Mortgage, Real Estate, and Credit Blog by Greg Phillips

HUD Is Proposing More Changes To The FHA Mortgage Program

The Federal Housing Administration announced several proposed changes today that could tighten standards even further. Some of these changes will have a significant impact on the housing market later this year. Here is a list of some of the proposed changes:

1) FHA currently requires borrowers to pay an Up Front Mortgage Insurance Premium (UFMIP) equal to 1.75% of the loan amount. That is likely to be increased to 2.25% as FHA has paid out more claims and need this additional revenue in order to balance out the loses from foreclosed homes.

2) Sometime around summer of 2010 seller’s will be restricted to contributing a maximum contribution of 3% toward the buyers closing costs. Currently the amount they can contribute is set at 6%. The impact of this change will be far greater in low value and lower income communities. This will cause buyers to need more cash set back for remaining closing costs on their home financing. The impact is more minimal in higher value area’s as 3% allows plenty of room still to pay the closing costs.

3) FHA is debating on establishing credit score requirements. Currently FHA has no credit score requirements. However, many lenders offering FHA loans have established minimum credit score requirements. So this change may be a little late but will help stop those lenders who still are lending to lower credit score borrowers that jeopardize the availability of these loans and are responsible for the majority of defaults. It is proprosed that a borrower would need a minimum score of 580 to take advantage of the minimum down payment allowable under the program which is currently 3.5% A score below 580 would require 10% down.

4) FHA is proposing more precise tracking and public availability of a lenders performance issuing these loans. They will continue to enforce tighter standards and hold more lenders accountable for their actions. Higher default rates will trigger a closer watch of that lenders activities.

Overall these changes are needed to keep the program going and FHA will continue to lead the way in making loans that are more affordable to consumers and less restrictive than conforming standards.

Reverse Mortgage Programs

Seniors over the age of 62 are eligible to take advantage of a Reverse Mortgage. This program has several options and the most popular versions of the program are offered by the Federal Housing Administration (FHA) and Fannie Mae. Over the years many seniors have taken advantage of these programs. Through these programs seniors are able to eliminate their mortgage payment, take a lump sum distribution at closing, and/or pay them self a monthly amount from the equity in their home.

A Reverse Mortgage Loan can eliminate the burden of a mortgage payment and supplement a seniors monthly income. The best part is they can live in the home for the rest of their life. Each Reverse Mortgage Lender can have their own set of rules and guidelines so keep this in mind when reading on. However, here is a list of some of the most common questions I am asked when doing a Reverse Mortgage:

• Interest is charged monthly on the loan balance. The interest is added onto the balance of the loan every month. The balance of the loan grows but there is no payment due from the borrower.
• The borrower must reside in the home. Most lenders can call the loan due and liquidate the asset if the borrower resides outside the home for 12 months.
• If the senior passes away the mortgagee (Lender) will liquidate the property. Sometimes the balance of the mortgage is for more than what the home sells for. This amount is forgiven and will not be taken from the deceased borrowers estate nor be required to be paid by the beneficiaries of the estate. The beneficiaries may also have the option to purchase the home if they wish.
• The most common loan is the version offered by FHA. It is called a Home Equity Conversion Mortgage (HECM). Typically 2 mortgages will be recorded on the home. The first will be for the initial disbursement taken out on the home. The 2nd will be an open ended loan in which the balance will grow as interest accumulates on the loan.
• Borrowers have options on how they take cash from the equity in their home. You can receive a lump sum distribution at closing or choose to take nothing at time of closing. You also can setup monthly distributions or take distributions only when you need them. You also can do both. Some choose to take a distribution at closing and take distributions as they please or as an equal amount every month.
• Property taxes and homeowners insurance is still the borrowers responsibility. You can pay these expenses yourself or use the credit line associated with the loan to pay them.
• Seniors can use this loan to purchase a home. Typically Seniors would take an advance out of their retirement or pension to make a down payment on the home.
• The amount a Senior qualifies for usually is based on the amount of equity in their home and their age.
• Seniors are required to take a course that educates them on how these loans work. They will be given a certificate of completion that is usually required to move forward with the loan. The fee can either be paid by the senior or it also may be able to be financed into the loan.
• Most Reverse Mortgages have options available for how interest is charged. Be aware that several offer variable interest rates. This was very common in the past. Most should now offer fixed interest rates as well. The type of rate option you choose can impact your ability to do the loan and/or the availability of distributions.

