FHA Loan Guide

FHA loan programs continue to soar in popularity. HUD reported that the FHA loans during the first part of August were receiving about 10,000 applications per day.  According to HUD officials, “The Federal Housing Administration was hit by increasing mortgage losses, is in jeopardy of seeing its reserves fall below the level demanded by Congress, in a development that could raise concerns about whether the agency needs a taxpayer bailout.”  Read the original article, FHA Home Loan Programs Driving Mortgage Economy online.

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According to FHA Loan Pros, the American Recovery and Reinvestment Act without the legislation would be reverted FHA loan limits back to $417,000. That would have eliminated millions of FHA borrowers, but fortunately Congress was able to include the higher FHA loan limits into their 2010 budget. FHA lending would have been scarce in many of the high-income, high-cost metro areas.  Certainly prohibiting a portion of the country to utilize FHA home financing is the last thing a struggling residential real estate market needs for recovery.

If this Congressional budget is approved, the single-family loan limit will remain $729,750 for high-cost areas in the lower 48 states and as much as $1,094,625 in Alaska, Hawaii, Guam and the Virgin Islands.

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According to a report released yesterday by the Government Accountability Office, the Department of Housing and Urban Development has left senior homeowners vulnerable to abusive FHA lending practices because of shortcomings in programs that offer reverse mortgage loans.  Reverse mortgages, which are usually backed by HUD’s Federal Housing Administration, enable seniors to withdraw equity from their homes. The senior home loan and the accumulated interest do not have to be paid back until the owner dies or sells the home. But the upfront costs are substantial.  While these specialty FHA home loans have become more attractive to seniors as the economy has soured and housing values have dropped, reverse home loans are complex. That is why the FHA has long required that the seniors take part in HUD-approved counseling sessions before these cash out refinance loans are processed. Yesterday’s report concluded that HUD “lacks effective controls” over the counseling programs.

Based on undercover participation in 15 counseling sessions, the GAO found that the counselors conveyed accurate information but none covered all of the mandatory topics and some exaggerated the length of the counseling sessions, which can be conducted by telephone or face-to-face. The report also said that seven of the 15 did not discuss alternatives to reverse mortgages, as required.   The report, requested by Sen. Claire McCaskill, also said that a limited review of reverse mortgage marketing materials found some misleading claims. Federal agencies responsible for protecting borrowers had reported few complaints. Some of the states that the GAO contacted also reported cross-selling, the practice of enticing borrowers to use their mortgage funds to buy insurance or other products that are not suitable for them. Recently enacted federal law aims to curb such practices as do some state laws.  

HUD spokesman Brian Sullivan said the reverse mortgage program has more safeguards, such as required counseling, than do private mortgage loan programs. “These existing consumer protections have contributed greatly to the success of the [reverse mortgage] program, which has provided financial security to several hundred thousand seniors,” he said.  According to the trade publication Inside Mortgage Finance in the first quarter, the FHA backed about $7.8 billion worth of reverse home mortgages, the largest amount in any quarter since the agency launched the program in 1988.

Nearly two months ago, the FHA mortgage lending announced its plans to ask Congress for nearly $800 million in taxpayer money to cover projected losses on reverse mortgages in fiscal 2010.  The losses are not related to fraud but to falling home values, HUD Secretary Shaun Donovan said at the time. That’s because by the time a reverse mortgage needs to be repaid, the value of the house could have dropped and the FHA-insured lender is left with no choice but to recoup less money than it loaned out.  Donovan said the Obama administration is requesting a subsidy instead of raising charges for seniors.

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Mortgage industry groups lowered their forecast for 2009 home loan originations by more than 25% as higher FHA mortgage rates stifle mortgage refinancing activity.  MBA estimated that FHA lenders will make $2.03 trillion in new home loans this year, down by more than $700 billion from its forecast in March.  The Washington-based group attributed $84 billion to reduce mortgage lending on home purchases.  The rest of the decline would be from fewer FHA refinance loans and “very low” volumes on an affordability loan program overseen by mortgage agencies FHA, Fannie Mae and Freddie Mac, MBA said in a statement.

