FHA Loan Guide

The Federal Housing Administration will launch a program on September 7th that will allow underwater homeowners who are current on a non-FHA loan to refinance into an FHA-backed loan when their lender agrees to write off at least 10 percent of their principal.  The FHA Short Refinance program, originally announced in March, is designed to help homeowners in markets that have seen large declines in home values refinance into “a safer, more secure” mortgage, FHA Commissioner David Stevens said in a statement

HUD recently announced changes to the FHA mortgage loan program to assist homeowners with mortgage loans that exceed the value of their home. The changes are part of broader efforts to assist homeowners that were announced by the Obama Administration.  Previously, Obama’s mortgage relief team had announced that by the Fall, they planned to revise FHA guidelines with additional changes to the FHA loan programs.  Their goal is to offer a FHA refinance loan option for borrowers who have made their loan payments on time but owe more than their home is worth.

In Mortgage Letter 2010-23 HUD sets forth the details regarding the FHA short refinance alternative. The option will be available for loans with case numbers issued on or after September 7, 2010 and closed on or before December 31, 2012. However, HUD advises that the loss coverage that will be part of the refinance option will use funds under the Emergency Economic Stabilization Act of 2008 (EESA), and that if availability of the loss coverage is delayed beyond September 7, 2010 the implementation of the loss coverage also will be delayed. Supplemental Directive 10-08, issued under the Making Home Affordable (MHA) Program in conjunction with Mortgagee Letter 2010-23, provides additional guidance for investors and servicers. The Supplemental Directive notes that the FHA refinancing is not yet effective and a subsequent Supplemental Directive will be issued when the program is operational and servicers can executed a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (SPA) or a Service Schedule to the SPA, as applicable, with the U.S. Department of Treasury.

FHA Short Refinance Eligibility- The refinance option is available for homeowners with a non-FHA mortgage only if the following conditions are satisfied:

• The homeowner must be in a negative equity position. (mortgage balance must be greater than the property value)
• Borrower must be current on their current home mortgage loan.
• The homeowner must occupies the home as their primary residence and the home consists of one to four units.
• Borrower must qualify under standard FHA underwriting requirements and have a “FICO based” decision credit score of at least 500.
• The existing first lien mortgage loan holder must write off at least 10% of the unpaid principal balance.
• The FHA refinance loan may have a maximum loan-to-value ratio (LTV) of 97.75%.
• Second mortgage loans that are not extinguished must be re-subordinated and the combined LTV (CLTV) with the FHA refinance loan may not exceed 115% LTV.
• For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) or that are manually underwritten, the homeowner’s total monthly mortgage payment for the FHA refinance loan and any subordinate mortgage loans may not exceed 31 percent of the homeowner’s gross monthly income, and the total monthly debt payments of the homeowner may not exceed 50% of such income.
• Premium pricing may not be used to pay off existing debt obligations to qualify the homeowner for the FHA mortgage.
• The mortgagee may not make mortgage loan payments on behalf of the homeowner or otherwise bring the existing loan current to make the homeowner eligible for the refinance option.
• The existing home  loan holder may not have brought the existing loan current, other than through an acceptable permanent loan modification.
• For a homeowner with a loan that was permanently modified under the Making Home Affordable Program (HAMP), the FHA refinance loan may not close before the month that follows the month in which the modification became permanent. For a homeowner with a non-HAMP permanent modification, the homeowner must make at least three monthly payments on time and the modified loan must be current for the month due. If a homeowner is in a temporary or trial modification period, the homeowner is not eligible for an FHA refinance loan under the program.

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After considering increasing the FHA loan costs, the Federal Housing Administration decided to turn the talk into increased revenues.  The FHA came together in agreement today that starting September 7th to raise the annual fees for FHA loans insured by the agency in an effort to strengthen its cash-strapped balance sheet.  Earlier this week, the Senate extended their approval for a bill that enables the FHA to raise their annual fees that borrowers who have an FHA mortgage pay by nearly 300%. However, a spokesman for the FHA said that their initial plans will begin with modest increases of the loan fees at first. President Barack Obama is expected to sign the FHA bill later this month.  HUD announced earlier today that they have a new FHA refinance loan called the FHA short refinance and this program was created to extend loan relief to distressed borrowers.

Will the Icreased Annual FHA Fees Reduce Homeownership?

