You don’t need to have an FHA mortgage to refinance with FHA. And the fact that you only need 3.5% home equity is a compelling reason to consider this refinancing option. For those with conventional loans, FHA refinancing may be better than paying Fannie and Freddie’s risk-based pricing adjustments. But FHA also has its costs (and they’re going up soon).

FHA, Traditional, or HARP Refinance?

The refinancing choice best for you depends on your credit rating and the amount of equity you have. Regardless of your equity, FHA requires a mortgage insurance premium (MIP). There is also a monthly charge for most loans. If you have at least 20% equity and excellent credit, a conventional refinance is your least costly alternative. And if you don’t have at least 3.5% equity and your current mortgage is owned / serviced by Fannie or Freddie, than the HARP is your only choice. It’s those who fall between these extremes who have to carefully evaluate before choosing a refinance option.

HARP Highlights

If you originally bought your home with at least 20% down, and now you have less than 20% home equity due to decreasing home values, a HARP is worth a look. If you didn’t need mortgage insurance on your original mortgage, you don’t need it on your HARP loan, even if your mortgage balance exceeds your property’s value. If you have low-to-middling credit scores, a high loan-to-value ratio, and / or other monkey wrenches like a manufactured home or condo, HARP may be better than traditional financing — there is a 2% cap on fees, while normal refinances can have much higher surcharges depending on the strength of your application.

HARP Doesn’t Always Sound Good

HARP has its drawbacks — borrowers have reported that lenders take a very long time to process them and interest rates can rise while you’re waiting. In many cases you are stuck with your original lender and while it has you captive it doesn’t necessarily offer you the best rate. And often mortgage insurance is very difficult to come by.

FHA Advantages

If you have at least 3.5% equity in your home, FHA’s refinance might be a better deal. First, its credit underwriting standards are less rigorous than Fannie Mae’s and Freddie Mac’s. Second, even though there is an MIP required, you are allowed to finance it, and that amount isn’t included in your loan to value calculation. Third, you can shop for your loan and choose the most competitive provider.

Here’s an Example

Supposing you originally bought your $300,000 condo by putting 10% down, and your property value dropped to $285,000, so that you now have 5% equity. Your current interest rate is 6.25% and your credit score is 659. What’s better, HARP, FHA, or a Fannie Mae refi? Let’s have a look.

FHA Costs

On a $270,000 FHA mortgage, your costs are:

Upfront MIP 1.75% (increases to 2.25% in late spring / early summer 2010) $4,725
Monthly MIP of .5% or $113 a month
Assuming 2% normal closing costs and a 5% interest rate, your APR is 5.72%

HARP Costs

Same $270,000 mortgage, costs are:

Loan Level Pricing Adjustments (LLPA) 2% $5,400
Monthly Mortgage Insurance at .94% (higher if you live in a soft real estate market) = $212 per month
Assuming 2% normal closing costs and a 5% interest rate, your APR is 6.08%.

Regular Fannie Mae Refi

Loan Level Pricing Adjustments as follows:
Adverse market delivery charge: .250%
Credit score: 1.75%
Condo: .75%
Total: 2.75% or $7,425
Monthly Mortgage Insurance at .94% (higher if you live in a soft real estate market) = $212 per month
Assuming 2% normal closing costs and a 5% interest rate, your APR is 6.15%.

So when looking at refinancing, consider FHA, even if your current mortgage is not an FHA loan. Try several lenders and compare their Good Faith Estimates for fees and APRs. And do it quickly, before FHA increases those insurance premiums.

Beginning February 1, FHA made it a little easier for cash-strapped wanna-be buyers, property investors, and communities hard-hit by foreclosures by suspending its anti-flipping prohibition. What’s an anti-flipping prohibition? FHA would not insure a mortgage on property that had been owned by the seller for less than 90 days.

FHA’s Stance on Home Selling Gymnastics

The reason FHA has historically refused to insure mortgages on flipped properties is that this activity was the MO of major scamming dirtbags. Dirtbag A would snap up a cheap, ugly house, do a little cosmetic work on it, and resell it quickly for a lot more money to Dirtbag B, who was a partner in the crime. The house would be flipped repeatedly over several months until its price was unrealistically high.

Eventually they’d unload the house on some unsuspecting dupe who would take out an FHA mortgage with a low down payment. Of course, the buyer who had little investment in a totally overpriced house would bail on the mortgage and FHA would take a fat loss.

Today, Things Are Different

Today’s foreclosure crisis has spelled disaster for many hard-hit communities, but could mean opportunity for those looking for affordable homes and for the knowledgeable investors who sell them.
The idea is to avoid fraud while speeding up sales of affordable renovated houses to buyers.