FHA mortgage rates have risen from record lows since the MBA’s prior forecast as have Treasury yields, which spiked amid a flood of debt issuance needed to fund federal rescue programs.  Read the original article online > FHA Mortgage Rates Rise

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The House of Representatives passed a bill containing the long awaited rehabilitation to the FHA Hope for Homeowners loan program late last week and the Senate will likely deliberate early shortly. The mortgage relief measure are attached to H.R. 1106, a controversial home financing bill that would grant bankruptcy judges the authority to cram down borrowers’ mortgage loan balances when they file for a Chapter 13 bankruptcy. 

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Until recently, FHA has allowed cash out refinancing for homeowners up 95% loan to value if the borrowers have made their mortgage payments on time for at the prior least twelve months.  The seasonally adjusted percentage of FHA home mortgages that are 90 days or more delinquent increased to 4.11%.  The Washington Post recently that these instant defaults nearly tripled in the past year alone and more than quadrupled among FHA home refinancing.

FHA refinance loans now make up two-fifths of all the agency’s instant defaults, according to the Washington Post article, some lenders have singled out cash out refinance loans as especially risky. With conventional loans, many FHA lenders now offer cash out mortgage only to borrowers with high credit scores and significant equity in their homes.  Read the complete FHA article > FHA Rumored to Tighten Cash Out Refinancing Guidelines

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The government-sponsored mortgage giants released revisions in their loan work-outs last week.  Many mortgage servicers could be pushing as much as $200 billion of Fannie Mae and Freddie Mac home loans through new standard mortgage loan modification procedures.   However, these foreclosure prevention plans designed by the Obama administration continue to miss a large portion of distressed homeowners who are unable to qualify for traditional or FHA mortgage refinancing.  

Many of these borrowers are beginning to panic, because it’s starting to sink in, that the government is not going to finance these non-traditional bail-outs as foreclosure rates are continuing to rise among the groups of homeowners who carry the burdens of jumbo mortgage loans and bad credit scores.

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When it was passed last year as part of the FHA reform package, the Hope for Homeowners program was a federal mortgage refinancing plan designed to help some 400,000 people who now have toxic loans. In fact, the program has been a complete bust. As of January 31st, HUD figures show that there have been 465 Hope for Homeowners applications — and not one approval from the government.  Hope for Homeowners has gone nowhere because it’s complex. It requires FHA mortgage lenders to take a loss and borrowers to share profits and make big payments to Uncle Sam. While the intention is good, the program is just too complex to succeed.

Now we find an effort to revamp the Hope for Homeowners program and the betting here is that few FHA loans will result.

Under H.R. 1106: The Helping Families Save Their Homes Act of 2009, the program will become MORE restrictive if the legislation passes as it is now written. Huh? How can that help anyone?

Once again, the intention is good but the result is doomed to failure. For instance, the legislation requires that a borrower does not “intentionally defaulted on the existing FHA mortgage loans.”   Translation: If you’re stuck in an over-priced house you can’t buy a replacement home and then default on house #1. This seems logical, except that when someone applies to buy that second home they have not yet defaulted on the first house. If default comes at all, it will come later. Read more of the  article >  Is the FHA Planning to Penalize Borrowers?

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In a recent article, FHA Loan Pro’s weighed in on the HUD counseling mess as homeowners with FHA loans now have new counseling choices to consider. If you are a homeowner in default HUD counselors are not supposed to charge you. It seems that recent reports suggest something else is going on. 

In a letter to FHA mortgage lenders dated February 19th, HUD says:  “HUD had previously sent guidance to HUD approved counseling agencies indicating that fees may not be charged for clients needing homeless counseling or default counseling.   “It has come to HUD’s attention that some Housing Counseling agencies have been asking the real estate broker or agent on a short sale to provide their agency a part of the Real Estate Brokers sales commission to pay for the clients foreclosure counseling session.   “Please be advised that splitting the Real Estate Brokers fee is not a permissible funding source for foreclosure counseling, and may be a violation of RESPA as well as the conflict of interest provisions of 24 CFR Part 214. It may also be grounds for termination from HUD’s Housing Counseling program.  “HUD approved Housing Counseling agencies, their affiliates, and branches that are collecting fees from real estate agents for the referral of clients and to assist with the costs of foreclosure counseling must terminate this practice immediately.”

In 2007 HUD, under the Bush Administration, announced that “funding for housing counseling is a major concern among participating agencies. In a change in this final rule, HUD is clarifying that it will allow for participating agencies to accept funding from lenders, as long as the relationship does not create a conflict of interest and that the relationship is disclosed to the client.”

