Spring 2010 FHA Guidelines Make Borrowing Tougher And More Expensive

Written by Administrator | 25 August 2010

Securing an FHA mortgage is about to get more expensive.

In a statement issued Wednesday, the Federal Housing Authority outlined policy changes to its mortgage assistance program. The shift is meant to both reduce the government group’s portfolio risk while strengthening its overall financials.

For consumers, the changes mean higher costs.

As listed in the official announcement, there are 3 major guideline updates for the FHA:

1. Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%
2. Minimum downpayments for applicants with sub-580 FICOs are rising to 10 percent
3. Seller concessions are being limited to 3%, down from today’s allowable 6%

Furthermore, the FHA has appealed to Congress to raise an FHA borrowers’ monthly mortgage insurance premiums.

To read the FHA’s statement, it’s clear what the group is trying to balance.  On one side, the FHA wants to provide affordable financing to families that need it. That’s its mission statement. On the other side, though, the FHA must manage the risk that comes with insuring lesser-quality loans.

To that end, the FHA is stepping up its enforcement of “bad lenders” in hopes of stopping problems where they start.

Also in its new policies, the FHA is introducing a “termination clause”. If banks or loan officers that produce more than their fair share of bad loans, they lose their right to originate FHA mortgages.

As a result, homebuyers should expect tougher FHA underwriting in 2010. Not because the FHA says so, necessarily, but because banks don’t want to do “bad loans”.  Lenders are incented to turn down at-risk applicants and, already, we’re seeing examples of this. Despite FHA allowing 580 FICOs and lower, many banks have made 620 their minimum.

Some have other guideline overlays, too.

The FHA’s new guidelines don’t go into effect until spring.  So, between now and then, the old guidelines will apply.  Therefore, if you know you’re going to need an FHA home loan in the next few months, consider moving up your time-frame.

If nothing else, you’ll save some money at closing.

Buying short sales with FHA home loans

Written by Administrator | 25 August 2010

For the readers not familiar with short sales let us first define the term as it applies to real estate. As “short sale” on real estate is when the existing lien holder(s) agree to accept a lower amount than is currently owed on the existing loan(s).

If you need an example suppose the home owner has only one mortgage for $350,000 (existing payoff) on a home. Perhaps that home is currently valued only at $275,000. The home owner cannot refinance, the lender has failed to modify and foreclosure is looming so the lender agrees to accept a sales price equal to the current appraised value even though it is a full $75,000 lower than (short of) the payoff.

Answering the question, “can an FHA loan be used to purchase a short sale”, really is too simple. The answer is “yes” provided the property and transaction fall within FHA insurance guidelines. Remember FHA has maximum loan amounts, guidelines for property type and guidelines for property use.

Is FHA Trying To Become LESS Popular?

Written by Administrator | 25 August 2010

There is a buzz in the real estate and mortgage world that says that FHA is moving towards changing how they charge insurance premiums – again!  And the proposal I am hearing is going to reduce the number of people who are eligible for the FHA Program, as well as make the program less attractive.

Let’s start by explaining that, contrary to the public’s consensus, the FHA is not a lender, they are a government owned insurance company.  They collect premiums from borrowers and insure lenders of repayment, if those borrowers default on their mortgages….this insurance allows lenders to loosen their underwriting standards and approve many more applicants.  Presently, they charge these premiums in two different ways:

1. The UFMIP (Up Front Mortgage Insurance Premium) for most FHA loans is levied at 2.25% of the loan amount.  The good news is that while it is a closing cost, the UFMIP can be (and usually is) financed….added on top of the base loan amount.  So, for example, on a $200,000 base loan amount has a $4500 UFMIP; therefore, the total loan amount is $204,500.  Because it is financed in the loan amount, our borrower is paying $24.17 in their monthly P&I payment to cover it (at a 5% note rate).
2. The second insurance charged is the MMIP (Monthly Mortgage Insurance Premium).  Currently, for most FHA loans is calculated by multiplying the principal balance of the loan by .55% and dividing by 12.  Because the principal balance is constantly being reduced as payments are made, the MMIP adjusts downward annually until such time as the principal balance is reduced to 78% of the purchase price (which will be a minimum of 5 years, but typically 12-14 years).  In our $200,000 example the MMIP is $91.67.  This amount, too, is added to the mortgage payment.

As you know, a major factor in approving borrowers is that borrower’s ability to repay the loan which is determined by dividing their debt by their income.  Any increase in payment makes it harder to qualify.  In our example, our borrower’s qualification includes a total of $115.84 to cover the FHA insurance premiums.

Now look at the proposed changes.  FHA wants to reduce the UFMIP to 1% and increase the MMIP to 1.55%.  On its surface it doesn’t look tragic, but let’s look at our example $200,000 loan.   Our total loan amount is now $202,000, which means the monthly impact of the $2000 is $10.74 (as opposed to the $24.17).  BUT, our MMIP has been increased to $258.33 (a whopping $166.66 more)!  In total, our borrower’s mortgage payment will go up $153.23!!!!

What’s the real impact?  The same borrower that qualifies for a $200,000 FHA loan, based on their income, will only qualify for $172,000 loan.  They will have to look in different neighborhoods and/or sellers will need to reduce their prices further to keep the same buyers interested in their home.  It has the same effect as interest rates going up more than 1%….I shudder to think what the cumulative effect will be if this happens AND rates go up.

I am asking you to call your elected officials and tell them that they need to stop the FHA from implementing this….NOW!!!

This blog post was brought to us by our good friends over at kcmblog.com and Dean Hartman, the Chief Planning Officer at Continental Home Loans.