Why Is 90 Days Such a Big Deal, Anyway?

Investors who fix up and resell foreclosures say it’s a very big deal. The longer they hang onto property, the more it costs them. Many properties can be rehabilitated and put on the market in a month or two. But in the past, the most likely buyers for these homes couldn’t use FHA financing, and would have to come up with at least 10% down with a conventional lender or buy something else. Often, they opted to buy something else.

Without the 90-day rule, foreclosed properties are more attractive to investors, which stimulates foreclosure sales, and increased demand supports the housing market.

How Can FHA Thwart the Dirtbags?

The new rules don’t allow conflicts of interest among anyone involved — all transactions must be arm’s-length. In addition, price increases between the time the investor acquires and sells the property must be reasonable and justifiable — generally, the limit will be 20% unless the seller can thoroughly document the renovation expenditures to justify the hefty price increase. Like, the place was built on a toxic waste dump, there was a meth lab in the garage, and the owner kept 50 cats in the bedroom. That would require some serious rehabilitation.

For buyers, communities, and investors, FHA’s new stance on flipped houses is a big win-win.

For all the talk of failures, the FHA mortgage program is expected to generate $6 billion in profits during the 2011 fiscal year, a period which begins October 1st.

Looking at the budget for the coming year, HUD says it “will reflect $6 billion in profit for the FHA, generated thanks to the FHA reforms announced last month by FHA Commissioner Stevens. Those policy changes will strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities and support the nation’s housing market recovery.”

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The Washington Post reports that “whether the housing market is ready or not, the government is pulling out.”

According to the paper, “the wind-down of federal support for mortgage rates, set to end in two months, is a momentous test of whether the Obama administration and the Federal Reserve have succeeded in jump-starting the housing market and ensuring it can hold its own. The stakes for the economy are massive: If the market again falls into a tailspin, homeowners could face another wave of trouble, and it would deal a body blow to President Obama’s efforts to get the economy on track.” (See: Stakes are high as government plans exit from mortgage markets, January 25th)

I’ve been wondering about this since the article appeared last week and my general conclusion is: You’re kidding.
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It was just two years ago that Congress voted to dump downpayment assistance plans (DPAs) for FHA mortgages.

In basic terms, with a DPA a buyer seeks to purchase a home but lacks cash for a downpayment. The seller provides the money plus a smaller fee to a non-profit group and then group then turns around and gives the buyer enough money for the downpayment. Since the cash comes from a nonprofit group the grant was allowed under FHA rules.
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HUD has just introduced a new loan modification concept, one which private-sector lenders might want to duplicate.

Under the plan, HUD does not want FHA mortgage borrowers to first get in trouble and then seek modification. Instead, HUD has a smart idea: Why wait? If you see you’re running into trouble let’s try to do something before things get worse? In other words, even if you’re now making your FHA loan payments, if you’re not delinquent, you may still qualify for help.

The Early Relief program outlined by HUD works this way:

If you’re facing “imminent default” and your monthly payment is current or less than 30 days past due, then you may qualify for early relief in the form of a forbearance agreement, an agreement to postpone, reduce or suspend payment(s) for a short period. The HUD says the new FHA guidelines will offer three forms of forbearance: informal, formal or special.
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Policy changes announced by HUD yesterday, Wednesday January 20, are expected to be implemented in the early summer and late spring of 2010. The changes will require borrowers to pay more for mortgage insurance, and borrowers with poor credit scores will have to come up with much bigger down payments. If you think you may be adversely affected by these changes, act now to become eligible for the best mortgage terms when buying or refinancing a home through FHA.

FHA Home Loans Will Be More Expensive, Harder to Get

Federal Housing Administration (FHA) Commissioner David Stevens recently announced several policy changes to bolster the agency’s financial position, enabling it to continue to support home ownership for borrowers with limited means and help facilitate the nation’s real estate market recovery.

What Are the Key FHA Changes?

If you plan to buy or refinance a home through FHA, these are the changes that could affect you:

What Can You Do?

A study by the Department of Housing and Urban Development found that borrowers who bring more money to the closing table are far less likely to default on their mortgages. These changes are FHA’s way of keeping financing available while beefing up its reserves and minimizing risk. But if you’re one of those who will be affected by the changes, what can you do?

FHA’s new requirements could be thought of as burdensome, but if complying with them forces you to adopt better debt management practices and save money, your new habits could make you better off for the rest of your life. Someday, you may even want to thank FHA.

The FHA is raising its mortgage insurance premium and taking other steps to boost revenue and reduce risk.

