As early as May 2010, the Federal Housing Administration implemented three major changes to the underwriting guidelines for its mortgage loans. First, the upfront mortgage insurance premium charged to borrowers decreased from 2.25 percent to 1.0 percent, while the annual insurance premium increased. Prior to the changes, the annual mortgage insurance premium was 0.55 percent. Now, however, the annual mortgage insurance premium is 1.55 percent, which is paid out in monthly increments that are commonly rolled into the borrower’s monthly mortgage payment. Over the entire life of the loan, the increase in the annual insurance premium will increase the overall cost to borrowers. This change alone, according to the FHA Commissioner, David Stevens, will increase capital reserves by $3.6 billion on an annual basis.

The Federal Housing Administration also attached a stipulation regarding the loan-to-value ratio and the annual insurance premium paid by borrowers. An increase in the loan-to-value ratio will cause a subsequent increase in the annual insurance premium. For example, if a prospective borrower has a loan-to-value ratio of up to 95 percent, the annual insurance premium would increase to 0.85 percent, which is 0.30 percent higher than average. If the loan-to-value ratio exceeds 95 percent, the annual insurance premium would increase to 0.90 percent. This is the second major modification to the underwriting guidelines of FHA loans.

The third change is an increase in the minimum credit requirement for FHA borrowers. FHA loans are best known for their low down payment requirements, which can be as low as 3.5 percent of the loan amount. However, this option will no longer be available for all FHA borrowers. To qualify for a 3.5 percent down payment, the borrower must have a credit score no less than 580. If his or her credit score is between 500 and 579, then a 10 percent down payment is the minimum the borrower may apply. If his or her credit score is less than 500, then, under the new qualification guidelines, he or she will not qualify for an FHA loan.

Not only are FHA borrowers encountering immense roadblocks to qualify for an FHA loan, but lenders are also facing tough challenges.

A primary concern is that the proposed FHA guidelines are extremely subjective. The verbiage is such that a very rigid interpretation and enforcement upon mortgage lenders is most likely to result. For example, the U.S. Department of Housing and Urban Development, which regulates the FHA, states that it requires a “continual” review of mortgage lenders. The word “continual” is ambiguous and HUD does not define its meaning. Moreover, the MBA adds, the “continual review” fails to take into account any fluctuations in the market and the time that is necessary to remediate current faulty loans. Lenders are, hence, held to an unrealistically high standard that is difficult to follow.

Another concern addressed by the MBA is the five-year extension on the annual mortgage insurance premiums. The Federal Housing Administration imposes on FHA loan borrowers a period of five years minimum or until their loan to value ratios reach 78 percent before the monthly mortgage insurance fee is lifted. The Mortgage Bankers Association proposes shortening the time limit to only three years, which is still a year longer than the previous FHA underwriting guidelines. There are too many unknowns in the market that can occur, such as the market fluctuations aforementioned, that cannot be hedged against with such strict underwriting guidelines.

In a staunch effort to gain its financial stability, the Federal Housing Administration is limiting the scope of mortgage lenders and spurning potential FHA borrowers.

During the heart of the Great Depression in 1934, the Federal Housing Administration was formed. Unemployment had peaked nationwide; residential and commercial construction had declined; loans were virtually unattainable; and homeownership was a near impossibility with only 4 in 10 Americans owning a home of their own. So, in an effort to offset these dismal circumstances, the government founded the FHA. The purpose of the Federal Housing Administration is not to originate mortgage loans, but rather insure those loans against mortgage default. The FHA enforces loan qualifying guidelines for potential homebuyers and charges an insurance premium. Since its inception, the FHA has helped families realize the American dream of homeownership.

More recent developments in the mortgage market, however, have limited the effectiveness of the FHA. During subprime-lending days in roughly 2005 through 2007, the agency insured only 2 percent of the mortgages in the market. Private companies offered borrowers with the most favorable loan options, such as no income, no asset loans (also known as NINA loans) and requiring little to no documentation. The demand for housing increased causing a subsequent rise in home prices, which were beyond the conforming mortgage loan limits, hence, the scope of the FHA. Nearly 80 percent of home mortgage loans were subprime loans with an adjustable mortgage rate. The rationality was that as housing prices continued to climb, homeowners would refinance their homes and use the equity to pay down the balance or modify the loan terms. However, as the qualification standards loosened, the mortgage market was flooded with subpar homeowners who would be unable to afford their new homes.

