In a delay that will cost borrowers big money, HUD has told lenders that “that for the first four months of 2010, the staff of the Mortgagee Review Board (MRB) will exercise restraint in enforcing new regulatory requirements under the Real Estate Settlement Procedures Act (RESPA), due to take full effect on January 1. The MRB instructed its staff to exercise such restraint in considering an action against FHA-approved lenders who have demonstrated that they are making a good faith effort to comply with RESPA’s new requirements.”

In case you’re worried about FHA mortgage lenders being somehow unable to meet the new RESPA requirements, HUD notes that the new rules actually “became effective on January 16, 2009, but provided a one-year transition period for the mortgage industry to incorporate these changes.”
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The Federal Housing Administration (FHA) insures 685 billion in home loans; the US Congress mandates that FHA maintain cash reserves equal to two percent of this amount. Current reserves held by FHA total about one-half percent, or $3.6 billion. Against the backdrop of government bailouts to Fannie Mae and Freddie Mac, this news is particularly grim for bail-out weary taxpayers. There may be good news on the horizon.

FHA Market Share Growth May Re-pad Dwindling Reserves

As sub-prime lenders fell by the wayside, homebuyers of modest means turned to FHA loans, which are currently the premier source of home financing for those who can’t pay 10 to 20 percent down plus closing costs for buying a home. Low mortgage rates are enabling more moderate income buyers to qualify for home loans, and these buyers are turning to FHA. The agency insured approximately $360 billion in mortgage loans during fiscal 2009, about five times more than it insured during fiscal 2005. The burgeoning numbers of new FHA home loans,and consequently, the increase in FHA mortgage insurance premiums collected from homeowners, should help rebuild depleted reserves. The question is, how can FHA meet its mission of providing accessibility to home ownership to those who cannot qualify for conventional mortgage loans without losing it all by making risky loans?

FHA Loan Requirements: Time to Reconsider?

The current problems facing the FHA stem from risky loans made under FHA loan requirements that provided home loans to large numbers of homeowners who defaulted on their loans. Whether these borrowers fell behind on payments because they couldn’t afford it at all, or defaulted due to harsh economic conditions is unknown. FHA loan requirements may be too lenient, but what happens to housing markets if FHA guidelines are rewritten to exclude large numbers of home buyers? On the other hand, the US government cannot continue to supply bailouts to dysfunctional private and public entities that can’t survive without billion$ in bailouts.

FHA: Balancing Homebuyer Needs with Responsible Lending

If FHA needs a bailout, it’s reasonable for Congress to attach mandates for review and revision of FHA loan requirements. The elephant in the room remains; with unemployment levels at 10.2 percent and expected to grow, many more FHA insured loans may fail as borrowers lose their jobs and/or exhaust their resources paying for homes they can neither afford nor sell in today’s depressed markets. FHA’s long term solvency could largely depend on the success of government sponsored modification and refinance programs designed to prevent foreclosure, but these programs won’t help those who cannot meet income requirements. Until the US job market improves, FHA will likely continue to absorb mortgage loan losses caused by foreclosure.

As universally predicted, the FHA says that its capital reserves have fallen during the past year and are now less than 2 percent of the mortgage insurance the program has in force.

However, it appears that many headlines do not reflect what HUD actually had to say about the program. Yes, the capital reserve has fallen to $3.6 billion — BUT there are additional reserves. As HUD explains:

“FHA’s capital reserve ratio, which is determined through findings from the independent actuarial study, measures reserves held in excess of those needed to cover projected losses over the next 30 years.  The review projects the capital reserve ratio to be 0.53 percent of total insurance in force this year, below the two-percent statutory threshold.  This capital ratio fell from 3 percent in the fall of 2008, reflecting difficult conditions in the housing market. The 0.53 percent capital ratio (which represents the funds held in the Capital Reserve Account) is in addition to the auditor’s base case estimate of the 30-year reserves needed to pay for losses on existing loans (which are held in the Financing Account).  Combining those two accounts, FHA holds $31 billion in its total reserves today, or more than 4.5 percent of total insurance-in-force.”
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The Wall Street Journal reports that cash reserves have fallen well below the 2 percent level mandated by Congress. This news fuels speculation that FHA may need a tax payer funded bailout, a situation that could could provoke public disapproval of FHA home loan programs.

