FHA Loans

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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It’s about to get more difficult to qualify for a FHA home loan, often considered the replacement loan for the collapsed subprime market.  Moving to head off the financial impact of defaulting borrowers, the FHA is adding more-stringent lending requirements and higher fees borrowers must pay to get the federally-insured loans.  The announcement comes on the heels of an investigation into 15 FHA lenders with high incidences of FHA mortgage insurance claims. The same companies have reached out for government assistance money from taxpayers.

Mortgage insurance is paid by borrowers, typically when the down payment is lower than 20%. FHA Borrowers pay, but the coverage protects lenders with cash benefits should the borrower default. When lenders foreclose against homeowners with the coverage, it triggers mortgage insurance benefits for lenders to help pay off the mortgage.

Rick Sharga Vice President of ReatyTrac says foreclosures were up 21 % from a year ago and 120 % from two years ago and it could get worse.  The FHA is more exposed to defaults than ever. By some estimates, as much as 50 % of all purchase loans in some areas are FHA insured. Before the housing collapse, FHA wrote only 3 % of all home loans. After notice and comment periods, but beginning this spring, the FHA will raise mortgage insurance fees that borrowers must pay, cap the amount of cash that sellers can contribute for closing costs and require higher down payments for the borrowers with poor credit scores.

• The new upfront FHA loan premium will cost borrowers 2.25 % of the loan amount, up from the current 1.75 % and the second increase in the past two years. The upfront premium can be rolled into the loan. Later, some of the cost increase could be added to a borrower’s additional annual mortgage insurance premium which is paid monthly.  “Increasing the insurance premium on FHA loans is simply a reflection of the substantial risk the administration has taken on in recent years,” says Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.

• New borrowers must have a minimum FICO credit score of 580 to qualify for FHA’s 3.5 % down payment loan, otherwise the borrower must put 10 % down. Most lenders require a minimum credit score of about 620. A credit score is a numerical rendition of a borrower’s creditworthiness. The higher the score, the better the credit and the better likelihood of qualifying for the least expensive loan.   “The absence of equity in their home has become a key predictor of a borrower defaulting on their mortgage payment in this distressed market. Requiring a greater down payment should be the first step towards more prudent underwriting and lending practices,” Osborne added.

• Sellers will only be able to contribute closing costs that amount to 3 % of the sale price, half the current 6 %. Experts say the higher maximum encouraged borrowers to mark up the price to compensate for their concession.

The value of the FHA’s reserves, $3.6 billion is down from 3 % a year ago and an amount that’s far below the amount required by Congress.  Late last year FHA proposed stiffer rules for lenders to also reduce its risk — that lenders to have a net worth of at least $1 million in the first year and $2.5 million within three years, up from the original requirement of $250,000. The federal agency also wants tighter approval requirements and greater liability for lenders and mortgage brokers who want to originate, underwrite or service FHA.  Even with the higher fees, tougher underwriting, and lender crackdown, it’s not going to be easy rebuilding reserves in a hung over housing market.  The FHA’s move could further exacerbate conditions for the housing market, by removing some low-down payment loans that were allowing new buyers to buy and others to refinance their way out of foreclosure.

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Americans have grown accustomed to FHA loans for purchasing and mortgage refinancing.  A recent Bloomberg article highlighted new obstacles for Homebuyers seeking mortgage refinancing to take advantage of FHA loan program.   Borrowers will now have to put down additional funds in some cases as officials look for ways to shore up finances at the Federal Housing Administration.  FHA loan defaults have sky-rocketed over the last few years because of the economy and lack of mortgage loan products.

HUD secretary Shaun Donovan told reporters “Down payment is one of the elements we’re looking at.” Donovan continued, “A second is the upcoming mortgage insurance premium and then additional money that needs to be brought to the table.”

The FHA is also considering cutting the amount of home seller concessions a buyer can receive by half to 3% of the purchase price to combat inflated appraised home values.  The minimum credit scores required for borrowers may also be raised, and the guarantee fees charged to lenders may increase, Donovan said.   “We have made the decision to exercise our authority to increase the up-front cash that a borrower has to bring to the table in an FHA-backed loan, to make sure that FHA borrowers have more ‘skin in the game,’” Donovan told the committee.

HUD, which oversees FHA, will provide details in January, he said. Some FHA guideline changes may take affect in the first quarter while others, like raising annual insurance premiums, need congressional approval and will take more time, he said.

The National Association of Realtors said FHA must be careful not to raise costs too high for borrowers and constrict access to credit. “Requiring a larger down payment will make homeownership out of reach for many families and for others could deplete their cash reserves for home and other emergencies,” said Vicki Cox Golder, an Arizona Realtor and president of the National Association of Realtors, which represents the industry from Washington.