As you can see there are many benefits to doing a Reverse Mortgage Loan. There is some bad press surrounding these mortgages that you should be aware of. Most of these stories are cases of predatory lenders taking advantage of Seniors. Overall this loan program can allow a Senior to live in their home for the rest of their life and free up income for a more enjoyable retirement.

FHA Steamline Refinance Changes

Mortgagee Letter 2009-32 revises the current FHA Streamline Refinance guidelines. This program is very popular for folks who currently have FHA mortgages. It has limited requirements for credit and documentation such as no income or assets are verified. It also does not require a new appraisal be done.

The mortgagee letter is very clear and easy to understand. I will paste it below. If you have questions please make a comment.

September 18, 2009                                                                                                                       MORTGAGEE LETTER 2009-32

TO:     ALL APPROVED MORTGAGEES 

SUBJECT:  Revised Streamline Refinance Transactions 

This Mortgagee Letter provides (1) revised procedures; and (2) reaffirms existing procedures regarding Streamline Refinance transactions.  This Mortgagee Letter is effective for new case numbers assigned on or after 60 days from the date of this letter. 

Key Revisions: 

• Seasoning
• Payment history
• Net tangible benefit for the borrower
• Maximum Combined Loan-to-Value
• New Maximum Mortgage Amount for Streamline Refinances WITHOUT an Appraisal
• Discounts Points no longer included in Existing Debt for Streamline Refinances WITH an Appraisal
• Verification of any assets needed to close
• Certification that borrower is employed and has income
• Elimination of abbreviated Uniform Residential Loan Application (URLA) 

       I.             Revisions for ALL Streamline Refinance Transactions 

1. A.    Seasoning 

At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced. 

1. B.     Payment History  

At the time of loan application, the borrower must exhibit an acceptable payment history as described below.

 1)      For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due.

2)      For mortgages with a 12 months payment history or greater, the borrower must have:

a)      Experienced no more than one 30 day late payment in the preceding 12 months,   

AND 

b)      Made all mortgage payments within the month due for the three months prior to the date of loan application. 

1. C.    Net Tangible Benefit 

The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal.  Net tangible benefit is defined as:

• reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens), 
•  refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage,

OR 

• reducing the term of the mortgage. 

Reduction in Total Mortgage Payment:  The new total mortgage payment is 5 percent lower than the total mortgage payment for the mortgage being refinanced.  Example:  Total mortgage payment on the existing FHA-insured mortgage is $895; the total mortgage payment for the new FHA-insured mortgage must be $850 or less.  

This requirement is applicable when refinancing from a Fixed Rate to Fixed Rate, from an ARM to ARM, from a Graduated Payment Mortgage (GPM) to Fixed Rate, from GPM to ARM, from a 203(k) to 203(b) and from a 235 to 203(b). 

Fixed Rate to ARM:  Fixed rate mortgages may be refinanced to a one-year ARM provided that the interest rate on the new mortgage is at least 2 percentage points below the interest rate of the current mortgage    

ARM to Fixed Rate:  The interest rate on the new fixed rate mortgage will be no greater than 2 percentage points above the current rate of the one-year ARM.  For hybrid ARMs, the total mortgage payment on the new fixed rate mortgage may not increase by more than 20 percent .  Example:  total mortgage payment on the hybrid ARM is $895; the total mortgage payment for the new fixed rate mortgage must be $1,074 or less. 

Reduction in Term:   For transactions that include a reduction in the mortgage term, that loan must be underwritten and closed as a rate and term (no cash-out) refinance transaction. 

Investment Properties/Secondary Residences:  In addition to meeting the requirement for a reduction in the total mortgage payment, investment properties or secondary residences are noteligible for streamline refinancing to ARMs. 

1. D.    Certifications and Verifications 

When submitting the loan for insurance endorsement, the lender must include a signed and dated cover letter on their letterhead certifying[1] that the borrower is employed and has income at the time of loan application. 

If assets are needed to close, the lender must verify and document those assets. 

The lenders must also include the pay-off statement in the case binder. 

1. E.     Credit  Score 

If a credit score is available, the lender must enter the credit score into FHA Connection.  If more than one credit score is available, lenders must enter all available credit scores. 

1. F.     Maximum Combined Loan to Value 

If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent. 

• For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property. 
• For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value. 

1. G.    TOTAL Scorecard  

Lenders should not use TOTAL on streamline refinance transactions.  If a lender uses TOTAL, that loan must be underwritten and closed as a rate and term (no cash-out) refinance transaction. 