FHA Loans Provide Funding for Moderate Income Buyers

The loss of FHA home loans could spell disaster for moderate income homebuyers who cannot qualify for home loans under stringent conventional mortgage lending requirements. Buyers with steady jobs, documented income, and acceptable credit are often roadblocked by required down payments of 10 to 20 percent of home value. Although home values have fallen sharply in some areas, finding several thousand dollars for a down payment and closing cost can be the line between buying a home and remaining renters.

Low Interest Rates, Lower Home Prices, and FHA Loans: Combination for Opportunity

Moderate income home shoppers continue to enjoy the combined positive effects of low interest rates, lower home prices (although there are signs of change), and flexible FHA guidelines for loan approval. In years past, mid six figure home prices, higher rates, and a variety of sub prime loan products led many homebuyers straight into the nightmare of foreclosure.

Extension of Tax Credit and FHA Home Loans: More Benefits for Buyers

In a move intended to bolster the US housing market, Congress extended the federal tax credit for first time homebuyers, and also expanded eligibility to some current and former homeowners. Buyers who are prepared to qualify for FHA loans may gain the benefits the unprecedented intersection of favorable home prices, interest rates, comparatively lenient FHA guidelines, and a tax credit of up to $8000 for first time buyers or $6500 for eligible current and former homeowners.

Congressional Balancing Act: Reconciling FHA Financial Worries with Housing Market Needs

If Congress acts to limit FHA home loans, housing markets would likely suffer another set back. FHA loans now account for about 25 percent of the market share. If borrowers eligible for FHA loans, but not able to qualify for conventional mortgage loans are denied financing, the pool of qualified buyers will shrink. A detailed analysis of foreclosed FHA loans may yield sufficient information to revise FHA home loan programs to better protect reserves and reduce the need for a public bailout for the FHA.

In what should be good news for homeowners in general and the FHA reserve fund in particular, Zillow is reporting that home prices may be stabilizing.

“The percent of American single-family homes with mortgages in negative equity(1) fell to 21 percent in the third quarter, down from 23 percent in the second, as home values stabilized in the short term and more underwater homeowners lost their homes to foreclosure, according to the third quarter Zillow Real Estate Market Reports.

The idea is not so much that home prices are rising but rather than declines are becoming less severe.
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The extension of the federal home buyer tax credit comes as good news to more people, as eligibility now includes some existing homeowners. Here are the highlights of the new tax credit program:

Tax Credit Eligibility Requirements Expanded

• Buyers who have owned a home for five of the past eight years are eligible.
• Single buyers may have gross annual income up to $125,000, while married couples may have gross annual income of up to $225,000.
• First time buyers (defined as anyone who has not owned a home within the preceding three years) are eligible for the full tax credit of $8000 while former or existing homeowners qualify for a credit of $6500.

New Tax Credit Qualification Deadlines

Under the new tax deadline, you must sign a purchase contract no later than April 30, 2010, and close no later than June 30, 2010.

No or Low Down Payment? FHA Qualification Requirements May Help

• If you don’t have enough cash to come up with 10% or 20% down, an FHA loan may help. FHA assists in facilitating home ownership by providing loans with low down payment requirements, and allows of as little as 3.5%.
• Source of down payment may include family, friends, employer, charitable organization, or government agency
• FHA Financing offers more lenient credit qualifying requirements than conventional mortgages.
• Closing costs:, FHA loans offer choices for paying closing costs. You can roll many closing costs into your mortgage amount, or have the lender absorb your closing costs in exchange for a higher interest rate. Of course, you may also pay closing costs up front.

FHA Mortgage Insurance

FHA insures mortgage lenders against losses caused by defaults. Borrowers are required to pay for FHA mortgage insurance in two segments: You pay an up-front mortgage insurance premium (UFMIP) at closing. In most cases, borrowers choose to roll the UFMIP into their mortgage amount. You also have to pay annual mortgage insurance premiums that are typically pro-rated on a monthly basis and added to your monthly mortgage payments along with amounts for paying property taxes and hazard insurance. Your FHA-approved lender can explain these costs when going over the “Good Faith Estimate” of loan charges, fees, and costs. If you’re buying your first home, it’s important to budget for the additional costs of owning a home.

Contact an FHA-approved lender to learn more about how combining the benefits of the tax credit with FHA financing can help make owning a home an affordable reality.

President Obama has signed HR 3548, the Worker, Homeownership, and Business Assistance Act of 2009, legislation which should help FHA borrowers — but legislation which is likely to be re-done early next year.

