Welcome to FHA Mortgage Guide.

The Obama administration estimates that the FHA could need an infusion of cash from taxpayers of nearly $1 billion, according to a report on April 10, 2013. The agency, which insures approximately $1.1 trillion in mortgage loans, faced a projected deficit of $16.3 billion in November 2012 according to an independent audit.

Since that audit, FHA mortgage requirements have changed in order to increase the size of the agency’s cash reserves. FHA Commissioner Carol Galante says that policy changes could bring in as much as $18 billion in 2013.

Some of the changes to FHA 203b loans in 2013 include increased mortgage insurance premiums and, in some cases, the requirement to continue paying mortgage insurance for the entire term of the loan.

FHA approved lenders have tightened some of their guidelines, too, so that home buyers and borrowers who want to refinance with an FHA loan now must have a credit score of 620 or 640 or above for most lenders, a debt-to-income ratio of no more than 43 percent and sometimes less, and documented income and assets.

However, the Obama administration estimates that risky FHA loans made as housing values dropped could result in losses of as much as $943 million.

How do FHA problems impact consumers?

Since the FHA was created during the Depression it has functioned as a source of funding available to all homebuyers and homeowners who qualify but primarily geared to borrowers with a modest income and to first-time buyers. However, FHA loan limits are higher in 2013 than loan limits for conventional financing in communities with high cost housing. For example, the conforming loan limit in Washington, D.C. for a conventional loan is $625,500, but the loan limit for an FHA loan in that area is $729,750.

Greater scrutiny of FHA borrowers and higher mortgage insurance premiums are two consequences that have already impacted FHA borrowers, but critics of the government agency believe loan requirements should be tighter to avoid future loan defaults.

Whether this bailout actually occurs and the consequences for future FHA guidelines remains to be seen.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

FHA loan rates, while often slightly lower than conventional mortgage rates, are off-set by the fact that borrowers must pay both upfront and annual mortgage insurance on these loan products. Insurance premiums jumped again in April and additional changes to the program will take effect June 1, along with other new FHA requirements that are aimed at reducing the number of FHA loan defaults and increasing the funds available to reimburse lenders for those loans that do go into default.

FHA mortgage insurance

Upfront insurance premiums for both purchase mortgages and refinancing mortgages remain the same in 2013 at 1.75 percent, but new annual mortgage insurance premiums (MIP) on FHA 203b loans vary according to the loan-to-value and the loan term. For loans longer than 15 years with a loan-to-value under 95 percent, the annual MIP is 1.30 percent; for loans above 95.01 percent, MIP goes up to 1.35 percent. FHA loans of 15 years or less require 0.45 percent in MIP.

Another change instituted as of April 1, 2013, is that mortgage insurance premiums, which used to be cancelled once the borrowers had paid for five years and their loan-to-value had reached 78 percent, will now continue for the entire loan term for borrowers who have a loan-to-value of 90 percent or less when they first take out the loan. MIP payments must be made for at least 11 years by other borrowers.

FHA refinancing

In spite of the mortgage insurance that is part of FHA mortgage requirements, FHA loans were 20 percent of all closed loans in February 2013, according to Ellie Mae, a provider of mortgage data. FHA loans had dipped to 18 percent of all mortgage loans in January 2013, so it’s possible that the uptick in these loans in February represents a flurry of activity prior to the increase in mortgage insurance premiums.

For purchasers, FHA loans remain appealing because borrowers can make a down payment as low as 3.5 percent and can use gift funds from family members or friends for the entire down payment.

For refinancing homeowners, FHA guidelines can make refinancing easier for borrowers who might be unable to qualify for a conventional loan. For example, FHA guidelines allow:

• Loan-to-value as high as 97.5 percent.
• Credit scores as low as 620.
• Debt-to-income ratio as high as 43 percent.