1. H.    Uniform Residential Loan Application (URLA) 

Mortgagees may no longer use an abbreviated version of the URLA.  Due to various disclosure requirements and our long-standing belief that borrowers are best served when certifications they must make are divulged as early as possible in the loan application process, the application for mortgage insurance must be signed and dated by the borrower(s) before the loan is underwritten.  Mortgagees are permitted to process and underwrite the loan after the borrowers and interviewer complete the initial URLA and initial form HUD-92900A, HUD/VA Addendume to Uniform Residential Loan Application. 

    II.            Revised Streamline Refinance Transactions WITHOUT an Appraisal 

The maximum insurable mortgage cannot exceed: 

• The outstanding principal balance[2] minus the applicable refund of the UFMIP, 

PLUS 

• The new UFMIP that will be charged on the refinance. 

 III.            Revised Streamline Transaction WITH an Appraisal 

The maximum insurable mortgage is the lower of: 

1)      Outstanding principal balance² minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and  the new UFMIP that will be charge on the refinance; 

OR 

2)      97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance. 

            Discount points may not be included in the new mortgage.  If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.  

 IV.            Unchanged Streamline Refinance Transactions 

The following on streamline refinance transactions remains unchanged. 

If you have any questions regarding this Mortgagee Letter, please contact the FHA Resource Center at 1-800-CALL-FHA (1-800-225-5342).  Persons with hearing or speech impairments may access this number via TTD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483). 

Sincerely,

David H. Stevens

Assistant Secretary for Housing-

                                                                           Federal Housing Commissioner 

Paperwork Reduction Act 

Paperwork reduction information collection requirements contained in this document have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control number 2502-0059.  In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB Control Number.

[2] The outstanding principal balance may include interest charged by the servicing lender when the payoff is not received on the first day of the month but may not include delinquent interest, late charges or escrow shortages.

Home Sales Increase In October

The latest report shows home sales rose 10.1 percent in October which is the highest in 2.5 years. This is great news! It may have been influenced by a potential deadline for the Federal Income Tax Credit incentives which was later extended.

Pockets in the country are reporting bidding wars on homes while the inventory of homes on the market has decreased. There is still a rather large inventory of homes for sale though.

Any step in the right direction is a good one at this point. I will be very eager to see the numbers for November. While I feel they should be almost as good if not better I feel the off season may be fairly bleak. The extension of the tax credit and additional incentives offered to current home owners should help though.

Mortgage rates are staying low! Why should you act now?

Many home owners and home buyers are being blessed across the country with phenomenally low interest rates in recent weeks. This has caused home owners to look at mortgage refinancing. I have seen significant monthly savings for people who simply lower their rate on their mortgage.  Some home owners are also taking advantage of debt consolidation opportunities or the extended Federal Income Tax Credit that is available to current home owners who purchase another home. It is important to act now.

We all say act now. So, why is it so important in this time and age?

When you refinance or purchase a home 99% of the time an appraisal is required. In recent years the lenders have tightened down on appraisals due to declining home prices. They are requiring more comparable sales on appraisals than ever before. If you act now you can take advantage of the prime season sales!

Many pockets in the United States experience slow seasons where the number of home sales decline during what most call the off season. That also means more supply and less demand which could result in lower prices. If you are buying a home this could bode well for you! I also suggest you obtain a pre-approval for your mortgage so you can find out what you qualify for.

First Time Home Buyer Federal Income Tax Credit Extension – Additional $6,500 to Second Time Home Buyer’s

Today President Obama will sign HR3548 into law. This extends the First Time Home Buyer Federal Income Tax Credit. The extension is through April, 30th 2010. You must have a fully executed purchase agreement before May 1, 2010 and close before July 1, 2010.

Some other welcomed changes have been made to the existing bill. The income limits have been increase from $75,00 (Single) and $150,000 (Married Filing Joint) to $125,000 and $250,000.

If someone has owned there primary home for the last 5 years and purchases another home they may be eligible to receive up to $6,500.

See my post regarding the initial tax credit incentives for additional Information.

As soon as the IRS releases more details on the final bill I will update this post.

First Time Home Buyer Federal Income Tax Credit 2008 and 2009

Due to some confusion regarding this credit I am writing an article. I want to clear up some of the myths and arm you with the correct information.

First Time Home Buyer’s are defined as a person who has not owned a home considered their principle residence in the last 3 years. If you purchase a home that is occupied as your principle residence and are a First Time Home Buyer you are eligible to receive a tax credit. On returns filed separately your individual Adjusted Gross Income cannot exceed $95,000. If you are married filing joint your Adjusted Gross Income cannot exceed $170,000. To claim the full credit your Adjusted Gross Income must be equal to or less than $75,000 individual or $150,000 married filing joint.