When last we left off with the first-time homebuyer tax credit, first-time purchasers could get as much as $8,000 in yummy tax reductions if only they would please, please buy a home and buy one before December 1st. Most importantly, buyers in 15 states could — in some cases — actually borrow with an FHA mortgage and buy with nothing down.

With December 1st soon upon us, the government responded in two ways — it extended the deadline until April 30th AND it improved the benefit. What is did not do was increase the first-time write off to $15,000 from $8,000 as some in the real estate industry wanted.

Okay, so what’s really new here?

Current Buyers

The first-time homebuyer credit is no longer just for first-time homebuyers — think of the term “mission creep.” The program has been expanded to include many current homeowners as well.

The deal for current homeowners works this way: If you have owned a home for five consecutive years out of the last eight and purchase a new principal residence between November 7, 2009 and April 30, 2010, you can get a tax credit of up to $6,500

Income

One of the qualification factors under the 2009 credit was that you could not have an income of more than $75,000 if single or $150,000 if married. The new rule increases the income limits to $125,000 for singles and $225,000 for joint filers to get the full write-off. (You can get some credit — but not the entire credit — with an income of as much $145,000 if single and $245,000 for couples. Above that, nothing.)

In essence, what this does is to open the program to buyers who are looking for more expensive homes and will max out the tax credit. However, the value of the property cannot exceed $800,000.

When

To qualify for the new first-time credit you must purchase between November 7, 2009 and April 30, 2010. However, by “purchase” the government means having a signed contract in hand — you can actually close as late as July 1st, 2010. If you have any concerns regarding deadlines, check with your broker and the IRS.

Which Homes?

Basically the new credit applies to just about any prime residence — think of single-family homes, condos, townhouses, and co-ops. Be sure to first check with the IRS if you plan to claim something unusual as a first-time home — a boat, a trailer on wheels, etc.

How Long?

As before you have to keep the property for at least three years — otherwise you may have to give back the credit money to Uncle Sam.

A lot of people have looked at the first-time homebuyer credit program and discovered that they do not qualify — after buying a home! Be sure to get a copy of IRS Form 5405 and check out related information on the IRS site before considering the credit.

Because the legislation only extends the benefit until April 30th, look for another piece of legislation next year to extend the credit for additional time.

In a reversal of its plan to tighten eligibility guidelines covering condominium units under its mortgage insurance program, FHA announced that it will review and revise changes to condominium lending requirements released June 12, 2009. The original revisions were seen as too difficult for FHA lenders to follow without incurring significant delays in approving and processing FHA home loans.

Revising Revisions: Changes Delayed as FHA Reconsiders Condo Guidelines

Highlights of the original proposal include:

• No more than 30% of units within an FHA-approved complex could be insured by FHA. This reduces the current percentage of FHA mortgages allowed within approved condominium developments from 50%. Condo developments consisting of 3 or fewer units would only be permitted one unit insured by an FHA mortgage or FHA refinance.
• The new requirements would no longer allow “spot loans” within condo complexes awaiting FHA certification. All condominium loans would have to be made on units within FHA-approved complexes.
• Most problematic for lenders is the proposal requiring all FHA-approved condominium complexes to be re-certified every two years. In its announcement of the delay of changes to its requirements for insuring mortgages secured by condominium units, FHA indicated that it would review this requirement. This move could prevent delays in approving loans within condo complexes due for re-certification. FHA lenders with direct endorsement authority would retain authority to certify condominium projects, which could prevent delays in approving FHA mortgages in condominium developments due for re-certification.

Loosening these guidelines could be good news for those seeking an FHA mortgage or refinance on a condominium unit, as delays can cause problems for homeowners, buyers, and sellers, particularly if mortgage rates rise while borrowers await purchase or refinance approval.

Condominium Units Offer Affordable Alternative

First-time buyers may find condominiums more affordable than single family homes, and can more easily get approved for mortgages under FHA qualification requirements. Any significant restrictions placed on approving FHA home loans secured by condominium units could place additional hardship on first-time buyers. FHA mortgages provide access to condo ownership for people who may be first-time buyers, facing credit challenges, or those who need low-cost, low-maintenance housing. Condominium units are popular starter homes for first-time buyers, and also provide affordable homes for empty nesters or seniors desiring smaller homes with less maintenance.

These buyers and others could be impacted if FHA holds its ground on its revised requirements for home loans secured by condominium units.

This morning at 9AM, HUD Secretary Steve Preston and FHA Commissioner David H. Stevens were supposed to host a briefing at the National Press Club in Washington to talk about the FHA’s fiscal health and financial outlook, based on an independent actuarial study.