The new law would grant FHA the authority to increase annual mortgage insurance premiums paid by the borrower over the life of FHA home loans capping out at a maximum of 1.5 %.  Presently, the annual mortgage insurance is limited to 0.55%.  However, FHA Commissioner David Stevens indicated that the mortgage premium would be raised gradually, first to 0.85 % or 0.9 %, depending on the size of the borrower’s down payment. The new FHA loan costs are expected to increase about $3.6 billion annually for the FHA.

The good news for new homebuyers is that FHA promised to reduce the upfront mortgage insurance premium from the current 2.25% to about 1% and the agency hopes that this helps offset the increased cost of the annual premium for FHA borrowers. The upfront premium is paid prior to the FHA loan closing.  Stevens has said it makes more sense for the fees to be paid throughout the life of the loan in the annual premium instead of forcing borrowers to pay them when the loan is made.  New borrowers would pay an average of just under $40 per month more under the new fee structure.  The minimum down-payments for FHA loans remain at 3.5% for most homebuyers. Lawmakers struck down a Republican proposal to raise them to 5%. 

The FHA has capital reserves equal to just 0.53% of the value of the thousands of outstanding mortgage loans that they insure.  Many mortgage executives have been troubled by this because it is well below the 2.0% required by law, according to an independent actuarial study released late last year. A new study is expected to be released this fall.  In addition to raising the FHA annual fees, the House has also passed another finance bill that was created in an effort to strengthen the FHA’s enforcement capabilities.

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FHA continues to be active with tightening FHA loan guidelines for many of their loan products, but the FHA short-refinance is very aggressive mortgage relief for a targeted group of troubled borrowers.  The U.S. Department of Housing and Urban Development announced the new FHA loan program because almost 25% of financed homes above 100% loan-to-value.  We have been hearing about this government initiative to help borrowers who property values had declined below their mortgage balance.  Foreclosures continued to rise and HUD felt like this was the time to roll out the FHA Short Refi Program.   This is unlike the other FHA refinance loan programs that limit borrowers to 96.5% loan-to-value and the FHA short refinance goes above and beyond the value of the home. 

FHA Short Refi Focuses on Helping Underwater Mortgages

HUD will release the Federal Housing Administration’s new Short Refinance program, which is designed to help facilitate mortgage refinancing by borrowers who are underwater, meaning they owe more on their mortgage than the home is worth. HUD Secretary Shaun Donovan told a group of black real estate professionals Tuesday in Fort Worth that while the Obama administration has made strides in ensuring affordable housing for all, there’s still room to improve.  “There’s no question that the state of today’s housing market is in significantly better shape than anyone predicted a year ago,” Donovan said. 

Many borrowers find their homes underwater and with the forecast for continued high unemployment, the housing recovery remain the biggest threats to a double dip recession. At the end of last year, among all U.S. households that had a mortgage on their property, 11.3 million, or 2 %, were underwater, he said. Those depreciated properties are mostly in California, Arizona, Florida, Michigan and Nevada.

Most FHA lenders believe that the FHA short-refi is a unique approach and that this mortgage relief initiative will help out a lot of struggling homeowners, but unfortunately not everyone will qualify and meet the FHA loan requirements.

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The FHA has promised to lower closing costs in the summer of 2010.  Specifically FHA has discussed lowering the allowable seller concessions. FHA will reduce seller concessions from 6% to 3%. According to an announcement in January, the current level of 6% exposes the FHA mortgage to excess risk by creating incentives for appraisers to increase the value of these homes. The change will take place in “early summer,” according to the FHA, but a spokesperson said no specific date has been set.  The FHA closing costs include fees for origination, attorneys, appraisal and inspections, title search, title insurance, credit reports, and more. FHA down payment assistance is not included as a closing cost.

Read the original FHA loan article > FHA Lenders Lowering Closing Costs

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It looks like finally the government is tightening the FHA credit guidelines for home loans and refinancing.  The Federal Housing Administration has always been a great proponent of homeownership and fair lending, but FHA loan defaults are sucking up the FHA reserves. FHA announced they were considering a proposal to no longer approve FHA mortgage loans to borrowers with credit scores below 500.  After Congress left the 2010 FHA loan limits at high levels FHA mortgage companies knew that the mortgage news can’t always be good.  Let’s be honest — For the most part, FHA mortgage refinance programs have been pretty aggressive with subprime borrowers.

