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.

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.

Although the majority of the country’s real estate values fall into the regular conforming loan limits, many areas have significantly higher prices for which borrowers must turn to jumbo mortgage financing. Prior to 2008, borrowers of true jumbo loans paid as much as two points in additional closing costs or interest rates for a mortgage to purchase a home. With this continued extension, conforming loan limits are as high at $729,750 in high real estate markets or 125% of the median home value within a metropolitan area, whichever is less. Without this extension, the conforming loan limit would have dropped to $625,500 in high cost areas. This puts what was once a jumbo loan at higher interest tables into the conforming loan category which enjoys much better rates. These same loan limits will also be extended for FHA loans.

For home buyers, this is great news. With real estate prices down, the value of many homes in high cost areas are falling within this conforming loan limit which, of course, means that potential home buyers are able to take advantage of low conforming interest rates. Areas around Los Angeles, Boston and New York, to name a few, will see the greatest benefits from this extension. Due to the difference from one metropolitan area to another, home buyers need to be aware that conforming loan limits will vary. The perfect plan that a home shopper could follow is to first find the high conforming limit for the area where they are looking to purchase. By doing so in advance, a home buyer will be in a position to purchase more home for their money while enjoying the benefits of a conforming loan with today’s record low interest rates. Needless to say, with this information in hand, potential home buyers could then inquire as to the amount of loan they are able to comfortably qualify for. Having this knowledge available together with the abundance of available homes for sale, they are then able to shop for a home within the conforming loan limit while, at the same time, assuring that they receive low interest rates.

The unstable economy and poor consumer outlook is making it necessary for the extensions to continue into 2011 but, at the same time, there are those out there who are still looking to purchase homes. Consumers who know their areas jumbo mortgage loan limit before home shopping are well prepared to get the best value for their dollar in the current buyer’s market.. To find your areas jumbo loan limit, visit https://www.efanniemae.com/sf/refmaterials/loanlimits/index.jsp?from=hp

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.

These higher loan limits were instituted in 2008 when President Bush signed the Housing and Recovery Act. Prior to that time, the conforming loan limit was $417,000 in high cost areas. Since the signing of the Recovery Act, the conforming loan limit has been $729,750 in most high cost areas or 150 percent of the median home values within a metropolitan area. In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the high loan limit is $938,250. In 2008, at the height of the housing crisis, these higher loan limits made refinancing and home buying available to consumers who, otherwise, would have had no where to turn. Backed by the government, the jumbo conforming loan has become quite a popular product over the past two years while it has saved the jumbo mortgage market.

This high conforming loan limit is especially helpful in areas such as California and New York where normal housing tends to be much costlier than the rest of the country. With housing prices down, many borrowers in high cost areas have found that they are eligible for refinancing with a conforming jumbo loan. Even first time home buyers can take advantage of an FHA Conforming Jumbo Loan for their purchase. These loans carry lower interest rates than true jumbo loans with the Jumbo 30 year fixed rate at 4.875% (0.7 to 1 point), the Jumbo 15 year fixed at 4.375% (0.7 to 1 point) and the Jumbo 5/1 ARM at 4.00% (.07 to 1 point).

As the housing market continues to be fragile, the extension of this H.R. 3081 is great news. Without it, consumers would have found the jumbo loan market in critical condition. In reality, with fewer investors for jumbo loans, the jumbo loan market could have come to halt on December 31, 2010 had this bill not been extended. The possible implications could have trickled through the entire housing market creating another crisis. At the current time, approximately 90% loans are going through Fannie Mae, Freddie Mac and FHA. With this latest extension, it is obvious that their book of business will keep growing for another year as the housing market continues to heal. . With conforming loan limits extended until September 30, 2011, consumers can look forward to another year of low interest rates while the government continues to treat the housing market with tender care.

In 2008, President George W. Bush signed into law the Housing and Economic Recovery Act, which increased the conforming jumbo loan limit. The limit was increased to either $729,750 or 150 percent of the median home values within the metropolitan statistical area. The primary goal of this law is to revive the housing market by restoring confidence in Fannie Mae and Freddie Mac and providing additional capital into these two mega mortgage funders. The higher loan limit is set to expire December 2010.