Keep in mind that individual lenders may have other guidelines for FHA and conventional loans, so borrowers should always consult a lender before making a decision on the type of loan that meets their needs.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

FHA loans represented 23 percent of all home loans in 2012, according to Ellie Mae, a provider of mortgage data — and this is in spite of the fact that mortgage insurance premiums have been increased several times for these government-insured home loans. Borrowers, whether they need a mortgage to buy a home or to refinance a home, often find that FHA lenders are able to approve an FHA 203b loan for someone who might not qualify for a conventional mortgage.

Every lender will need to meet FHA guidelines for a loan approval and will typically also be required to match the standards of their mortgage investors which may be higher than FHA standards. For example, while the FHA mandates that borrowers with a credit score of 580 or less must make a down payment of at least 10 percent, very few FHA lenders approve borrowers with a credit score under 620 or 640. Borrowers with a low credit score should search with several lenders to see if they can find one willing to approve an FHA loan.

FHA loan originations in 2012

According to Ellie Mae, the average borrower of an approved FHA loan in 2012 for a refinance had a credit score of 718, 88 percent loan-to-value, and a debt-to-income ratio of 39 percent. The average borrower of an approved FHA loan in 2012 for a home purchase had a credit score of 700, 96 percent loan-to-value, and a debt-to-income ratio of 41 percent.

Borrowers who were denied an FHA loan in 2012 for a refinance had an average credit score of 670, a loan-to-value of 88 percent, and a debt-to-income ratio of 44 percent. Those who were denied an FHA loan for purchase had an average credit score of 667, a loan-to-value of 95 percent, and a debt-to-income ratio of 47 percent.

FHA rates

Average FHA rates have been competitive with conventional mortgage rates in recent months and sometimes even lower. For example, according to HSH.com, for the week ending March 1, 2013, FHA mortgage rates averaged 3.39 percent while the average mortgage rate for a conventional loan was 3.80 percent. Borrowers can compare mortgage programs with a lender to find the best rates and the highest probability of a loan approval.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

FHA-insured loans have been available since the 1930s, when they were introduced to assist low- and moderate-income families to become homeowners. Just 3.1 percent of all home loans were FHA-insured in 2005, at the height of the housing boom; but in 2011, 34 percent of all new mortgages were FHA 203(b) loans. In December 2012, Ellie Mae says that FHA loans dipped to 19 percent of all new loans. New regulations have increased the mortgage insurance requirements of these loans over the past few years. At the same time, some mortgage lenders are beginning to offer home loans to qualified borrowers with down payments of 5 percent, not much higher than the FHA requirement of 3.5 percent down.

New changes to FHA guidelines that go into effect April 1, 2013 and June 3, 2013 include:

• Higher mortgage insurance premiums.
• Mortgage insurance paid for the life of the loan if the initial loan-to-value is 90 percent or less.
• Borrowers with a credit score under 620 will be required to have a debt-to-income ratio lower than 43 percent.
• Loans of $625,000 to $729,000 will require a down payment of 5 percent.

FHA loan advantages

In spite of these higher costs, there are several reasons many borrowers may still prefer an FHA loan for a home purchase or refinancing:

• Lower down payment and equity requirements. FHA loans require a down payment of just 3.5 percent of home equity or 2.75 percent for homeowners, compared to minimum down payments of 5 percent and home equity of 5 or 10 or more percent by conventional lenders.
• Lower credit score requirements. FHA lenders often accept borrowers with a credit score as low as 620 or 640.
• Gift allowance for down payment funds. FHA guidelines allow the entire down payment to come from a gift rather than the buyers’ own funds.
• Qualification guidelines are looser. FHA lenders often allow a higher debt-to-income ratio or lower cash reserves than conventional lenders.

Consult with FHA-approved lenders to find the best FHA rates.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

While no official date has been given for the changes, Acting FHA Commissioner Carol Galante promises several policy changes would be put in place before January 31, 2013, according to Inman News. The changes will impact new FHA loans and place a moratorium on the Standard Fixed Rate Home Equity Conversion Mortgage reverse mortgage program. Borrowers who currently have an FHA 203b loan will not be impacted by the changes, but borrowers who are refinancing an FHA loan may be impacted by the new FHA mortgage requirements.