The results of these FHA lending changes are starting to be realized as the FHA loan portfolio is starting to perform better with less delinquencies and defaults.  Stevens continued, “These are the latest in a series of modifications to allow the FHA to manage its risk better while continuing to support the recovery for the U.S. housing sectors.”  HUD reported that in May, FHA loans that were seriously delinquent rose almost 9%.  That was up from 7.93% at this time in the previous year.  The good news is that FHA loan defaults have declined since January, when they rose to 9.16% which was a record high.  The effects of the foreclosures have been drastic as they have nearly drained the once healthy, FHA reserves.  Congress requires that FHA keep the reserves above a minimum of 2%.  

Earlier this year, FHA proposed a measure to implement a minimum Fico score system to the FHA mortgage programs.  Jerry Mlnar of Woodfield Planning, who is a trusted Illinois mortgage company said,  “FHA has to protect the government home finance program to promote affordable home financing and credit score resquirements for FHA mortgages makes sense.”

The initiative is being considered as a pro-active measure to reduce delinquencies and FHA loan defaults.  Congress considered raising the minimum down-payment requirements to 5% and 10% for borrowers with Fico scores that fell below 580.  For the most part, home buyers are only required to come up with a 3.5% down-payment when financing with FHA home loans.  However FHA direct endorsed underwriters have the discretion to require higher down-payments for candidates that pose a higher risk.

In a recent article, CNNMoney evaluated the FHA lending policies that are being considered in the reform circles of the lending community.  stage. Before going into effect, the department is soliciting public comment on the matters for 30 days. Then, it will evaluate the comments before implementing any changes.

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Recent government reports indicated that FHA mortgage loan origination dropped 3% in May from April’s volume.  FHA lenders originated $22.3 billion of FHA loans for single-family homes in May.  Almost 72% of the 124,750 FHA loan approvals went to borrowers buying a home.  Of the 30,900 FHA refinance loans in May, 68% were conventional loan transactions with borrowers putting only 3.5% down-payments which are the minimum FHA requirements for home purchase transactions.  The Federal Housing Administration indicated that 8.42% of its insured FHA loans are 90 days or more past due which almost the same as the 8.49% reported in April. 

Get the Latest Changes from the FHA Loan Blog

Many FHA loan companies are concerned that FHA guidelines could tighten more because of the FHA loan defaults.  Many insiders are predicting that HUD will increase the down-payment requirements from 3.5% to 5%.  This will make it tougher for many consumers to get approved for FHA financing but it may reduce loan defaults that put the FHA mortgage programs at risk. 

The government report also noted the lack of volume for the Hope for Homeowners programs that has helped very few borrowers qualify for FHA refinancing.  FHA mortgage rates remain at record lows but the pool of borrowers who qualify for FHA refinancing has clearly been reduced.

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The recent FHA Mortgagee Letter from HUD all have the underline toned of increased responsibilities for approved FHA lenders.  HUD is driving home the tone of responsible lending in each of the FHA letters in 2010.   FHA outlined key provisions of HUD’s recently issued final rule, and guidance to mortgagees on HUD’s implementation of this final rule. The recent FHA requirements have been changed again as the new rule calls for increased the net worth requirements for FHA approved lenders.  The letter eliminates FHA approval of loan correspondents, FHA requirements of the Helping Families Save Their Homes Act of 2009 and made minor modifications to other aspects of FHA’s regulations for FHA lenders. Increased Net Worth Requirements As stated in the final rule referenced above, FHA is implementing increases to its net worth requirements and is offering additional incentives for existing FHA-approved lenders and mortgagees.

FHA Requrements Change Again with FHA Lenders Needing Higher a Net-Worth

Effective May 20, 2010, all new applicants for FHA approved lenders, irrespective of size, must possess a net worth of at least $1,000,000, of which no less than 20% must be liquid assets consisting of cash or its equivalent acceptable to the Secretary. FHA Lender Approval Application that is available at: http://www.hud.gov/offices/adm/hudclips/.  Effective May 20, 2011, each FHA approved lender or mortgagee with FHA approval as of May 20, 2010, that exceeds the size standards for a small business as defined by the Small Business Administration, must possess a net worth of at least $1,000,000, of which no less than 20% must be liquid assets consisting of cash or its equivalent acceptable to the Secretary.