FHA Loan Pros complained about this rule loud and often and in the summer of 2008 Congress banned lender-paid counseling. In October of 2008, HUD complied with the new law and announced that “lenders can no longer pay HUD-approved counseling agencies, directly or indirectly, for counseling services through either a lump-sum payment or on a case-by-case basis.”  Read the complete article at FHA Mortgage Programs

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The government anticipates only 20,000 troubled borrowers will apply to refinance into more affordable home loans by next fall under a new mortgage relief program passed by lawmakers over the summer. The $300 billion ‘Hope for Homeowners’ program was launched October 1^st 2008.

FHA rolled out the new loan program, Hope for Homeowners loan that was designed by lawmakers eager to respond to the mortgage crisis, the Congressional Budget Office had projected it would let 400,000 troubled homeowners swap risky home mortgages for conventional 30-year fixed rate loans with lower rates. 

But according to the Federal Housing Administration, the early results are discouraging: the government received only 42 applications in the program’s first two weeks. The low turnout was first reported by the industry newsletter Housing Wire. Since the FHA loan applications take about 60 days to process, no home loans have been approved yet.  The FHA Loan Blog believes that the mortgage lenders are holding up the program with their guideline tweaks, like higher credit scores.

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Nancy West, a marketing and outreach specialist at HUD’s Santa Ana, Calif.-based office, said there are companies making solicitations with the claim that non-approved originators can do FHA mortgage loans and get paid for them. “I’m here to tell you [that] you cannot,” she said, adding it creates unfair competition with originators who do things properly.

Among the features of the FHA mortgage program is that no credit score is required and that manual underwriting is permissible. However, Ms. West said, there are FHA mortgage lenders who are imposing stricter guidelines. FHA cannot control that, she said. There are those that do not have stricter requirements. If a correspondent only works with a mortgage lender who only uses automated underwriting, they need to be aware there are FHA loans that the system will never approve. Ms. West suggested having an alternative sponsor who manually underwrites.

While the qualifying ratios for FHA loan programs are normally 31% and 43%, Ms. West said there have been loans approved with a backend ratio as high as 68%. It is important that the originator know what program is best for the customer, not only among the FHA offering but the programs at other federal agencies as well, she said. Among the bogus information being given out by lenders is that the borrower must take the property out o a living trust. That is not true, Ms. West said, noting that taking the property out of trust could trigger legal issues.

FHA loans can also be used on manufactured housing as long as it meets agency requirements. “We are the game in town for manufactured housing,” she said. HUD needs mortgage brokers’ help to get the word out about changes in the program to Realtors, who are not aware of items no longer required to be fixed, such as missing handrails, cracked window glass, minor plumbing leaks, poor workmanship and defective floor coverings.

The temporary loan limit increase expired on Dec. 31. Ms. West suggested that mortgage brokers and loan officers keep on top of sponsors to ensure their loans are approved by the deadline. As for the Hope For Homeowners program, while Ms. West said the parameters make certain that only a small number of borrowers are eligible for, there are some benefits. “It is a tool and we will be able to help some folks with it, but it is not a cure all.” The borrower gets to keep a home he or she can no longer keep. They are not paying to make FHA money, only what they owe. Most of the originators of these loans are servicers. The originator is allowed to charge one point only; no administrative or add-on fees allowed. “I’m not saying don’t do it, but don’t make it your meal ticket,” said Ms. West.  Article Written By Brad Finkelstein.

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Yes credit is tight and potential home buyers might think they need a significant of cash or a superlative credit score to wade into the devastated housing market. FHA eliminates some of the lender risks to provide mortgages because it will pay a claim to the lender in the event that a homeowner defaults on their loan. 

Until 2008, FHA loan programs were capped so low that the program was out of step with the real price of a house. But in February 2008, the FHA loan limits in the high cost housing markets rose from $362,750 to $729,750.  But in 2009 the FHA mortgage limits are being down-sized again.  FHA announced the new ceiling in the high cost markets will be $625,500. FHA loans in 2009 will cap out at 115% of the median home price in a county or metropolitan area. Still, huge swaths of the housing market will remain, as never before, eligible for an FHA home mortgage.