The anticipated changes will be felt primarily by would-be FHA borrowers with a low credit score, loan applicants who have experienced a foreclosure, and borrowers at the high end of FHA loan limits.

Specific proposals set to change FHA requirements:

• Credit score, debt-to-income ratio, and compensating factors
  Borrowers with a credit score below 620 will be required to have a debt-to-income ratio of no more than 43 percent for automatic underwriting. Borrowers with a higher debt-to-income ratio will require manual processing and FHA lenders will need to document compensating factors such as a bigger down payment or more cash reserves. However, very few FHA lenders even accept applications from borrowers with a credit score below 620 and many require a credit score of 640 or higher.
• Down payments and mortgage insurance premiums
  Loans between $625,500 and $729,000 will require a down payment of 5 percent rather than the standard 3.5 percent for FHA loans. In addition, mortgage insurance premiums for these larger loans will rise to 155 basis points (1.55 percent).
• Underwriting criteria after foreclosure
  FHA loan applicants who have owned property that was foreclosed on will need to meet all underwriting criteria and have reestablished their credit. Some FHA lenders have promised that borrowers can automatically qualify for an FHA loan as long as three years have passed since the foreclosure. In addition, the FHA will ask lenders to review loan performance to see if borrowers who lost their homes due to a one-time event such as a job loss are more likely to keep up with payments on a new home loan than borrowers who lost their home for other reasons.

While this may not be happy news to borrowers, higher down payments, higher mortgage insurance payments, and stricter credit guidelines are likely to be part of the solution to fix the FHA mortgage program.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

While the FHA (Federal Housing Administration) loan program has been in place since the 1930s and was specifically designed to help low- and moderate-income families become homeowners, FHA-insured loans have become increasingly popular since 2006-2007 when credit standards for conventional loans were tightened.

Michele Lerner

Condominium owners know that lenders must review both their own credit qualifications for a mortgage as well as the qualifications of the condominium association. During the housing downturn, this dual qualification contributed to condo values tumbling farther and faster in many markets compared to single family homes. Some condo associations suffered as well when owners fell behind on their dues and reserve funds shrank. In response, the Federal Housing Administration (FHA) and most lenders made it more difficult to qualify for a condo loan.

Lower down payments for buyers, lower home equity for refinancing homeowners and lower credit score requirements are the appealing parts of FHA loan guidelines for condo owners; but unless a condo development is also on the FHA approved list, an FHA-insured loan cannot be approved. FHA guidelines used to allow for a spot approval, which meant that individual borrowers could request an FHA loan even for a development that wasn’t on the list, but spot approvals are not permitted by current FHA guidelines. There is a review process that associations and lenders can pursue to see if the development can be added to the list, however.

On September 13, 2012, the FHA changed some of its rules to help more condo developments become eligible for FHA loans, but many of the existing FHA mortgage requirements remain intact.
Condo dues
One big issue many condo associations face is delinquent dues. As it stands, eligibility for FHA loans is denied if more than 15 percent of the condo’s owners are delinquent on their dues. But new FHA rules define delinquency as condo fees that are 60 days past due rather than 30 days past due, and this could make more developments eligible for the loans.

Even if a building is on the FHA approved condominium list, if more than 15 percent of homeowners are 60 days or more past due on their fees, a new FHA mortgage cannot be approved for anyone regardless of whether they are buying or refinancing.
Owner-occupants and investors
Another issue particularly relevant to new condo developments is how many units are owned by investors. In order to be approved by an FHA lender, at least 50 percent of the units must be owner-occupied. The rules have eased a bit on investors, with one or more investors now allowed to own up to 50 percent of the total units. In the past, a single investor could only own 10 percent of the homes. For new condominium communities, the units owned by the developer will no longer count as investor-owned properties.