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Over the last few months many FHA loan companies have been struggling to submit new loans into process because the loan application volumes were down for FHA refinancing and new home buying.  There were a few good weeks here an there, but overall, morale was down for loan officers according to several FHA lenders.  The Mortgage Bankers Association published its weekly home loan application report for the week that ended on June 11th.  Home refinancing and purchase mortgage applications rose and that is good news for mortgage brokers and lenders across the country. 

There was also good news the government mortgage programs as both FHA and VA loan applications increased significantly.  refinance loan guidelines have seen some tightening of one of the most popular programs, the FHA streamline in which borrowers are no longer allowed to finance the closing costs.  Borrowers must pay for the closing costs themselves outside of the loan.  Many FHA lenders have said that this had hurt their FHA refinance business, but it appears the borrowers are still using FHA for refinancing transactions.  FHA first time home buying loans could become fashionable again as more people look to become homeowners this summer.

The MBA’s index measures the volume of home mortgage applications and the report indicated an increase of 17.7% from the week prior. The Unadjusted Index spiked 29.7%, when compared to the prior week but the Memorial Day holiday shortened that week.

Michael Fratantoni who is MBA’s Vice President of Research and Economics, released a statement saying, “Mortgage loan applications for home buying rose last week, the first increase in over a month.  Mortgage refinance applications also roseup dramatically over the week.” He further went on to state that, “While it is clear that home loan applications in May dropped sharply as a result of the tax credit induced increase in applications in April, it is unclear whether we are seeing the beginnings of a rebound now.” The Weekly Home Loan Applications Survey contains over a dozen indices that covers mortgage-related application activity for fixed and adjustment rate, as well as conventional and government loans for home purchase and refinances. 

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Bloomberg published an article recently that considered the impact of FHA loans.  FHA first time homebuying remains popular with the low FHA interest rates.  FHA home loans re guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae and Freddie Mac.  FHA mortgage lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners.  “This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”  The FHA mortgage loan is insured by the government so when loan defaults sky-rocket, there are reasons to worry.  With down payments as low as 3.5%, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac, according to data compiled by Washington-based Potomac Partners.  The FHA and Fannie Mae and Freddie Mac, which regulators seized in 2008, have been financing more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees.

FHA has been taking steps to shore up its program after being left with “terrible portfolios” from 2007 and 2008, Stevens said.  Freddie Mac has mainly “eliminated” its financing of certain “esoteric products,” Donald J. Bisenius, executive vice president of the McLean, Virginia-based company’s single- family credit-guarantee business, referring to debt such as low- documentation lending or so-called option adjustable-rate mortgages with growing balances. The company’s “parameters around” 30-year fixed-rate loans still allow for relatively low down payments and credit scores and high debt-to-income ratios, he said.  “It’s not obvious to me that the credit box has shrunk as much as the numbers might suggest,” Bisenius said. Article was written for Bloomberg by Jody Shenn and John Gittelsohn.

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Yes FHA mortgage rates are low, but the FHA loan program as a whole may be in jeopardy of existence.  Many FHA blogs have posed the reality that the FHA loan product is at serious risk to be shut down.  In this political climate it becomes obvious that anything is possible because Congress must pass bill to continue to fund the FHA finance programs. FHA FHA first time home buyer loans have been promoting home ownership since the great depression.  Even as we discuss their recent failures, the argument could be made that FHA is one of the most successful government initiative in the last century.  

The FHA Home Loan Refinancing blog reported that the FHA reserves have covered $6 billion over the last 6 months. Yet HUD had predicted the FHA agency would pay $8.7 billion for loan defaults.  This FHA blog poses the question, “should we cheer because the FHA home loans are preforming better than anticipated or be critical of a federal loan program that is failing in a failing economy?”  Read the original FHA loan article online > Is FHA Mortgage Financing in Trouble?

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Over the last few years, FHA loan policies have been different for condominiums.  Recent changes in the way the Federal Housing Administration approves home loans for condominiums have left many would-be homeowners out in the cold, at least temporarily. That’s because the FHA will no longer approve a mortgage for a unit in a community that does not comply with new, stringent standards that went into effect on February 1st. In order to be certified as a compliant community, the condo association must apply to the FHA become certified as meeting all the standards. An FHA mortgage lender can also apply on the condominium community’s behalf to get this certification.  The FHA doesn’t make loans itself, but it does ensure home loans made to people with small down payments or less than perfect credit. This is why among first-time buyers, FHA mortgage loans are often the only option for buying a home.