The FHA mortgage lending continues to struggle as mortgage insurance reserves fell to the lowest level in history last fiscal year and the government said more steps are needed to shore up the agency that guarantees one of every 5 single-family loans. The insurance fund tripled in size last year and has taken on more risk as private industry sources for lenders to finance and insure home loans dried up and mortgage default rates rose to record highs.

FHA’s net capital ratio, or reserves after accounting for projected losses, fell to its lowest level on record, 0.53%, in the year ended in September, from 3% in fiscal 2008 and 6.4 % in 2007, according to an annual review released last month.

FHA, along with federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, accounted for more than 90% of all U.S. mortgage loans in the first half of this year.

The agency may raise the up-front insurance premiums of 1.75% that it charges FHA lenders to guarantee the loans, Donovan said. The agency is seeking permission from Congress to increase its annual insurance rates as well, which will raise FHA home loan costs for consumers, Donovan said.

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What is a FHA home loan? Why are FHA mortgage loans so popular? Aside from food, there is no greater necessity than having shelter. Everyone wants a home. In this life, living from rented room to rented room or rented apartment to rented apartment is quite demoralizing. Everyone needs the security of having their very own house to come home to. When a place is rented, there is not enough sense of security because one does not own the place he or she is living in. Security is especially important especially for the people who have families or a family to take care of. Rent is also a drain on income without a return of investment. Having no home is even worse if one was kicked out through foreclosure and is jobless. The bad economy has done this to many families already. Those people who lost their jobs and as a result got their homes foreclosed have it so bad. It is very traumatic. This is why the FHA housing loan is so popular, because so many people need loans even if their credit is not perfect and even if they have low incomes.

The government created the Federal Housing Authority to help the people during the great depression. It was tasked to give those in bad financial situations a chance to get a loan for their own house. And now that the United States economy is starting to get into another bad depression, President Barack Obama created a bailout fund to fuel and strengthen the Authority to perform even better. There are much lower interest rates and easier ways to get accepted for an FHA loan right now because the government understands how a lot of people have bad credit not through any fault of theirs. With conventional loans, having a credit score that does not shine with perfection will get the loan application denied. Also, with conventional loans, having low income will automatically grant one a denial. But this is not true for FHA loans.

One also has to understand that the FHA does not use government tax funds to serve as the mortgage principal. No, the loans are actually from the accounts of banks and private lenders that were approved to give these FHA loans. What the FHA does is that it pays for the loans insurance, thus making sure that the lender will not be at much risk when lending money. The government in short will pay for the loan if the borrower cannot. This is why the lenders can give the loans away at such lenient conditions.

One must also know that FHA loans differ from each lender. So one should go shop around for the lender that gives the best deal that fits perfectly in the borrower’s situation.

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An FHA (Federal Housing Administration) refinance can be a great option for people in various scenarios. There are two types of FHA refinancing loans: 1.) cash out refinancing and 2.) streamlined refinancing. In either scenario the home owner must have some equity in their home to be able to participate in such a plan. In addition, they must also use the home as their primary residence to qualify for the refinancing. Refinancing allows a person to benefit from the investment they made on their home allowing help in many different stages of people’s lives. Some use the FHA loans for cash out refinances in an effort to send their child to college, while others use the money for home repairs. Other examples of how the loan can benefit someone are special vacations, and even consolidating other bills.

FHA refinancing differs slightly from conventional refinancing loans. A person’s income and credit will be viewed more leniently or not at all with an FHA refinance. FHA refinance loans allow bad credit refinancing. FHA guidelines evaluate the “big picture” of the borrower’s credit history, so if there are isolated incidents of credit problems, they are often over looked. The credit qualifying guidelines are also much more relaxed with a FHA loan even with past bankruptcies and foreclosures.

The fees will also be lower with a FHA refinance loan including closing costs and private mortgage insurance (PMI). Closing costs are regulated with FHA loans so the bank cannot charge an excessive amount to the homeowner. When you are shopping FHA loans, always compare the fees in the disclosures when deciding on a FHA lender.

In cash out refinancing FHA refinance the home owner usually has a home that has increased in value. The refinance can take place if the home owner purchased the home a year or more ago. They are able to take out the refinance loan for more than what they owe on their home (up to 85% of the appraised value of the home plus closing costs), so they can pay back their original mortgage, end up with a new mortgage and have money to spare. The extra money is actually the equity that the homeowner has built up over the years in their home. After their equity has basically turned into money, they can use it for the needed use at the time.

With a FHA streamline refinancing loan the current mortgage’s interest rate can be cut without an appraisal in most cases and with minimal paperwork. Credit checks and job verifications are not looked at to qualify for these loans, but the existing loan on the property must be an FHA mortgage, the refinance must decrease the homeowner’s monthly interest payments and the loan has to be in good standing (no late payments within the last year). The streamlined refinance does not have the option of receiving cash. Its best purpose is to lower someone’s monthly expenses.

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