In a telephone press conference with reporters this morning, FHA Commission David H. Stevens announced a series of changes which will both boost borrower costs while increasing funds to help bolster FHA reserves.

1. The FHA mortgage insurance premium (MIP) will be increased from 1.75 percent to 2.25 percent. This change will likely be officially announced tomorrow in a letter to mortgage lenders, however the higher fees will not go into effect until the Spring. IMPORTANT: If you want an FHA mortgage it will be cheaper to get it now rather than in a few months.

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In an effort to stimulate home sales, HUD has announced that as of February 1st it will suspend its 90-day anti-flipping rule. This should have the effect of making FHA loans more easy to obtain for recently refurbished homes.

With certain exceptions, says HUD, “the FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.”

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In little-noticed testimony last month HUD Secretary Shaun Donovan laid out the grounds for a new FHA, one which would make lenders more responsible for the FHA loans they originate.

“We will step up efforts to ensure lenders assume responsibility for any losses associated with loans not underwritten to FHA standards,” said Donovan.

“We will hold lenders accountable for their origination quality and compliance with FHA policies, increasing our review of mortgagee compliance with FHA program requirements.

“And we intend to expand enforcement for new loans as well. That includes requiring lenders to indemnify the FHA fund for their own failures to meet FHA requirements, and holding lenders accountable nationally for any improper activities, as we are presently limited to sanctioning individual branches.”

Reading between the lines, what Donovan is saying is this: If you’re a lender and use a mortgage broker to sell FHA loans that’s fine — but if the mortgage broker does something wrong the lender will be responsible and may be forced to pay off any FHA losses.
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HUD has published a new Shopping For Your Home guide for consumers and it could not be more blunt when it comes to private-sector adjustable-rate mortgages.

“Two of the most common types of mortgage loans are fixed-rate mortgages and adjustable rate mortgages. The interest rate on a fixed-rate mortgage will remain the same for the entire life of your loan while the interest rate on an adjustable rate mortgage (ARM) may adjust at regular intervals and may be tied to an economic index, such as a rate for Treasury securities. When the interest rate on an ARM adjusts it may cause your payment to increase.”

Notice the expression, ARMs MAY cause your payment to increase? Not WILL cause your payment to rise, or ABSOLUTELY WITHOUT A DOUBT your payment will shoot up, but perhaps, maybe the payment may rise.

HUD then says this:
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It was in mid-December when the National Association of Realtors released some interesting figures: FHA loans accounted for the financing used by 39 percent of all recent buyers while the number of first-time home buyers continued to climb to 51 percent.

“FHA helps provide affordable mortgage financing to homeowners, particularly first-time home buyers who are so important in drawing down inventory to help stabilize the current housing market,” said NAR President Vicki Cox Golder. “These recent survey results reaffirm that, despite its current challenges, FHA is a critical part of the American housing fabric.”

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HUD released a new directive for lenders which says they may charge more than a 1% origination fee for most FHA loans, those made under the 203(b) program.

Think of it as a holiday gift for lenders.

According to the HUD announcement, the FHA “no longer limits the origination fee to 1 percent of the mortgage amount for its standard mortgage insurance programs. However, both Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance Programs retain their statutory origination fee caps.”

So how much can lenders charge?

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The past year has been a wonder of low mortgages rates. The weekly reports from Freddie Mac have generally shown that rates for 30-year fixed-rate loans have hovered at or below 5 percent. In fact, in December mortgage rates actually reached 4.71 percent with .7 points — an interest level that ought to make a lot of people very happy.

The catch is that we don’t know if similar rates will be available in 2010. The view here — for what it’s worth — is that not only will rates be higher, they must increase. Here’s why:
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During the past few days there have been interesting — if somewhat conflicting reports — which suggest that home prices in some areas have begun to stabilize and perhaps even rise.

First up, we have the National Association of Realtors which reports that “the national median existing-home price4 for all housing types was $172,600 in November, which is 4.3 percent below November 2008. Distressed properties, which accounted for 33 percent of sales in November, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes in the same area.”

Next, the Federal Housing Finance Agency tells us that “U.S. house prices rose 0.6 percent on a seasonally adjusted basis from September to October.” As well, says the agency, “the previously reported 0.0 (zero) percent change in September was revised to a 0.4 percent decline. For the 12 months ending in October, U.S. prices fell 1.9 percent. The U.S. index is 10.8 percent below its April 2007 peak.”

Lastly, we have an NAR report which says that “during the third quarter, 123 out of 153 metropolitan statistical areas2 reported lower median existing single-family home prices in comparison with the third quarter of 2008, while 30 areas had price gains.”
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