Lemar Wooley, an FHA spokesman, said the new regulations were put into place because Congress changed the law, allowing FHA guidelines to make approvals of loans to condominium buyers more similar to single-family home-loan approvals. “The “Housing and Economic Recovery Act of 2008′ (HERA), moved the condominium authority from Section 234 to Section 203 to allow for more flexible condominium policy guidance,” Wooley said. “”Because of this change in law, the Federal Housing Administration (FHA) is implementing a new approval process for condominium projects and insurance requirements for mortgages on individual units, as authorized under Section 203(b) of the National Housing Act.”Wooley explained that Section 234 was a special section dealing specifically with condominiums. Section 203 provides general guidance for single-family homes.

Announced in November, the new regulations fall into three broad categories, according to Orest Tomaselli, the president of National Condo Advisors, a consulting company that works with condominium associations to help them meet the regulations.  First, he said, the community must demonstrate it has a budget reserve that is equal to 10 % of its annual budget. The reserve exists for repairs and maintenance of the common property and plant – the sidewalks, roofing, siding, windows, swimming pool, tennis courts, clubhouse or other facilities. If a community does not have or want such a large reserve, Tomaselli said it can hire an engineer to study the community’s needs and recommend a lower amount. If the FHA accepts the engineer’s study, a lower reserve amount can be set for that community

Second, the condominium community must meet new flood-plain requirements set forth by the Federal Emergency Management Agency. If the community is not in a flood plain, this is not an issue. However, when FEMA redrew its flood maps recently, it expanded the areas it believes will flood. Within those areas, buildings can still comply if the community has flood insurance and the highest living space is 10 feet or more above the flood plain. Or, the community can hire an engineer to file a “Letter of Loan Amendment,’ which, in effect, demonstrates that the FEMA guidance needs adjusting in their case. If FHA accepts this amendment, the community can be certified.

Third, the community must meet certain ownership requirements. At least half of all the units in the community must be owner-occupied, and no one investor can own more than 10 % of all the units. In the case of a community that is still being built, a certain %age of units must be presold.  Tomaselli said that the requirements aren’t really bad. Having sufficient capital reserves to meet maintenance needs is wise. Having most of the units occupied by the owners also ensures that the community will be well looked after. And flooding in some areas has been more frequent in recent years. But that doesn’t change the fact that these regulations have hit hardest those with the least ability to pay for engineering studies or increased budget reserves.

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Once again 1st-time home buyers made up almost half of the homes purchased in April.  New home buyers have been inspired by historically low interest rates and low down-payment requirements with FHA loans.  Many mortgage executives privately feared rate hikes once the Federal Reserve allowed $1.25 trillion mortgage-securities purchase program to officially expire, but conforming and FHA loan rates remain at record lows. 

The flexible FHA guidelines and aggressive lending standards set forth by the Federal Housing Administration have encourages FHA lenders to finance new home buying if the borrower can document their income.  In 2010, government home financing has taken the market-share for mortgage loans as, through Freddie Mac, Fannie Mae and the FHA, have seized almost 97% of the home financing market.  

According to FHA commissioner David Stevens “This is a mortgage market surviving purely on life support and sustained by the federal government.” Stevens spoke with passion at the Mortgage Bankers Association conference yesterday. He reached out to FHA lenders to start thinking more about the borrower and helping the mortgage industry recover rather than focusing on maxing out loan commissions.  HUD has tightened FHA loan requirements with stricter FHA guidelines that have made qualifying with FHA for challenging for borrower than it was in the past few years.

FHA lenders continue to be blessed with affordable FHA loan rates. The Mortgage Bankers Association mentions that FHA rates should remain relatively low in the short term because of concerns in Europe financial woes with debt burdens. Lower FHA rates help to reinforce demand. Despite average thirty-year FHA interest rates dipping below the 5% illustrious threshold, the MBA noted last week that the number of people seeking purchase loan applications has declined by over 27%, the most dramatic drop since May of 1997.   Read the original FHA loan article online at CNN Money >

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Last week, the House Financial Services Committee approved a request by the Federal Housing Administration to increase the ceiling on annual FHA mortgage insurance premiums from its current level of 0.55%.  FHA had requested the increase as one part of a plan aimed at shoring up its capital reserves which have dropped below the 2% required by law.  HUD already raised the up-front premium charged to borrowers closing that became effective on April 9th.  FHA says it intends to gradually raise the annual premium for FHA loans to 1.5%. 

