It was a very good Thanksgiving indeed. Not only was the turkey delightful, but loan rates swooned. Freddie Mac reported that rate for 30-year fixed-rate financing reached 4.78 percent with an average .7 points for the week ending November 25th. This is the same rate we saw on April 30th, a record low.

Having borrowed mortgage money in the past for more than 10 percent, I look at today’s rates with awe. Less than 5 percent? You’re kidding.

I also look around the world and wonder how much longer low rates can continue.
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FHA loan requirements have been seen as an obstacle to condo buyers and owners wishing to refinance. The New York Times reports that allowing the maximum loan amount for condos in Manhattan and North New Jersey will allow more people to buy condos in those areas. The maximum loan limit of $729,750 will expire after 2010, but real estate professionals and potential buyers are hoping for an extension.

Lender Approval of Home Loans in Non-approved FHA Condominium Complexes Ends January 31, 2010

Perhaps most helpful for those wishing to finance a condo loan is FHA’s temporary waiver of its requirement of approving condominium complexes before FHA loans could be used to finance individual condominium units. FHA guidelines currently allow lenders to make “spot loans” for units in condominium complexes believed by the lender to qualify for approval by FHA. The delegated approval in complexes not yet approved by FHA will end January 31,2010, but may be extended.The approval of condominium complexes by FHA can be a lengthy process that without the spot loan program could effectively delay the sale of individual condominium units to buyers needing FHA mortgage loans.

FHA Guidelines Help Cash-Poor Borrowers Buy Homes in Pricier Markets

FHA’s relatively lenient lending policies are useful for those who have the income and credit for getting a mortgage, but don’t have enough funds for down payments and closing costs. It’s also possible to qualify for an FHA home loan with less than stellar credit. This can help young professionals and others with limited cash qualify for affordable home loans. The combined benefits of low mortgage rates and FHA guidelines may benefit buyers who could not otherwise buy homes in high-cost areas.

Properties in certain areas are typically priced beyond accessibility to first-time buyers; they don’t have the benefit of cash from the sale of another home, and cannot make a 20% down payment on market-priced homes. FHA could further assist these buyers by continuing to allow maximum loan limits to apply to condominium units in high-priced areas. Extending the spot-loan program for units in complexes not yet approved by FHA would facilitate more condo sales and purchases, and help preserve and possibly increase home values in complexes awaiting formal FHA approval.

FHA Plays Vital Role in US Housing Market

As credit has become more difficult to get, and sub-prime lenders have closed up shop, FHA has increased its market share of 1-4 family loans to about 25%. If FHA, the housing branch of the US Department of Housing and Urban Development, stops making loans, or significantly restricts its loan requirements, many buyers will be lost to the housing market. FHA’s primary task is balancing its responsibility to taxpayers with its mission of providing affordable housing to low and moderate income families.

For much of the past two years HUD has required FHA mortgage borrowers to get two appraisals if they want a mortgage of $417,000 or more.

Two appraisals, of course, are more expensive then one appraisal, thus there has been much opposition to the HUD rule. Some of this opposition has been coming from the very people who are screaming about the the decline in FHA reserves — the very declines that the two-appraisal standard was designed to prevent.
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Prolonged unemployment, illness, and bankruptcy can lead to difficulties in providing traditional credit reports and scoring. You may qualify for an FHA loan if you can document proof of on-time housing payments and current payments from two other sources for the past 12 months.

FHA-insured mortgages can help home buyers and homeowners get back on their feet after major financial problems. FHA guidelines permit bankruptcy and foreclosure; in general, you may qualify for an FHA mortgage loan two years after your bankruptcy is discharged, or three years after having a mortgage foreclosed. It’s no secret that establishing credit is not easy after either of these events, but FHA requirements are more lenient than conventional mortgage underwriting guidelines.

Mortgage Underwriting: Traditional and Non-Traditional

In today’s conservative credit environment, it can be difficult to qualify for a conventional mortgage loan without minimum credit scores of 740 and funds for a 20% down payment and closing costs. As increasing numbers of people experience financial problems resulting from recent economic conditions, FHA home loan programs can provide those with credit problems a chance for owning a home or refinancing an existing mortgage to more favorable terms. Here’s how to provide evidence of “alternative” or “non-traditional” credit for an FHA loan. It’s important to keep in mind that non-traditional credit is manually underwritten and may take longer for approval. Here are the basic requirements:

Minimum Traditional Credit Requirements

• Credit lines: You must have a minimum of three credit lines in good standing. Two of these must be at least 12 months old, and one must be at least 24 months old.
• Credit scores: Three credit scores are required for each borrower of record.

Nontraditional FHA Requirements for Documenting Credit

FHA states that, “Neither the lack of credit history nor the borrower’s decision not to use credit may be used as a basis for rejecting the loan application. We also recognize that some prospective borrowers may not have an established credit history. For those borrowers, and for those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means of direct access from the credit provider. The lender must document that the providers of non-traditional credit do, in fact, exist and verify the credit information.” Alternatively, the lender can choose to purchase a non-traditional credit report and have the credit bureau verify these sources of credit.

If you rely on non-traditional credit, you need to be very careful with your bills–utility payments are not normally reported on a credit report, but yours will be. And your rent payment history will also be critical. In addition to your housing, other payments that might be considered are:

• Utility bills (not included in rent payment) including electric, heating fuel, phone.
• Insurance,cable and/or Internet, or cell phone payments.
• Retail credit including department and furniture stores, or other installment loans.

You should also demonstrate a patter of saving with at least quarterly deposits to a savings account over 12 months. Payroll deductions are not eligible. You have to prove “voluntary” savings.

FHA guidelines are subject to change, but if you’ve had credit problems, keeping accurate records for documenting alternative credit can help you qualify for an FHA mortgage. Contact FHA lenders or a housing counselor for more information on current FHA loan requirements.

There’s been a touch of good news of late on the real estate front, it appears that some level of stability has begun to creep into some local markets.

It’s not wise to overstate what’s happening, but something is going on: The National Association of Realtors says that 30 of 153 metro areas actually saw prices rise in the third quarter.
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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.