According to Redfin Corp., the prestigious online brokerage firm, of the seven major housing markets, the luxury housing market is the only category that boosted sales. Less than half of the active listings in 2009 resulted in sales. The aggressive pursuit of jumbo mortgage borrowers by big banks, such as J.P. Morgan Chase and Bank of America, contributed to renewed interest in this pricing segment. The National Association of Realtors also reported a 29 percent increase in sales volume of homes between $700,000 and $1 million. Spokesman for the NAR, Walter Maloney, attributes the recent affordability and the increased availability of jumbo mortgage loans to the boost in sales. Current 30-year jumbo mortgage rates just hit a record low yesterday at 4.875 percent.

The cited positive progress in the housing market could be feasibly halted by the expiration of the jumbo loan limit. California Democrat and member of the House Financial Services Committee, Representative Brad Sherman, said that if the government lowers the jumbo limit then housing prices will drop dramatically and, “[it would be] impossible to finance homes in most parts of Los Angeles and certain other major cities.”

Sherman is right in that Los Angeles has a strong reliance on the higher loan limits. Borrowers, for example, may purchase a condominium or house for $750,000 with only 3.5 percent down. Private lenders typically require at least 20 percent down. Moreover, their loans are guaranteed by the FHA, which also incentivizes lenders. Last year, California accounted for one in eight FHA-insured loans. With the hopes of further stabilizing the housing market, the Obama Administration offers its full support for an one-year extension of the higher jumbo loan limits.

On the other hand, the effect of decreasing the jumbo loan limit could be minimal. Some economists believe that now is a good time to lower the limit because housing prices have dropped. Director of USC’s Lusk Center for Real Estate, Richard K. Green, said, “We need to think how we are going to exit from a Fannie-and-Freddie world, and this is a very small step toward that exit.”

Higher loan limits only spell increased risk for the government. According to data from the Federal Housing Administration, loans greater than $400,000 had higher default rates than loans less than $400,000. By May 2010, nearly 13.4 percent of the more expensive loans were 90 days delinquent or in foreclosure in comparison with 8.3 percent of loans less than $400,000.

Trying to predict the government’s next move seems tricky. However, one must consider not only the political backdrop of every decision, but also the financial implications of those decisions. Note that Fannie and Freddie just filed for another bailout from the U.S. Treasury Department of $1.5 billion and $1.8 billion, respectively; the national unemployment rate is grazing double digits; and the FHA Commissioner, David Stevens, is tightening up standards in order to increase capital reserves, which dipped below Congress mandated requirements. Nevertheless, a double-dip in the housing market is not in the best interest of the current administration nor beneficial for the American people.

H.R. 6218 is called The Housing Opportunity and Mortgage Equity Act of 2010 (HOME). It is designed to offer refinances directly to homeowners who need help. As other foreclosure prevention programs have failed to prevent further defaults, this bill can possibly reduce foreclosures drastically and reward those who have continued to make their monthly mortgage payments even through economic struggles. With reduced mortgage payments, consumers will have more available cash to spend each month thus stimulating a dragging economy. In addition, this type of refinance can help eliminate strategic defaults and loan modifications.

Following are some of the details of the bill:

-A qualified mortgage is one that is current or in default as long as it is the borrower’s primary residence and is owned or guaranteed by Fannie Mae or Freddie Mac, This residence can be a single family dwelling, one to four family dwelling, condominium or a share in a cooperative ownership housing association.

-Any penalties for prepayment or refinancing and penalties due to default or delinquency would be waived or forgiven.

-The term of the new refinance could be no longer than 40 years.

-The servicer cannot charge the borrower any fees for refinancing.

-Fees for title insurance coverage will be reasonable in comparison with fees for the same coverage available. Any fees associated with the refinance would be rolled into the mortgage.

-The enterprise (Fannie Mae and Freddie Mac) will pay the servicer a fee not to exceed $1,000 for each qualified mortgage that is refinanced.

-There will be no appraisal required.

-In order to pay for this, the old mortgages will be paid off when refinanced. The new refinances will be funded by selling new mortgage securities.