In short, as mortgage rates adjusted, the number of defaults soared, which put subprime mortgage lenders out of business and caused a stark decline in private lending. In an attempt to keep the market afloat, in 2007 and 2008 the Federal Housing Administration insured bad performing loans. The government sponsored agencies, Fannie Mae and Freddie Mac, increased the conforming loan limit and loosened qualification standards. The FHA even offered borrowers super low down payment options as low as 3 percent of the loan. As a result, the FHA has experienced rapid growth, accounting for over 25 percent of the mortgage market, and had to seek government assistance for the first time in its 76-year history.

In August 2010, the FHA Commissioner, David Stevens, reported that FHA capital reserves dipped below Congress mandated requirements. In September 2008, capital reserves were strong at $19.3 billion. However, in June 2010, capital reserves decreased to only $3.5 billion. The primary explanation for the severe reduction in the capital reserves in less than two years is the spike in FHA-insured mortgage defaults and foreclosures. As FHA borrowers were losing their homes, the Federal Housing Administration was depleting its capital reserves to pay off mortgage lenders.

Nevertheless, it seems as though the worst of the storm has passed. Although, the mortgage crisis caused an unhealthy reliance on the Federal Housing Administration, the agency instituted three primary changes to its underwriting practices. First, it increased the annual insurance premium, which was expected to bump up FHA capital reserves by $3.6 billion annually, according to Stevens. Second, it adjusted the loan-to-value ratios to correlate with the annual insurance premiums charged to borrowers. For example, if a prospective borrower has a loan-to-value ratio of up to 95 percent, the annual insurance premium would increase to 0.85 percent, which is 0.30 percent higher than average. If the loan-to-value ratio exceeds 95 percent, the annual insurance premium would increase to 0.90 percent. Finally, the FHA now requires higher credit scores for borrowers interested in obtaining the lowest down payment options. Due to these underwriting modifications, the FHA has boosted its capital reserves and expects to surpass the 2 percent requirement in 2015.

Home buyers love FHA loans for many different reasons. One of these is that it is possible to get an FHA loan even when a homeowner lost their home. There are several things that someone in this position needs to be aware of. FHA will approve a loan for someone who had a foreclosure or who gave a deed-in-lieu of foreclosure after 3 years have passed while conventional loans have a 5 to 7 year waiting period. With FHA, a past financial difficulty does not automatically make a borrower a high risk for life. Approval for a mortgage through FHA requires that the foreclosure had to be the result of extenuating circumstances which were beyond the borrower’s control. Events such as the death of a spouse, loss of employment and a serious long term illness are examples of acceptable circumstances. FHA does not look at being unable to sell a house due to a transfer from one place to another as acceptable criteria. The FHA underwriter will also look at the borrower’s credit history to determine if it has improved from the time of the foreclosure. It is expected that during those 3 years a borrower has established good credit with at least 4 new lines of credit that are 2 years old. They must also have used this credit responsibly. They will look for derogatory credit such as being more than 30 days late on rent, car payments and credit cards. Timely payments are essential and anything other than that will require letters of explanation to be considered by the FHA underwriter.

There is a lot of opportunity out there today for purchasing a home at very low prices for those homeowners who had foreclosures in the past. Those who meet the FHA guidelines should take this opportunity to again own a home at a more affordable purchase prices together with a low FHA mortgage rate. As long as FHA continues its dominant role in helping consumers with affordable housing, the dream of homeownership need not be forgotten with today’s statistics. Many borrowers will again be ready to purchase a home and will be getting an FHA loan after foreclosure in the coming years when the current crisis has subsided.

Nearly 25 percent, which is approximately 11 million, of all homeowners are underwater on their mortgages. This means that they owe more money on their property than the property is currently valued, which is also known as negative equity. For example, a young family purchased a 2 bedroom 2 bath townhome in the suburbs of Las Vegas for $150,000 in 2005. Today, the fair market value of the property is $50,000. The young family is underwater by $100,000. The government has initiated programs to help defaulting homeowners and FHA-insured borrowers, such as the HARP Refinance program and Making Homes Affordable program. However, homeowners who are underwater, yet, current on their mortgage payments, were not provided with any options. Even less options were offered to non-FHA borrowers. That is, until last month.

The U.S. Department of Housing and Urban Development (HUD) announced last month that it is expanding its refinance program to include non-FHA borrowers. Beginning September 7th, 2010 and expiring year-end 2012, the FHA will offer non-FHA borrowers the opportunity to refinance into a Short-Refinance option, which grants the lender permission to forgive a portion of the unpaid principal of the mortgage. To participate, the FHA enforces credit score minimums, loan-to-value limits, and other underwriting requirements.