FHA revealed late last year that its current reserves are at .53%, but officials have said that their tightened lending requirements as well as the increase in premiums would allow them to restore the levels by collecting an additional $5.8 billion over the next few years.  The Congressional Budget Office has put the number at a much more conservative $1.9 billion.  While approving the increase, the Committee defeated a proposal sponsored by Scott Garrett which would have increased the minimum down payment for insured FHA loans from 3.5% to 5%.  It also would have prohibited sellers from participating in the buyer’s closing costs and prohibited the inclusion of any initial services charges such as appraisal, inspections, and other fees in the principal amount of an FHA mortgage loan. 

The FHA has already reduced the amount that a seller can contribute to the buyer’s closing costs from 6 % of the loan amount to 3 %.  Garrett has also submitted separate legislation which would prohibit the home buyer from rolling the upfront lending cost into the mortgage which would essentially raise the money required of a borrower at closing.  Had the Garrett Amendment survived the Committee vote it could have had a considerable negative effect on the housing market.  FHA guaranteed loans have historically been a minor factor in mortgage financing, but in the last few years, as credit tightened, the FHA was forced to increase its funding efforts up to 25% of all home loans and an even high proportion of loans to first time home buyers. 

In 2010 FHA refinance loans were hindered by tighter credit guidelines and a dysfunctional appraisal process.  FHA refinance application volume has dropped significantly from the previous year, mostly because millions of borrowers have already been turned down.

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FHA offers first time home buyers a low down-payment mortgage that only require a 3.5% down payment.  According to 2010 FHA guidelines, borrowers can finance a home up to 97.5% loan to value.  I/f you want to buy a home without coming out of pocket for lender fees, FHA guidelines allow lender paid closing costs.  FHA lenders can pay for borrower closing costs but the FHA rates will be slightly higher as the closing costs are factored in.  In addition, FHA also allows gift money for FHA home loan transactions. This means that borrowers can utilize money from friends or family as the source of the down-payment.  Read the original article, FHA Ensures Affordable Financing for First Time Home Buyers on the FHA Home Loan Blog.

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In an effort to minimize lending risks, the government wants to toughen standards for lenders who offer FHA home loans. At first this may not seem like much of a concern for borrowers, but in fact if you need a loan you may well be impacted.  In a recent article, FHA Commission David H. Stevens explained how the federal government is moving towards requiring more capital to be a FHA-approved lender. “Since 1993,” says Stevens, the “FHA has required approved lenders to have a net worth of at least $250,000. To ensure that FHA mortgage lenders are sufficiently capitalized to meet potential need, effective immediately, all new lender applicants for FHA loan programs must now possess a minimum net worth of $1 million.” There will be an exception for current FHA-approved small business lenders, they’ll need a minimum net worth of $500,000.

This means that FHA lenders will pay a price if they don’t make FHA loans that don’t perform well.  It also means that FHA brokers will pay a high price for making mistakes on the loan documents. Under the new FHA guidelines, HUD can force lenders to buy back government mortgages which are not properly underwritten. If you are a small lender and the FHA wants you to buy back a few loans at $250,000, you might be out of business.

FHA Lenders in such situations face some difficult choices. If they don’t buy back the loans they’re out of the FHA loan program and that greatly limits their ability to compete for borrowers. Alternatively, smaller firms with that $250,000 in capital may not have the cash to buy back the mortgages, meaning they’re out of business.  HUD is forcing lenders to take on more risk if they are serious about originating FHA loans. Stevens says “approved lenders and applicants to FHA single-family programs must have a net worth of $1 million plus 1% of total loan volume in excess of $25 million.”  These FHA loan requirements signal that the FHA is intent on decreasing the loan default ratios and that they plan to be around for the next decade.  Read the original FHA article >

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FHA seeks to empower struggling neighborhoods with help from FHA loan program that promote home ownership and affordable mortgage payments. FHA lenders have been pushed to the limit with loan defaults and high foreclosure rates. HUD continues to increase FHA loan requirements and tighten FHA guidelines yet they say they want to assist distressed neighborhoods with better FHA loan products.  First time home buyer loans are still available with only a 3.5% down-payment.  Some states will allow borrowers to use credit from the first time home buyers tax credit towards their deposit as down payment assistance.  FHA lenders don’t expect that to last and most FHA loan programs will not approve these types of FHA mortgages.