Your lender can check any development to find out if it’s on the list of approved communities for FHA loans.
Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

FHA lenders qualify borrowers based on their ability to repay the mortgage and the value of the property, not whether they are first-time buyers or meet income requirements. The government-insured loans do have established limits set by Congress each year, but FHA loan limits are actually higher than the loan limits established by Fannie Mae and Freddie Mac in 2012 in areas with expensive housing. For example, in Washington, D.C., conforming loan limits are capped at $625,500, while buyers and homeowners who are refinancing in that area can borrow up to $729,750 with an FHA loan.
FHA loans and high-income borrowers
A recent study by the Center for Real Estate and Urban Analysis of the George Washington University showed that more than 30 percent of the mortgages insured by FHA in 2010 were approved for households with an income higher than 115 percent of area median income. The FHA Assessment Report also showed that within that 30 percent of FHA-insured loans, more than half were issued to borrowers making more than 150 percent of their area’s median income.

When introduced in the 1930s, FHA guidelines were meant to provide mortgage financing for first-time, low-income and minority buyers. However, in 2011, the FHA Assessment Report shows that 54 percent of FHA loans were issued for properties with values greater than 125 percent of their area’s median value as compared to just 15 percent in 2007.

FHA loans for refinancing
While FHA requirements such as a down payment of just 3.5 percent clearly benefit home buyers, these loans can be equally appealing to homeowners who face refinancing challenges because they have credit problems or minimal equity in their homes.

Conventional financing typically requires a credit score of 720 or 740 or higher to get the best mortgage rates, while FHA lenders generally approve borrowers at the same interest rate as long as their credit score is higher than 620 or 640.

Borrowers who already have an FHA loan, may qualify for a streamline refinance with reduced documentation. Borrowers with a conventional loan can also benefit because FHA loans require as little as 3.5 percent in home equity.

The disadvantage of these loans is that all borrowers must pay mortgage insurance, which will increase their monthly payments. All borrowers should compare conventional and FHA loan options before choosing the appropriate mortgage.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

FHA 203(k) loan amounts are based on an appraisal of the home as-is, plus an estimate of the as-repaired value. The total amount that can be borrowed for both renovations and purchase costs cannot exceed the maximum FHA loan limits for the area.

Regardless of whether the FHA loan is for a purchase or refinance, borrowers have two options for an FHA 203(k) loan:

• Streamlined 203(k). Streamlined loans are limited to a maximum of $35,000 in repairs, which must be non-structural, non-luxury projects such as replacing the HVAC system, replacing windows, appliances or kitchen counters. There is no minimum repair amount. All repairs must start within 30 days of settlement and be complete within six months.
• Standard 203(k). This FHA loan has a minimum repair amount of $5,000, allows structural repair work and requires a HUD consultant to supervise and approve of all renovations.

FHA mortgage requirements

Qualifying for an FHA 203(k) loan is similar to meeting traditional FHA mortgage requirements, including the need for a down payment (or home equity) of at least 3.5 percent, and the payment of mortgage insurance premiums. FHA lenders have varying standards for qualifications, but most require a credit score of at least 620 or 640 and a debt-to-income ratio of 41 percent to 45 percent, based on the total loan amount for renovations and purchase as well as other debts.

In addition, borrowers must pay slightly higher interest rates and additional fees that typically total about 1.5 percent of the cost of repairs. But given the limited availability of renovation loans and the higher credit and down-payment requirements for these transactions, an FHA 203(k) loan may be worth the extra costs for many homeowners and buyers who would like to renovate.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

The FHA Streamline Refinance program, limited to borrowers who already have an FHA loan, received some revisions June 1, 2012, when mortgage insurance premiums were lowered for borrowers who qualified for a refinance. Income verification and an appraisal are not needed for an FHA Streamline Refinance, which encouraged many homeowners to apply even if they were underwater on their home loans. These borrowers still must meet FHA mortgage requirements and be current on their mortgage payments. In addition, each home loan must be within local FHA loan limits.