You can own other homes. You could not have occupied those homes as your principle residence in the last 3 years.

If you and/or your spouse purchase a home then you are eligible for the credit as long as neither of you have owned a home in the last 3 years. If you file a joint return the credit is 10% of the purchase price up to $7,500/$8,000. If you file separately you split the credit. (5% of the purchase price up to $3,750/$4,000 each)

If you and another person (Not a Spouse) purchase a home together the credit is divided equally among all purchasers. However, if one or more purchaser’s is not a First Time Home Buyer then their portion of the credit cannot be claimed.

This credit was created initially through the Housing and Economic Recovery Act of 2008 which covered homes purchased between April 8, 2008 and November 31, 2008. Under this legislation you were eligible to receive a tax credit of 10% of the homes purchase price up to $7,500. The money was to be paid back beginning with the 2010 tax year and over the next 15 years in equal installments. It is a no interest loan.

The American Recovery and Reinvestment Act of 2009 extended this credit for home purchases made between January 1, 2009 and November 31, 2009. It also made the credit a maximum of $8,000. You DO NOT have to repay the credit to the IRS under this act unless you sell or transfer your home within 3 years after the date of purchase. The credit can be claimed on your 2008 Federal Income Tax Return. If you have already filed a return you can amend your 2008 Federal Income Tax Return by filing a 1040X and receive the credit for this tax year OR you can file for the credit on your 2009 Federal Income Tax Return.

More information is available on the tax form used for claiming the credit below:

IRS Form 5405

If you have a specific question make a comment on this post and I will get an answer. You could also contact the IRS directly.

I also want to discuss how this credit has effected the housing industry. I personally and several others have seen a reaction to this credit. People who have hesitated to purchase a home have made the decision to do so as a result of the credit. However, the credit ends on December 1. 2009 and currently has no solid plan to continue.

If people are trying to claim this credit they would need to be in contract to purchase a home by the beginning of November to have a valid chance to close on time. The date the deed is recorded is the official date you own the home.

How to get a Home Buyer or Home Owner Grant for Down Payment, Closing Costs, or Home Repair

Every time a borrower applies for a mortgage with me I tell them about federal grant money they may have access too. Many loans now require a down payment. There is grant money available in many counties in your state.

All you need to do is contact the county you wish to buy a home in and ask. The department that typically handles administration of the funds is  Economic Planning and Development.

The grant funds vary based on what the county chooses. Some have a $5,000 down payment. Others have that and rehab money. You may also find a few choose a low interest or no interest grant.

Most of these grants do however place a 2nd lien on your home that has deferred payments and/or a portion of the amount borrowed is forgiven annually until 15% remains.

Check and see what your county has available for you.

MDIA Mortgage Disclosure Improvement Act

The Mortgage Disclosure Improvement Act – MDIA was passed with the Housing and Economic Recovery Act of 2008 -HERA. Effective on all applications taken July 30, 2009 lenders must comply with the guidelines set forth in this new act. The act was designed to allow homeowners and home buyers additional opportunities to review critical loan documentation. It effects all types of mortgage lenders.

The act enforces a 3 day mail wait and 3 day review period on preliminary loan disclosures and rediclosures. There is a 7 day wait after application in which the lender cannot close the loan. Up front fees cannot be collected during this time except a credit report fee.

If the APR on the loan increases by more than .125% the lender must re-disclose the TIL with the new APR. A 3 day mail wait and a 3 day review period is enforced to allow the customer the opportunity for review.

The Home Valuation Code Of Conduct or HVCC requires lenders to use an Appraisal Management Company on all Conforming Loans. This also gives the borrower a chance to review the appraisal prior to closing. The customer can waive this option but most lenders do not want them too. There is a 3 day mail wait and 3 day review period.

Each of these components will cause delays in the closing process. The mail wait can be avoided by hand delivery or emailing as long as you have a read receipt.

The above guidelines are for a Lender. When you deal with a Mortgage Broker they are not the Lender. The lender they use will have to follow these requirements and they usually will mail the documentation. Brokers will have additional delays due to this.

Overall, I hope this act improves the housing situation as planned. I feel most consumers will not take the time to review or they will review but be frustrated by the legal language they will not comprehend.

In the end it is up to the Loan Officers the fuly explain everything to each client.

FHA – Federal Housing Administration Mortgage

The FHA loan is one of the most popular loan programs used in the United States to purchase or refinance a home. The qualifying criteria is much easier than a Conventional Loan. I am going to cover this program in detail to help educate you on how it works and what to expect.