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o    FHA home loans can only be originated from a FHA-approved mortgage lender.

o    Down payment requirements are minimal. Buyers need only 3.5% of the house’s price tag.

o    The down-payment can be a gift from a family member, employer, local charity, or local government program.

o    FHA loan programs enable all ranges of credit scores with compensating factors.

o    You must have a 2-year employment record. The new FHA loan payment must be less than 31% of your income, and debt to income ratio is usually less than 43% of your income.  Read the complete article at >

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In most cases, FHA home loans are more flexible than conforming mortgage lenders regarding credit qualifications and home equity requirements for purchasing or refinancing. In fact, FHA loan guidelines enable borrowers with bad credit scores to re-establish their credit:

• Must be at least 2 years since the bankruptcy was discharged 
• All judgments must have already been paid
• Tax liens must been satisfied or appropriate arrangements
• Must be at least 3 years foreclosure or a deed-in-lieu has been resolved

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The 203k FHA mortgage is a unique loan that enables a new homebuyer to finance the purchase and rehabilitation of a house in the same home loan.  A part of this FHA loan is used to pay off the seller and their mortgage lender.  While the remaining FHA home loan amount is wired to an escrow account set up to fund the home remodeling and rehabilitation.

HUD has specific guidelines for these FHA home improvement loans have follows details:

• The house must be at least twelve months old. 
• The cost of rehabilitation must be at least $5,000, but the total property value including the cost of repairs – must fall within the maimum limit for FHA loans. 
• The 203(k) FHA loan must follow many of the 203(b) eligibility requirements.  

Talk to a FHA mortgage lender about specific home improvement plans, contractor structural guidelines and your eligibility as a borrower.

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To get a mortgage now, you’ll have to make a down payment and document that you have the income and reserves to make your mortgage payment, run your household and still handle unexpected expenses.  Subprime mortgage loans that were offered to borrowers with questionable qualifications during the housing boom have dried up because lenders — and the investment firms that bought the mortgages — can no longer count on appreciating home prices to bail out bad loans. Now FHA mortgage lenders and brokers must play by the rules of Freddie Mac and Fannie Mae, which guaranteemortgages that meet their criteria so that home financing investors will want to buy them in the secondary market.

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FHA mortgage loans are backed by the Federal Housing Administration have also regained favor as an option, not just for credit-challenged borrowers for good credit borrowers looking for low down payments.  The FHA loan programs gave Kyle and Tracy Spear of Swampscott, Massachusetts, north of Boston, an opportunity to buy a larger home with less of a down-payment. Last summer, the couple had planned to subdivide their property in Boston and sell the home plus a separate lot. But the city and their neighborhood nixed the subdivision, and they ended up netting just $15,000 on the sale. For two months, Kyle, 38, Tracy, 37, and their three boys — Kyle, 4; Tyler, 2; and Jack, 11 months — lived with friends and family to save money until they found their next home, a 2,800-square-foot house with four bedrooms that cost $540,000. They qualified for a thirty-year jumbo mortgage loans with a fixed rate of 6.875% backed by the FHA. And because the FHA required a down payment of only 3%, they had to put down just $16,000.

Prove it. The days of “Take my word for it” are over, and stated-income loans, are very difficult to find. Lenders will ask you for at least two months of financial account statements, two years of tax returns and even verification from employers that overtime, commission or bonus income will continue.

FHA mortgage lenders are also scrutinizing more carefully the ratio of your debt to income. Beginning February 1, 2009, Freddie Mac is imposing a limit of 45% of all pretax income for all debt; borrowers with a credit score of 740 or better will get the best rates. The FHA refinance guidelines are even tighter: Mortgage debt may not exceed 31% of your income, and total debt can’t top 43%. The FHA doesn’t impose a credit-score threshold.

Home loans with no down payment, or those that combine first and second mortgages, such as the 80-20, are also gone. Home mortgages backed by Fannie and Freddie require a minimum down payment of 3% to 5%. The bigger your down payment and the better your credit score, the better your interest rate. If you put less than 20% down, you’ll pay private mortgage insurance, or PMI.  But here is something to consider; If home prices have been falling in your area, you may not be able to get PMI, and if you can, you’ll have to ante up 10% to 15% for a down payment.