FHA lenders

While the FHA Streamline Refinance program seems very simple, even FHA-approved lenders are allowed to set their own guidelines for loan approval. According to a recent article on BusinessWeek.com, some lenders such as JPMorgan Chase, Wells Fargo and Bank of America announced that they would limit their FHA Streamline Refinance program to current customers. The banks said they were overloaded with applications for an FHA refinance and could not handle additional new customers.

Housing industry experts told BusinessWeek.com that some lenders refuse to refinance customers, even on a Streamline Refinance, unless they had a high credit score. Some lenders are also requesting an appraisal before approving a loan, particularly in cases in which they suspect the homeowner

may owe a substantial amount on their mortgage above the value of their home.

Homeowners with an FHA home loan who want to refinance can contact their current mortgage servicer, but they also can shop around with other FHA lenders to compare programs as well as the individual requirements of each lender.

Refinancing from conventional to FHA loans

While a Streamline Refinance is clearly a better deal for homeowners because of the reduced mortgage insurance fees, some homeowners with conventional mortgage loans may also want to look into refinancing into an FHA loan. Borrowers with credit scores under 740 or 720 may want to compare their options for conventional and FHA refinancing, because while FHA loans require mortgage insurance, they do not have risk-based interest rates as conventional mortgages do. Borrowers with low equity may have a better chance of approval from an FHA loan, because the loan-to-value can be as high as 97 percent. An FHA-approved lender can calculate payments on both loans to see which one has the lowest monthly payments.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

The Federal Housing Administration (FHA) announced in June that it will abandon the requirement that applicants must settle their credit disputes before receiving an FHA-insured loan — a rule that had sparked protests from lenders, builders and real estate agents since it appeared in April.

As originally written, the rule required borrowers to pay off any credit dispute of $1,000 or more or document a payment arrangement. That payment arrangement was to become part of the borrower’s debt-to-income ratio.

After quickly revising the rule to exempt people with credit issues outside of their control, the <a href=”../2012/04/fha-delays-requirement-for-resolving-collection-accounts/”>FHA delayed the rule</a> in its entirety a week after imposing it, inviting lenders and other housing industry members to comment on the restriction. On June 15, the rule was formally rescinded, although the FHA says they will still take comments on the original proposal.

<strong>The FHA and credit disputes</strong>

The FHA has been tweaking <a href=”../fha-guidelines/”>its guidelines</a> for more than a year in order to compensate for the rising delinquencies that have sapped its reserve fund. Among the changes have been an increase in mortgage insurance premiums and a new rule that requires borrowers with a credit score of 580 or less to make a down payment of at least 10 percent.

Congress mandates that the insurance premiums the agency collects must be kept in a reserve fund that the FHA uses to pay lenders if a borrower defaults on an FHA-insured loan. The tightened credit standards and higher premiums were intended to reduce the number of defaults on FHA-insured loans and to increase the size of the reserve fund, reducing the chances that the agency would require a taxpayer bailout.

Lenders and home-builders, particularly those who work often with first-time home-buyers, fought the FHA rule on credit disputes when it came out because of concerns that too many borrowers would be unable to qualify for an FHA loan under the new rule.

They complained that consumers with credit issues are less likely to qualify for conventional financing, particularly if they have less than 20 percent for a down payment. In that case, the borrowers must pay private mortgage insurance and meet the requirements of mortgage insurance companies, which tend to be even stricter than conventional lending standards.

So for many consumers with credit issues, the new FHA restriction may have closed their most accessible route to home ownership.