Although lenders believe that they will lose too much money if this bill is adopted, it can probably be the best solution given to date to halt the endless foreclosure issue. It will be interesting to see how this bill develops, what will be added and what will be taken away or even if it will pass. According to Congressman Cardoza’s website, there are about 30 million mortgages guaranteed by Fannie Mae and Freddie Mac. The savings from this program could be tremendous and have been estimated by Morgan Stanley and JP Morgan Chase to be an annual reduction of approximately $50 billion in mortgage payments. While the success of the available current programs is still questionable, this proposed bill which allows almost everyone to refinance could be the answer to accelerating the economy.

As reported by Zillow, according to Fair Isaac Corporation, the creator of the FICO score, 29.3% of today’s borrowers have a credit score below 620 which makes them unable to borrower money for a purchase mortgage. Anyone with a credit score below 620 is very unlikely to be able to obtain financing. Even if this group of people had a large down payment, they would most likely not be able to obtain a mortgage. On the other hand, the good news is that 47% of today’s borrowers have scores above 720 and a total of 71% are able to borrow. Higher credit scores are awarded with the best interest rates available.

Due to tight credit standards and stricter underwriting guidelines, many borrowers today are being turned away from obtaining a mortgage. Years ago, these same borrowers were turning to sub-prime mortgage products as their only financing option. At that time, many of these same borrowers would have qualified for FHA loans but opted for sub-prime instead. In fact, prior to the introduction of sub-prime, there were only FHA loans available to these borrowers. Now, with FHAs exposure in the mortgage market so pronounced, they, too, are further tightening their lending guidelines making it difficult for this 29.3% group of people to obtain a mortgage.

More people have been choosing to clean up their credit and pay off credit cards as credit card interest rates have increased. This is a positive move in an effort to increase their credit scores and make them more eligible to buy a home. Although people have been cutting back other spending while doing this and growth of the economy has suffered, they are becoming responsible spenders. As this movement continues, the percentage of borrowers that are credit worthy and able to buy should increase over time. Just as it took many years for this turmoil to occur, it will take time for the benefits of these actions to be seen.

Although the number of borrowers that are unable to obtain a mortgage may seem high, earlier studies show that nearly 20% of the population had FICO scores below 620 in 2002 when the unemployment rate averaged around 5.7%. Considering the fact that we have just gone through the Great Recession followed by a very slow economic recovery and a very high unemployment rate, this new percentage of 29.3% is not so frightening. Reflecting on the fact that 71% of borrowers do qualify for a new home loan, things may just improve when borrowers realize that they are in this category and able to take advantage of historically low interest rates.

***CORRECTED 9/29 AT 11:35 AM- ZILLOW FOUND 71% OF BORROWERS QUALIFY FOR A PURCHASE LOAN, NOT A REFINANCE

The National Association of Realtors announced this morning a 7.6 percent boost in home sales for the month of August over home sales in July. NAR reported a seasonally adjusted annual rate of 4.13 million home sales for August; July home sales, which are the most disappointing of the year, were 3.84 million. According to NAR data, 34 percent of the home sales reported for August were distressed homes, whereas distressed homes accounted for 32 percent of the home sales for the month of July. Chief economist for NAR, Lawrence Yun, says that although the expiration of the home buyer tax credit in April slighted the recovery of the housing market, the market “… is trying to recover on its own power.” He adds that sales could improve further, “…provided the economy consistently adds jobs.”

Ultra-low mortgage interest rates are definitely strong incentives for homeowners to refinance their mortgage loans. Conforming fixed mortgage rates, as of this writing, are 4.00 percent for well-qualified borrowers, which are lower than Tuesday’s reported rates of 4.125 percent, with 0.7 to 1.0 point origination. Current 15-year rates are 3.5 percent, which are also slightly less than Tuesday’s rates of 3.625 percent. Such low rates have motivated some homeowners to refinance their loans. As the Mortgage Banks Association reported that refinance applications increased by 17 percent.

In addition to positive home sales and low mortgage rates, the Obama Administration has implemented two programs to help homeowners refinance their mortgages: HARP and the FHA-Short Refinance program. The Home Affordable Refinance Program (HARP,) which was launched last year, helps homeowners who are underwater on their mortgage to refinance into better loan terms. The program does not reduce the principal amount owed on the loan, but, it does allow homeowners to take advantage of favorable mortgage rates. The FHA-Short Refinance program, which was put into gear earlier this month, aids non-FHA borrowers with negative equity by reducing their mortgage loan balances. Such borrowers must be current on their payments in order to qualify for this program and lenders must agree to write off at least 10 percent of the unpaid principal.