Congress has authorized the FHA, which relies on its own program of mortgage insurance, to take up the slack in declining markets, says Meg Burns, director of the FHA’s Office of Single-Family Program Development. The FHA can insure loans up to the same amount as Fannie and Freddie. Beginning January 1, the limit is 115% of a metro area’s median home price, up to $625,500, and the minimum down payment is 3.5%, up from 3% in 2008. FHA mortgage loans have become reasonabbly affordable.

According to HSH Associates, at the beginning of November the national average rate on a 30-year fixed-rate loan was 6.4%. FHA home loans had a 6.7% mortgage rate; the expanded jumbo interest rate was 6.8%, and the traditional jumbo mortgage rate was 7.9%. Adjustable interest rate FHA home loans didn’t offer much of an advantage: The interest rate on a 5/1 ARM was 6.4%, and on a one-year ARM it was 5.8%.  Read the complete article >.  

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FHA loan programs continue to support the brunt of the mortgage product that focus on refinancing homeowners facing foreclosure.  The FHA Secure looked great on paper in 2007 when HUD rolled it out, but very few lenders offered the product to the borrowers who needed.  HUD just rolled out the Hope for Homeowners product and hopefully these FHA loans will provide the mortgage relief to the millions of homeowners who need to refinance or get a loan modification that provides an affordable monthly payment.

In a recent Reuters article, a congressionally appointed panel that oversees the Treasury Department’s $700 billion financial rescue fund is expected to release a report on Wednesday highly critical of how it has been handled, The Wall Street Journal reported on Tuesday.  The Journal, citing people familiar with the matter, also said the panel would push the Bush administration to act more aggressively to prevent foreclosures.  The newspaper said the oversight report due on Wednesday is not expected to contain new findings. It said a draft of the report posed 10 questions, pressing officials for a clearer strategy and asking whether there is sufficient accountability and why more has not been done to prevent foreclosures.  Elizabeth Warren, the Harvard University law professor who heads the congressional oversight panel, is scheduled to testify before the U.S. House of Representatives Financial Services Committee on Wednesday and is expected to discuss the report.

Rep. Jeb Hensarling, a Texas Republican who opposed the financial rescue bill and also serves on the oversight panel, said in a statement he could not sign the report. “In my role on the TARP (Troubled Asset Relief Program) panel, my top three goals are to ensure that the program works, to ensure that decisions made are based on merit and not political considerations, and most importantly, to ensure that taxpayers are protected,” Hensarling said.  “I am hopeful that the oversight panel will eventually be an effective vehicle for these goals to be met but thus far the jury is still out on that,” Hensarling said.  Caleb Weaver, a spokesman for the oversight panel declined to comment on the Wall Street Journal’s report.

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Mortgage refinance loan activity has peaked at an all time high over the last six years due to rising home values and low interest rates.  The FHA Refinance program is designed to provide an FHA alternative to the commercial products currently being offered to homeowners with substantial equity in their homes.  The purpose of these FHA home loans is to take out a new mortgage that provides cash left over after the old home loan has been paid off.

The FHA loan requirements demand that the applicant for a cash-out refinance loan has occupied the premises for at least twelve months and that payments on the existing home loan have been on time for at least one year. Cash-out refinancing cannot be more than the FHA loan limit for the area of the house being refinanced.  The other limit to the amount of a refinance loan may come from the mortgage lender.  Many of them limit total indebtedness on a property to 80% of its present appraised value.  That means your new mortgage, plus any other mortgage liens you have against the property, cannot total more than 80% of the home’s worth.

If there is a second mortgage on the home, it must be subordinated to the new FHA mortgage loan.  The homeowner will have to meet the mortgage lender’s requirements for ability to pay on both mortgages; generally that means the loan applicant must meet the lender’s cap on mortgage payments in relation to total monthly debt.  All borrowers must meet certain credit requirements on these loans, and any co-signer on the cash out refinance loan must also be owner occupied on the property.  These FHA mortgage loans are limited to homes with a maximum of two living units. 

The credit requirements are generally those set forth by the FHA mortgage lender.  Because most traditional home loan lenders have tightened up their requirements recently, it is going to be important to shop for a loan with both a decent interest rate and reasonable credit requirements.  A few lenders still allow bad credit mortgage loans with the FHA lending guidelines, but usually they have a significant amount of equity and positive compensating factors.

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