Non-FHA borrowers interested in the program must primarily be current in their monthly mortgage payments. Despite the discouraging value of their home, prospective borrowers cannot have missed any mortgage payments. The caveat, however, is that borrowers who have unsuccessfully attempted a loan modification more than three months prior to the Short-Refinance, may qualify for the FHA Short-Refinance program, provided they have kept up with mortgage payments since. Note, too, that only non-FHA borrowers qualify for the FHA Short-Refinance program.

Prospective non-FHA borrowers are required to abide by FHA underwriting guidelines. Since the program is sponsored by the Federal Housing Administration, prospective borrowers must qualify for the program under FHA criteria. The credit score must be greater than 500 with a thorough explanation for any negative credit data. Bankruptcies must be two years old. Foreclosures must be three years old.

The refinanced property must be the prospective borrower’s primary residence. If it is a multi-unit property, the borrower must reside in one of the units to qualify for the program. Moreover, the property must have a loan-to-value ratio less than 97.75 percent. If there are any second mortgages, also known as junior liens, on the property, they must be re-subordinated and the new loan cannot have a loan-to-value ratio greater than 115 percent of the original loan.

Lenders originating the new loan must agree to forgive at least 10 percent of the unpaid principal balance. Lender participation in the program is entirely voluntary. Fortunately, with lenders, such as Bank of America and J.P. Morgan Chase, halting foreclosures nationwide and the GSEs, Fannie Mae and Freddie Mac, pushing banks to repurchase faulty loans, voluntary lender participation in the FHA Short-Refinance program is likely.

The FHA Commissioner, David Stevens, has high hopes for the FHA Short-Refinance program. He deemed it a “lifeline” for American families. Stevens said, “Servicers and investors have got to begin writing down principal.” He also has the full support of the Obama Administration, which is due to apply pressure on mortgage lenders to forgive underwater borrowers. Stevens further commented that the Administration may be the “critical element” to stabilize the flagging housing market. The FHA Short-Refinance program may prove to be the solution we are looking for.

Real estate is like any other investment in that you never know if it is going up or down. The current decline of real estate prices has caused a stir, but for those who purchased homes for the long term, this decline should be less of a worry. Just as the stock market goes up and down and the long term investors hold on to their portfolio waiting for a rebound, the same should be for homeowners. At least there is always the advantage that homeowners can lighten their burden by refinancing. There are many people who could benefit from these record low FHA interest rates at this time. Homeowners who have current FHA mortgages can apply for a rate reduction or rate and term reduction refinance loan. It is another option for those with underwater mortgages since they can apply for an FHA streamline refinance with no appraisal. With this loan, the new loan amount cannot exceed the original loan amount. Without an appraisal, closing costs must be paid up front or through a no-cost FHA streamline loan, but keep in mind, the no-cost streamline loan will incur a higher interest rate to cover the closing costs. The rate reduction streamline refinance must lower your monthly mortgage payment, but with these low interest rates that should not be too difficult to attain. The lender will verify income, employment and assets for closing costs. The current FHA loan must also be in good standing and at least 6 months old. The guidelines are not that difficult as is always the case with FHA loans. In these days, a loan with no appraisal is quite uncommon, except of course, for FHA.

Despite the bad news out there making headlines, the good news is that interest rates keep going down. At the same time, people are in need of making it easier on themselves and lightening their debt loan. Saving money by refinancing with an FHA rate reduction streamline loan at the lowest rates in history can help homeowners feel a little bit better and less concerned about the value of their home.

The current FHA Streamline Refinance has definitely changed from the past, but is still a great product for those borrowers who already have an FHA loan. The current guidelines for the streamline refinance are as follows:

-the lender must verify that the borrower(s) are employed at the time of application;
the lender must verify the household income of the borrower(s);

-the FHA loan must have at least 6 months payments (seasoning) made on the mortgage;

-if the FHA loan is less than 12 months old, all payments must have been made within 30 days of the due date;

-if the FHA is more than 23 months old, no payments can be made more than 30 days late within the last 12 months and all payments must be on time for the last 3 months;

-the lender must verify assets that will be used for closing costs;

-if there is a subordinate lien on the home (home equity loan) and it is remaining in place, the CLTV cannot exceed 125% of the original home value if no appraisal is performed;

-or 125% of the current appraised value (requires appraisal);

-the streamline refinance must have a net tangible benefit for the borrower (lower mortgage payment);

-cash out is not permitted;

-current loan must be an FHA to use an FHA streamline refinance;

-if closing costs are included in the refinanced FHA loan, there must be sufficient equity in the property which requires an appraisal;

-closing costs must be paid by the borrower at closing when no appraisal is performed;

-lenders can offer a “no cost” refinance by charging a higher rate of interest from which the lender pays any closing costs that have been incurred.