Despite historic low mortgage rates and creative government programs, stronger economic factors are involved: strict qualification standards, expensive closing costs, which can range from 3,000 dollars to 5,000 dollars, increasing job loss, and decreasing property values. The FHA-Short Refinance program is a good example of the enforcement of such stringent qualification requirements. Not only does the program require lenders to write down a minimum of 10 percent of the debt owed, which seems highly unlikely, but also the program requires potential borrowers to meet standard FHA underwriting requirements, such as occupying the property as a primary residence, maintaining a credit score equal to or better than 500, and sustaining steady employment for at least two years, preferably with the same employer. Moreover, the Federal Housing Administration also requires any bankruptcies to be at least two years old, provided the home borrower has had perfect credit since the bankruptcy discharge, and any foreclosures to be at least three years old with pristine credit since.

These restrictions are only amplified by the backdrop of increasing unemployment and bankruptcy filings. The Department of Labor predicts the unemployment rate to reach 10.1 percent by October, which is the worst employment slump since post-WW II. Without steady income, homeowners cannot qualify for a mortgage loan refinance, let alone afford a mortgage payment, regardless of how reduced the new payment is. Plus, the National Bankruptcy Research Center reported 127,028 bankruptcy filings for the month of August. The number of personal bankruptcy filings for this year is more than 1 million, which is nearly 8 percent higher than last year. Tough underwriting guidelines not only discourage homeowners from refinancing their mortgage loans, but also make refinancing nearly impossible to accomplish.

Adjustable rate mortgages were the hit of the housing boom. So many people purchased homes or refinanced with ARM mortgages. It was the gold rush of housing as people went for the best deal as fast as they could. The teaser interest rates offered were so low as compared to fixed mortgage rates at that time. With the economy buzzing and equity in homes growing each day, homeowners were confident that they would be able to refinance when the interest rate adjusted. They believed that within that period of time that they held the adjustable rate mortgage, their incomes would increase or they would have a better job. At that time, they would be able to handle the higher payments or would be in a position to refinance again. As time has told us, this did not happen for many homeowners. As housing prices declined, they lost the equity in their homes and started dealing with unpredictable mortgage payments. As unemployment has gone through the roof, their job security is no longer there and their hopes of a better job is forgotten.

Today is another chapter in history. According FHFA, homeowners are more likely to default with an ARM mortgage as compared to a fixed rate mortgage. Today’s homeowners who are able to refinance their mortgages are choosing a fixed rate mortgage. With today’s interest rates so close, the 30 year fixed rate at 4.125% (0.7 to 1% points), the 15 years fixed rate at 3.625% (0.7 to 1% points) and the 5/1ARM at 3.250% (0.7 to 1% points), it is much more practical and enticing to pick a fixed rate mortgage.

While applications for the 30 year and 15 year fixed rate mortgage continue to increase, applications for ARM mortgages are on the decrease. The risk of an ARM mortgage is too much for today’s homeowner to handle.
There are just too many if’s in the picture for them to take an ARM, too much uncertainty in the future. The housing bust has taught current homeowners that only under very limited circumstances should an ARM be sought and will make sense. If a homeowner knows for certain that they will only be living in the home for a few years prior to the ARM adjusting, then it might be the right decision. For homeowners who are financially in a position to handle any amount of monthly mortgage payment that might occur down the road, then the ARM might be a good choice. These types of borrowers are far and in between as the majority do not fall into either of these categories.

Today’s homeowners are becoming more educated about mortgages and less dependent on what a lender tells them. They are doing their own homework and finding the loan program that is personally good for them. With less and less ARMs being used for refinancing, time will tell if it is the end of the ARM and if it will eventually become obsolete. As cautious homeowners are continuing to refinance to fixed mortgages at a record percentage, ARM refinances continue to decline. Homeowners have learned a hard lesson as they are now making their own decisions and securing their own future.