Instead, this morning, HUD has sent reporters a note saying that “last evening, the independent auditor that prepares the FHA’s actuarial study notified HUD and FHA that the report will not, in fact, be final in time for today’s press briefing. Therefore, we are postponing the briefing and all related communications.

“HUD and FHA leadership will meet with the auditors today to ensure that we can report to Congress in a timely and accurate manner.”

Critics will look at this postponement as evidence that the FHA has something dark and woeful to hide while supporters will be thankful that someone in government is trying to get their facts right, a new concept in the Nation’s capital.

Realistically you don’t have to be Nostradamus to figure out what lurks ahead for the FHA. Here’s what we have been seeing during the past year — and what we can expect.
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Current loan limits for FHA home loans have been extended through the end of 2010. This move is expected to help ailing US housing markets by extending the availability of FHA loans to home buyers and homeowners in higher priced markets. FHA loan limits are calculated at 125% of local median home value, and vary by location. With the demise of sub-prime lending, FHA plays a significant role in providing home loans to borrowers who cannot meet conventional mortgage lending requirements. Challenges can include:

• Moderate income: FHA allows higher housing expense to income (31% or more) and debt to income (43% or more) ratios than conventional mortgage lenders. These ratios, sometimes called front-end and back-end ratios, are determined by dividing borrowers’ estimated housing expenses by gross income, and dividing total installment debts by gross income. FHA also allows non-resident co-borrowers (such as parents) to sign for primary borrowers needing income assistance. FHA guidelines are generally more lenient than conventional lending requirements.
• Non-traditional income: FHA can accommodate borrowers with cash-based income and small business owners who deal mostly in cash. Income verification is required, but FHA provides more options for verifying income than conventional loan requirements allow.
• Bad credit: FHA guidelines allow borrowers to carry more debt than conventional lenders, and also qualify borrowers with bankruptcy filings a minimum of two years prior to applying for an FHA loan and foreclosures occurring a minimum of three years prior to applying. FHA does not require a minimum credit scores, but instead focuses on borrowers’ demonstrated ability to pay their debts successfully.
• Low down payment: FHA loans require as little as 3.5% down for home purchases, and down payment funds can be provided by family members, employers, and housing assistance programs. The source of down payment funds is subject to verification, but FHA loan requirements are “friendly” toward first time buyers and others with low cash reserves. FHA guidelines allow for closing costs and the up-front mortgage insurance premium to be added to the home loan amount; borrowers may also elect to pay higher mortgage rates and have their lenders pay closing costs.
• Rehab loans available: FHA can provide mortgages based on a home’s potential value after it has been refurbished; this provides upfront funding for renovation expenses. Ask FHA lenders for details, or check out basic FHA guidelines for this program.

When getting quotes for FHA loans, compare the APRs in addition to mortgage rates. This can help you find savings on closing costs. The APR incorporates the mortgage interest rate and closing costs, so if you have two quotes offering the same mortgage rate, the lower APR indicates lower closing costs.

There was little question about this one: The FHA mortgage limits now in place have been extended through 2010. There are, in fact, exactly the same as at the end of 2008.

In real terms there was no other choice. Politically, areas with expensive homes need as much help as possible to maintain prices. Economically, FHA loans are now a huge part of the market and no one wants to fool with something which is successful.
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In a recent column for the Seattle Times, writer Froma Harrop questions FHA loan guidelines including low down payments and lending to borrowers with bad credit. Ms. Harrop cites a case involving a Colorado borrower who had met FHA’s minimum down payment requirement of 3.5% and who qualified for a home loan with blemished credit including a “recent” bankruptcy and home foreclosure. Harrop asserts,”No sane private lender would take such a risk without a sucker of first resort, again the taxpayer.” But where does that leave people/taxpayers facing financial problems through no fault of their own?

FHA Loan Guidelines Provide Opportunity During Tough Times

Protecting the interest of taxpayers is essential, but is limiting access to home ownership to all but those with 20% and “excellent” credit a reasonable solution? More importantly, what happens to the US housing market if FHA stops making home loans available to borrowers with moderate income and challenged credit? Home prices in many areas of the US average well into six figures, and 20% down is an unattainable amount for many hardworking families. FHA lending guidelines do allow borrowers to have a foreclosure (three years or more prior to applying for an FHA loan) and/or a bankruptcy that occurred a minimum of two years prior to applying. Whether or not two or three years is accurately deemed “recent” doesn’t matter in light of “recent” economic challenges. Plenty of suburbanites ensconced in “good” neighborhoods have seen their 20% down payments disappear along with any additional home equity they had accumulated. Financial security and home ownership itself have gone the way of the passenger pigeon for many.