<strong>Gone for good?</strong>

If you are considering an FHA loan and have any ongoing credit disputes, you may want to apply for your loan soon in case the rules change again. Or better yet, you could resolve your credit disputes before applying for a mortgage, placing you out-of-reach in case the FHA imposes a similar rule in the future — a possibility the agency has not ruled out.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

FHA announced that it will lower up-front and annual mortgage insurance premiums for streamline refinancing of FHA loans endorsed on or before May 31,2009. Effective June 11, 2012, the up-front mortgage insurance premium rate paid at closing will be reduced to .01 percent and the annual mortgage insurance premium rate will be reduced to .55 percent for qualified homeowners. Endorsement dates for FHA mortgage insurance can differ from actual mortgage closing dates. Homeowners interested in streamline refinancing can call their mortgage servicing companies for determining FHA endorsement dates for their loans. Acting FHA commissioner Carol Galante remarked that lowering the insurance premium rates for streamlining FHA mortgages “is one way that FHA can help homeowners who are doing the right thing, paying their bills on time and who want to take advantage of today’s low interest rates.” Homeowners whose home values have fallen and cannot refinance their <a title=”FHA home loan and mortgage overview” href=”http://www.fhaloanpros.com/resource/learning-center/fha-home-loan-and-mortgage-overview.php” target=”_self”>FHA mortgage loans</a> elsewhere may benefit from this program.

<strong>FHA: Streamline refinancing could help millions</strong>

<a title=”What is FHA?” href=”http://www.fhaloanpros.com/what-is-fha/”>FHA</a> estimates that there are approximately 3.4 million households with qualifying FHA mortgage loans with mortgage rates over 5 percent. The average household could save about $250 per month or $3000 annually using streamline refinancing. Providing homeowners with underwater mortgages an inexpensive method of refinancing can prevent foreclosures and provide homeowners with additional cash for paying bills or meeting essential household expenses. FHA asserts that lowering the MIP rates for streamline refinances will not incur taxpayer expenses or jeopardize its mutual mortgage insurance fund.

<strong>Low mortgage rates boosting refinance affordability</strong>

Refinancing to a lower mortgage rate provides benefits including lowering your monthly payments paying off your mortgage loan faster, as more of each mortgage payment is applied to your mortgage balance. FHA programs also provides <a title=”Refinancing your conventional loan to an fha loan” href=”http://www.fhaloanpros.com/resource/learning-center/refinancing-your-conventional-mortgage-to-an-fha-loan.php” target=”_self”>refinancing</a> options for homeowners wishing to refinance their non-FHA mortgage loans. Homeowners without enough equity for conventional refinancing options may qualify for refinancing through FHA, which allows for rolling allowable closing costs into the new mortgage amount and will approve refinance mortgages for up to 97.5 percent of your home’s current value. Contact your mortgage lender or FHA approved lenders for more information about FHA loans and <a title=”FHA Loan Pros: Current Mortgage Rates” href=”http://www.fhaloanpros.com/fha-mortgage-rates/” target=”_self”>current mortgage rates</a>. Comparing multiple quotes assists with finding your best deal on FHA refinancing.

The FHA has delayed requiring prospective borrowers to either pay off or make a minimum of three payments on their accounts referred for collection. The decision to delay this requirement’s effective date until July 1 came after FHA-approved mortgage lenders complained that the new rule would result in many potential FHA borrowers being disqualified.

Columnist Kathleen Pender wrote recently in the San Francisco Chronicle that approving FHA mortgage loans for borrowers who have outstanding debts in collection could increase taxpayer risk if these loans default and FHA doesn’t have enough in its reserve fund for reimbursing lenders’ losses. On the surface this makes sense, but several factors beyond would-be borrowers’ control can contribute to unpaid collection accounts:

• No or limited health insurance coverage: With hospitals billing at thousands of dollars per day, uninsured patients can easily accumulate insurmountable debt.
• Long periods of unemployment/underemployment: The economic downturn is causing many people with formerly spotless credit histories to default on their debts.
• Failure of creditors to remove derogatory credit information from credit reports: Creditors may fail to remove debts discharged through bankruptcy or those repaid long after the original default.

If you’re considering an FHA loan, review your credit reports before applying and address incorrect information through the three credit reporting bureaus. If you have unpaid debts due to a hardship, such as a long-term illness, serious injury or unemployment, the FHA has reportedly indicated that it may be willing to waive the coming debt requirements if the hardship is well documented.