I want to take a brief moment and explain the variations in the program guidelines between lenders. The United States Department of Housing and Urban Development (HUD) administrates this program. They establish a minimum set of guidelines in which they will insure these loans. Lenders offering the program must adhere to these guidelines in order to qualify for the protection HUD offers them when making these loans to consumers. However, with the recent events in the mortgage industry the lenders have made the qualifying criteria tougher to prevent losing money. So, with that being said you can expect inconsistent guidelines from lender to lender. One may decline you for an FHA Loan while another may approve you.

HUD publishes handbooks for lenders to use. These handbooks have the minimum set of guidelines lenders must follow for insurability. All handbooks can be found by clicking FHA Title II Mortgagee Starter Kit. All handbooks are listed first then near the bottom you will find Mortgagee Letters which are updates made to the programs. These letters can change the requirements of each handbook.

As you can see below there are several handbooks. These handbooks address lenders becoming approved to write FHA loans, the requirements for the collateral securing the loan, credit requirements, and so on. I have made the text bold on the 3 I am going to cover. They are used to determine if a borrower qualifies for a Reverse Mortgage (HECM), a Home Rehabilitation Loan (203k), or a Single Family Refinance or Purchase (203b).

Each handbook can be revised at HUD’s discretion to include updates. However, as of April 9th, 2009 HUD updated the Handbooks.  The most recent, 4155.1 REV-5, is no longer valid. The links above are the current Handbooks.

I am going to give a general overview of each program and it’s requirements for consumers. For a more details please post a comment with your question or refer to the handbook.

FHA 203b Single Family Purchase or Refinance

This program requires a minimum statutory investment of 3.5% when you are using it to purchase a home. This investment can be your own contribution toward the down payment, closing costs, or a combination of the 2. In most cases the maximum LTV (Loan To Value) is 97.75%. That would make the minimum down payment requirement 2.25%. However, you would need to contribute another 1.25% toward your closing costs in order to meet the minimum statuatory investment of 3.5%.

The maximum LTV on a refinance is usually 97.75%. This LTV is acceptable for a Rate and Term refinance only. (Pay off existing mortgage)

The maximum LTV for Cash Out refinances is 85% LTV. (A temporary suspension is in effect for the 95% Cash Out Refinance)

There are loan limits placed on these loans. The limits are defined by the county the property resides in. To search for a loan limit use this link.

1. No Minimum Credit Score Requirement
2. You can use non-traditional credit to qualify. If you have limited credit history on your credit report or no history then you can use the payment history you have with other companies not reporting on your credit report. Examples: Utilities, Insurance, and Loans.
3. There is no minimum or maximum income requirement.
4. Chapter 13 Bankruptcy does not disqualify you. You must have made 12 payments under your plan and have satisfactory payment history. If you own a home you can refinance and pay off your plan as long as you meet the requirements above.
5. Chapter 7 Bankruptcy does not disqualify you as long as you have re-stablised and show the ability to manage your credit. You must be discharged no less than 12 months. You also must prove the bankruptcy was caused by extenuating circumstances beyond your control. Otherwise you must be discharged a minimum of 24 months.
6. Consumer Credit Counseling (CCCS) does not disqualify you as long as you have made 12 monthly payments on the plan and have paid satisfactory.
7. Previous Foreclosure does not disqualify you as long as 3 years have elapsed since the Foreclosure and you have re-established credit. An exception can be made if the foreclosure was due to an extenuating circumstance.
8. Tip: Bad Credit after #5, 6, or 7 is usually a reason for denial.
9. A non-occupant co-signer can be used. Example: You want to buy a home but have limited credit history. Your parents can go on the loan as non-occupant co-borrowers to help you obtain the loan.
10. A gift from a relative can be used for the minimum statutory investment of 3.5%.

The collateral is subject to FHA property condition requirements. An FHA Licensed Appraiser determines whether the property is acceptable. If it is not the property must be repaired prior to closing unless the repair cannot be made due to seasonal conditions restricting the repair. In that case a repair escrow may be used to complete the repair after closing when weather conditions permit it. To find out more information on property eligibility refer to the 4150.2 Handbook or simply click here for a brief overview outlined in Mortgage Letter 2005-48.

The 203b program is the most widely used FHA product.

I have decided to write separate articles on the HECM and 203k. However, a general post is available on the 203k options in this post.

The credit requirements are the same for the 203k. However, the HECM varies a great deal. I will post an article soon on that program.