FHA has made different options available to borrowers with their streamline refinance. For those homeowners who have cash available, the current closing costs will be cheaper due to the decrease in the upfront mortgage insurance premium to 1%. With today’s lower FHA rates for the 30 yr. fixed at 3.875% (0.7 to 1 point) even the monthly mortgage insurance increase does not look so terrible anymore for borrowers. With the FHA Streamline Refinance available at these low rates together with less cash needed at closing, FHA should be busy through the rest of the year.

Almost everyone is aware and knowledgeable about the FHA 203b loan. This the most common FHA mortgage product available that has gained popularity over the past three years. It is available for new and existing one to four family homes, condos and townhouses. Borrowers with a satisfactory credit record, verifiable employment and income find this an easy and affordable loan to obtain. For those with a credit score of 580 and above also continue to enjoy the low required down payment of 3.5%.

With the current real estate market taking a downward turn, the condition of available homes for sale has also declined. Foreclosures and short sales are flooding the market making it difficult for buyers to find homes that are in decent condition. As these homes are often neglected and abused, many buyers will turn away without knowing the real potential of a home beyond what they see. Here is where the FHA 203k loan product comes to the rescue. It is for the fixer upper and homes that have not been maintained.

The FHA 203k is available for owner occupants only and for single to four family existing homes that have been completed for at least one year. For homes that are in need of repair, maintenance or rehabilitation, this is a great product offered through FHA. It can be used for repairs such as painting, room additions, decks, patios, bathroom and kitchen remodeling, appliances, finishing an attic or basement, new exterior siding, heating or air conditioning, plumbing, roofing and flooring. HUD does have some regulations such as energy efficiency and structural requirements such as caulking, insulation, ventilation and smoke detectors.

These FHA 203k loans are processed as normal except that the money for repairs can also be rolled into the loan. An as-is appraisal is completed with the appraisers estimate of the value of the home after repairs and improvements are done. The borrower is required to submit a proposal of the necessary work which includes a detailed cost estimate. The amount that can be borrowed is the as-is purchase price plus the rehab costs or 110% of the expected value of the property after repairs have been completed. In other words, an as-is price of a home at $150,000 will also allow $15,000 borrowed for rehab. The rehab money is kept in an escrow account and is released as the work is done. FHA requires that all rehab be completed within 6 months. As only certain lenders will offer an FHA 203k loan, they may also have their own requirements. The interest rate is also higher than a normal FHA mortgage and the amount of time to process this type loan is usually longer.

As real estate continues to be saturated with a variety of homes and an abundance of foreclosures and short sales, many consumers are looking to find a low cost, good deal purchase. At the same time, FHA continues to be a leader in the mortgage market. Knowing which is the right FHA loan product to pick, buyers can choose from a larger selection of homes.

For borrowers with a credit score of 580 and above, an FHA loan with a 3.5% down payment is the most popular product, but for many buyers, coming up with even this very low amount of money can be difficult. To assist with this issue, borrowers should be aware that there is the gift option which is available and approved through FHA guidelines. FHA is the only program that allows gifts to be used for up to 100% of the down payment on a home. This gift can be from family members, friends or a borrower’s employer or labor union. The gift letter, which must be documented and signed by the donor, is provided by the lender. There must also be proof that the donor had the money for a period of time which is usually in the form of a bank statement. In order to avoid paying gift tax, a donor is allowed to give each person up to $13,000 which means that a husband and wife can receive up to $26,000 with no gift tax implications involved. In addition, FHA still allows, at the current time, seller’s concessions up to 6% towards the closing costs of the loan. Combined with a gift, many borrowers need not bring any money to the closing to complete the mortgage transaction.

If the gift option is not viable, there are other programs that buyers may qualify for. HUD (Housing and Urban
Development) works very close with states, counties and communities to help community members purchase homes. These offerings vary from state to state and are, many times, influenced by the statistics of the area. They are provided in the form of grants, subsidized home loans and second mortgages which are specifically stated to be used for the down payment or closing costs. Each state is different and offers different programs for assistance. Some will be grants which do not have to be paid back while others will be second loans that get paid back in the future only after a borrower sells the home. Borrowers should contact their state’s Housing Finance Corporation (Home Affordable Program), the local Community Initiatives Program, the State Housing Partnership Program (SHIP) and even, for some areas, the USDA Rural Housing Service.