There is a difference between someone who charges a luxury vacation and doesn’t pay their credit card bill and a person who suffers a serious injury or illness while uninsured, unemployed or both. So if you’ve faced a situation in which a hardship led you into debt, be sure to make this distinction to your potential lender before you apply for an FHA loan.

The Los Angeles Times reported last week that FHA’s latest version of its streamline refinance program sounds sweet, but when you crunch the numbers, a lot of homeowners with FHA loans are ineligible for the program. Here are the qualifying criteria and their potential implications for would-be FHA refinancing candidates:

• Home loans being refinanced must be insured by FHA. This makes sense, as eligible refinancing homeowners have met FHA lending criteria in the past, and allows the agency to forgo traditional reams of underwriting paperwork.
• FHA loans owned by Fannie Mae, Freddie Mac, private investors or loans guaranteed by the Veterans Administration are not eligible for streamline refinancing.
• FHA loans otherwise eligible must have been endorsed for FHA insurance no later than May 31,2009. This policy is intended to protect FHA from losses related to high default rates traditionally associated with mortgage loans less than three years old. Skeptics also note that FHA could save additional money, as it offers a partial refund of FHA mortgage insurance premiums for home loans refinanced within the first three years of the loan term. Estimates suggest that 145,000 households financed with FHA loans with interest rates above 5 percent are being denied refinances due to this requirement.
• Homeowners must have made the past 12 consecutive mortgage payments on time.
• Refinance terms must reduce the new mortgage payment by 5 percent of the original mortgage’s monthly principle, interest and mortgage insurance payment.

Cleared the streamline FHA qualification hurdle? Here’s the good news

Qualified homeowners will likely breathe sighs of relief as the “streamline” part of the FHA streamline refinance program kicks in:

• No new verifications of employment or income required
• Up front mortgage insurance premiums (UFMIP) will be reduced to .01 percent of the refinanced loan amount, and the annual mortgage insurance premium (MIP) will be reduced to .55 percent.
• No new credit underwriting required. This means no new credit reports, credit scores or meeting current FHA credit criteria.
• No new physical appraisal of the property securing the refinance mortgage.
• Refinance terms must reduce the new mortgage payment by 5 percent of the original mortgage’s monthly principle, interest and mortgage insurance amount.

These requirements become effective for streamline refinance loans with FHA case numbers assigned on or after June 11, 2012.

Citigroup recently agreed to pay $158 million to settle charges that it improperly processed roughly 1,000 FHA loans over the past decade. More than 30 percent of the FHA loans made by Citi since 2004 have defaulted, and the complaint in the case alleged that Citi failed in many cases to verify the borrower’s ability

to meet the loan payments.

The settlement comes as the FHA continues to face challenges regarding the agency’s financial reserves, which remain below government-mandated minimums. High rates of default on FHA loans, as was seen among the Citibank loans, have been a drain on the agency’s insurance reserves, which exist to compensate lenders who suffer defaults under the program.
FHA reserves: The bad news and the good news

FHA reserves for reimbursing lenders for losses from defaulted FHA loans remain below the legally required minimum level of 2 percent of its mortgage insurance liability. The FHA reserve fund for paying mortgage insurance claims is self-funded by premiums paid by FHA mortgage borrowers, but due to the unprecedented drain on its reserves, FHA could be forced to seek other funding sources for maintaining its required levels.

The good news is that FHA is slated to receive $1 billion from a recent settlement with four loan servicing organizations. This settlement is separate from the Citigroup settlement.
FHA seeking approval for raising loan limits in high cost areas

In a move that appears counter-intuitive at least and suicidal at worst, the FHA also wants to raise loan limits in high priced areas such as Hawaii and California. The plan involves providing upside-down borrowers in these areas with opportunities for refinancing to FHA loans.

Taking on the additional risk of insuring larger loans when home values continue declining may seem foolhardy, but if approved, time will tell whether this plan stems the tide of foreclosures or further sinks FHA mortgage insurance reserves.