Refinance Challenge: Low Mortgage Rates, and Blemished Credit

Meanwhile, mortgage rates have dipped to near historic lows, and many people are stuck with high mortgage rates that they can’t refinance due to having little or no home equity. Let’s not forget the layoffs that have cost many “qualified” homeowners their jobs. Homeowners who have neither missed a payment on anything nor carried revolving debt are finding themselves in financial trouble. Formerly pristine credit ratings are looking a bit tattered these days. Refinancing their mortgage loans could help many of these people, but what if they don’t have a solid employment history, or have missed a couple of payments on credit cards, or even missed a mortgage payment? Formerly accommodating conventional lenders can’t help these folks. Getting an FHA refinance may be their only option at competitive mortgage rates.

Let’s recognize that FHA is helping many taxpayers; FHA loans and lenient FHA loan guidelines are providing essential opportunities for home buyers and homeowners who want to buy and/or keep a home for their families.

The FHA has pushed back tough new condo financing rules to December 7th. The rules were originally supposed to start October 1st.

In a note to lenders, HUD says the new rules will “offer additional leniencies to address the difficult market conditions.”

Translation: The new rules — which were intended to reduce FHA risk — went too far.
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The federal tax credit program for first time home buyers is set to expire November 30, but lawmakers are expected to extend the program “for a limited period of time,” according to Senator Bill Nelson, a Democratic member of the Senate Finance Committee. As the current expiration date draws near, home buyers can also take advantage of the benefits of an FHA loan. The Federal Housing Administration (FHA) insures mortgage loans by reimbursing lenders for losses associated with foreclosure or other mortgage default. Here are basic FHA loan requirements; please keep in mind that individual loans are approved through FHA approved lenders.

FHA Loan Requirements Include Low Down Payment

It’s possible to finance up to 96.5% of the home purchase price (or home value for an FHA refinance) and include some closing costs and the up-front mortgage insurance premium required by FHA. Conventional lenders typically require a minimum of 10% down, and many require 20% down. If you’re short on cash, an FHA loan may help you buy a home or refinance your current home loan. You may qualify for a streamlined FHA refinance if you currently have an FHA home loan.

• Credit Issues: If you an prove that you’ve made your housing payments on time (with no more than one 30 day late payment) during the 12 months preceding your FHA loan application, you may qualify for an FHA loan even if you’ve had a bankruptcy or foreclosure. A bankruptcy may have occurred no less than two years prior to applying for an FHA loan, and a foreclosure no less than three years prior to applying. When reviewing your loan application, FHA-approved lenders will run credit reports, but you will not be excluded from getting an FHA loan based on credit scores alone.
• Debt to income ratios: FHA allows borrowers to have a housing payment up to 31% of gross household income, and total debts (including housing) of up to 43% of gross household income. This allows borrowers to have housing payments and other fixed debts (credit cards, auto and student loans, alimony or child support payments) equal to 43% of their monthly income before deductions.
• Non-occupant co-borrower: Although FHA requires at least one borrower to occupy the mortgaged property as his or her primary residence, FHA permits non-resident co-borrowers. This is handy for buyers who need their parents or other family members to co-sign for their mortgage.

FHA refinance loans also provide a safe home financing alternative for homeowners who cannot qualify for refinancing under convnetional mortgage lending guidelines.

For months the tax credit for first-time homebuyers has been portrayed as a wonderful financial opportunity and with good reason: It is. First-timers can get as much as $8,000 in tax credits from Uncle Sam, a very good deal indeed.

In terms of FHA mortgages, the great idea has been to combine the first-time credit with FHA financing to buy a home with little or no money down. To do this a buyer must do two things:

First, get an advance from a state housing agency or an approved nonprofit.

Second, buy a property that requires not more than $228,571.42 in financing. (The FHA requires a minimum down payment of 3.5 percent of the purchase price and 3.5 percent of $228,571.42 equals $8,000).

No Money Down

For months, though, we have been saying that FHA mortgages with nothing down were likely to be rare. The reason is that fewer than 20 states have programs which make advances, money is limited and few nonprofits have such cash available. (Private lenders can provide advances, but not advances which substitute for the 3.5 percent down.)
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