and Freddie Mac were at 60% for Lenders One. Scott Stern the CEO of Lenders One stated, “FHA is the fastest-growing product,” and went on to state that, “Now we are almost 48% conventional and 48% FHA.”

He believes that FHA is receiving more good publicity and the at the federal mortgage insurance program are helping with this new trend. The main reason the federal mortgage insurance program is aiding is that fees have not raised and they have not tightened their underwriting standards that we have recently seen with Fannie Mae, Freddie Mac and others.

In July 2008, Ginnie Mae reported 24.9 billion in fixed issuance whereas Freddie Mac was only at 20.3 billion. This is the first time in history that Ginnie Mae had been above Fannie Mae or Freddie Mac.

August is looking great as well for Ginnie Mae since they have issued 25.3 billion to date while Fannie Mae is at 24.0 billion and Freddie Mac is at 16.5 billion.

With this trend, more and more homeowners are searching for government issued loans for all kinds of reasons over conventional loans. Not only should lenders look into becoming FHA approved, but also more agents should be seeking these lenders to help homebuyers in search of their dream home.

Problems with the Housing & Economic Recovery Act?

President Bush signed the Housing & Economic Recovery Act on July 30, 2008 with reservations due to the bill giving relief to Fannie Mac and Freddie Mac. Not only did the Democratic Congress add this provision to the bill but also there is another provision that is causing frustration for Americans. The provision prohibits the Federal Housing Administration commonly referred to as FHA from using any type of down payment assistance programs in which the seller will benefit from the transaction.

A few of the seller funded down payment assistance programs have been cited for causing serious problems and have lead to major losses for FHA as recognized by The U.S. Department of Housing and Urban Development (HUD) Inspector General, the Government Accountability Office, and the Internal Revenue Service. FHA noted had $4.6 billion in unanticipated long-term losses in its annual re-estimate this year, mainly due to the increase in seller-funded loans in its portfolio. Not only has FHA lost money, but also foreclosure rates for these loans have been to blame for three times higher than other FHA loans.

Is there help for individuals looking for a down payment assistance program for a FHA loan?

The answer could be yes. Representative Al Green (D-TX) introduced the “FHA Seller-Financed Down Payment Reform and Risk-Based Pricing Authorization Act of 2008” (H.R. 6694). This bill will reinstate FHA seller funded down payment assistance for those with certain credit scores. At the time of this writing, H.R. 6694 is pending in the House Committee on Financial Services. There is at this time, no Senate companion bill has been introduced.

Due to all the concerns of Senate Banking, Housing, and Urban Affairs Committee with these type of seller assistance programs, similar legislation in the Senate may not be forthcoming.