Saving for a down payment is often difficult for many people while making the monthly mortgage payment is not. As long as state and communities continue to encourage home ownership, these additional options will continue to stay around and the FHA zero down payment mortgage will still be available.

The Federal Housing Administration, an arm of HUD that insures mortgage loans, charges two insurance premiums on Home Equity Conversion Mortgages. The first is an upfront percentage of the amount borrowed and the second is annual percentage of the amount borrowed. On the standard HECM, the upfront insurance premium is 2 percent of the appraised value of the home, to a maximum value of $625,500, regardless of how much is actually borrowed. On the new HECM Saver Option, the upfront insurance premium is 0.01 percent. Both reverse mortgage options require an annual insurance premium of 1.25 percent of the actual loan balance on the home.

A reverse mortgage is very different from a traditional home loan. First, this unique type of loan pays the borrower. Senior homeowners who qualify for the HECM have several options with regards to disbursement of payments. They may receive the desired amount borrowed as a lump sum. They may receive it as an equity line of credit on the property. Alternatively, borrowers may receive regular monthly payments of the amount borrowed.

Second, the amount borrowed on a reverse mortgage is not limited by the income of the borrower. Rather, the amount borrowed is dependent upon the age of the borrower, the current interest rate, and either the appraised value of the property, sales price, or FHA’s mortgage limits, whichever is less. In short: the older the borrower, the more valuable the property, and the lower the interest rate, the higher the amount that may be borrowed against the home. Other qualifying requirements include: (1) at least 62 years old, (2) either own the property outright, or have a mortgage balance that may be paid off at closing by proceeds from the reverse mortgage, and (3) FHA requires prospective HECM borrowers to attend a counseling session with a HUD-approved HECM counselor regarding the financial obligations and legal aspects of a reverse mortgage.

The final difference between reverse mortgages and traditional home loans is repayment of the loan. The accrued interest is added to the principal amount of the home; however, it is not necessary to repay the loan in regular installments. Rather, when a homeowner sells his or her home, passes away, or moves out of the residence for more than 12 months, then the reverse mortgage plus any interest accrued and other fees are due in full to the lender.

Since the mortgage market crisis in 2007, affordability of a standard HECM was a primary concern. According to the FHA Commissioner, David Stevens, “…some senior citizens find that our [reverse mortgage] fees are too high.” Stevens is excited about the new HECM Saver Option because it will significantly lower the upfront costs to seniors to essentially nothing. With the HECM Saver Option, homeowners are able to borrow 10 to 20 percent less than the standard HECM, but pay 99.5 percent less.

FHA charges an upfront mortgage insurance premium (UFMIP) as part of the closing costs which, under many circumstances, is added into the loan. The UFMIP has decreased to 1% from the previous high of 2.25% of the loan amount. In addition to this fee, FHA charges an annual mortgage insurance premium, that is paid monthly, which has also changed. This fee was .55% and has now been increased to .90% of the loan amount and .85% if the loan to property value is 95% or less. These fees will not go up for existing FHA loans prior to October 4th.

Although many may look at these changes unfavorably, this is good news for all cash strapped home buyers, in particular, the first time buyer. As FHA has basically taken over the existing sub-prime market of buyers, the decrease in necessary cash to meet closing costs will make purchasing a home more affordable for consumers. While many buyers qualify for an FHA loan based on monthly mortgage payments, coming up with closing costs can indefinitely delay their purchase. Even though this UFMIP fee can be included in the loan, the 2.25% UFMIP ultimately increased the amount of the loan and the monthly mortgage insurance premium. On a $200,000 loan, the UFMIP was $4,500 and is now reduced to $2,000. The new monthly mortgage insurance premium for a $200,000 is approximately $150.00, up from approximately $92.00. By paying more monthly, it will take approximately four years for a homeowner to pay off the amount saved by the lower UFMIP.

As the FHA wants to continue to meet the mortgage needs of today’s housing market through refinances and home purchases, these changes were necessary for it to protect itself and grow its Mutual Mortgage Insurance Fund. Prior to the financial crisis, FHA loans comprised only 7% of the mortgage market while today they are a major player in the arena. With the absence of the sub-prime lending market and the growing population of sub-prime borrowers, FHA has become the main source of lending for these types of loans. With the new FHA changes meaning lower closing costs, more consumers may begin to look again at purchasing homes.