You may be able to buy a foreclosure home from your town or county; the program helps local governments purchase vacant or abandoned properties and resell them to qualified home buyers. Home buyers do not receive assistance directly from HUD. However, NSP money can be used to help home buyers purchase primary resident real estate. Interested buyers must contact an NSP grantee for application details.  FHA loan limits will vary from county to county so check the FHA loan limits in your area or talk to a loan officer.

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FHA credit guidelines have always been more flexible than traditional conventional mortgage loans.  HUD has announced several times that they have revised the FHA guidelines in recent months.  The FHA appraisal policy has been changed a bit and the FHA streamline refinance program has been hacked at as well. 

In addition, FHA credit guidelines were revised.  Many government loan skeptics believe that FHA should require credit scores; something HUD has instituted in the past FHA loan programs. Traditional lenders mandate credit score minimums that prevent borrowers with low credit scores from qualifying.  Most FHA lenders have implemented their own credit score minimums because they don’t want to be on the hook for FHA defaults. 

HUD is cracking down on FHA lenders that violate disclosure laws and incur high default rates. HUD did announce a new loan program that required a more significant down-payment and higher insurance premium for borrowers with credit scores as low as 580.  That was nice of HUD, but let’s see if any FHA mortgage companies actually offer this low fico FHA loan.

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In a recent article the FHA Mortgage Guide reported the statistics for February FHA loan originations.  HUD released these figures and the early results indicate that this new FHA loan program looks like a hit.  This FHA loan product is on its way to insure over two million FHA mortgages in 2010. Those figures sound robust but it’s still down 29.5% from the previous year.

Many industry insiders believe that FHA will lose some of their market share because of new FHA requirements and tighter FHA guidelines. FHA mortgage rates remain ridiculously low, but most first time home buyers are having a difficult time qualifying for a FHA home loan.  Time will tell if American consumers will continue to use FHA mortgage loans for refinancing.  Rising mortgage insurance premiums and their higher credit score requirements certainly are not helping matters.

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FHA officials recently expressed new reasons to be optimistic. The FHA home loans made in 2009 tended to go to borrowers with higher credit scores than in previous years. These borrowers turned to the FHA when the mortgage market collapsed and other lending sources dried up. By then, reputable lenders doing business with the agency were already imposing tougher restrictions on FHA borrowers, further boosting the credit profile of those FHA loans. The average credit score of an FHA borrower is now 690, up from 630 only two years ago, agency officials said.  Are credit repair efforts working or are loan officers doing a better job qualifying loan applicants? Nonetheless, these higher fico mortgages are expected to result in lower losses, so FHA should make money on mortgage loans issued this year and over the next few years, according to an independent audit designed to gauge the agency’s health.

The November audit, found that the cash the FHA set aside to pay for unexpected losses had dipped to historic lows, well below the level required by law. As of Sept. 30, those reserves were estimated at $3.6 billion, down from nearly $13 billion a year earlier. The most recent figure represents 0.53% of the value of all FHA 1-family home loans far lower than the 2% required by Congress.   But Ann Schnare, a former Freddie Mac official, said the situation could be even worse. She said the audit underestimates future losses because it does not take into account all loans that are now overdue, only those that the FHA has paid claims on.  Stevens said his agency has pored over its data to analyze risk and is taking steps to shore up its financial health. “You have a limited set of options under these circumstances: Raise fees [for borrowers] or make policy changes,” Stevens said in an interview. “We’ve done both.”

The agency banned 268 FHA lenders from making FHA mortgage loans last year, more than double the total terminated in the previous eight years. The FHA suspended six other firms. Among them were some of the largest FHA mortgage lenders –Taylor, Bean & Whitaker and Lend America, both of which shut their doors soon thereafter.   The agency also proposed a rule that would require banks to hold up to $2.5 million in capital that they can use to repay the agency for losses if they were involved in fraud. Banks are now required to hold only $250,000.

Borrowers are also facing tougher scrutiny from the agency. People taking out FHA mortgage loans will have to pay higher upfront fees, perhaps as early as this spring. Those with especially weak credit scores will also have to put down at least 10% instead of the usual 3.5% down-payment. The amount of money sellers can kick in toward closing costs and other fees will also be limited.

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