Welcome to FHA Mortgage Guide.

In many parts of the country, home buyers can choose between USDA and FHA programs. If you’re one of them, run through this checklist to see which program best meets your needs.

Property

USDA loans require that its financed properties be located in areas designated “rural.” That doesn’t mean miles from nowhere; it just means outside major metropolitan areas. For example, I live just south of Reno and am in a designated rural area — 5 minutes from a city of over 350,000 people! You can find out if a property is located in a designated rural area by typing it into the USDA’s property eligibility screen.  The FHA does not restrict properties by area, but does require the property pass an inspection. Condominium projects must be FHA-approved.

Borrowers

FHA imposes no income eligibility requirements. USDA requires borrowers earn less than 80 percent of the adjusted median income for their household size to get a subsidized mortgage funded directly by the government, and less than or equal to 115 percent of the median for a guaranteed mortgage at market rates from a private lender.  You can see if you meet income limits by checking the income eligibility screen of the USDA Rural Housing Web site.

Costs

USDA mortgages require no down payment at all for the purchase of a modest sized and moderately priced home. USDA does impose a fee of 3.5 percent that can be rolled into the loan. There is no mortgage insurance. FHA mortgages require down payments of 3.5 percent for borrowers with credit scores of at least 580, and 10 percent down for those with scores of 500-579. FHA charges an upfront mortgage insurance premium of 1 percent and monthly mortgage insurance premiums calculated at 1.15 percent of the mortgage balance per year.

Here’s a comparison of a USDA vs FHA mortgage on a $200,000 loan.

USDA

Sales price: $200,000

USDA funding fee: $7,000

Loan amount: $200,000

Payment for guaranteed loan at 5 percent: $1,073.64

Payment if funding fee is financed: $1,111.22

Payment for direct loan (33 year term, financed funding fee, 4.5 percent subsidized rate: $1,004.37

FHA

3.5 percent down payment required, 1 percent upfront mortgage insurance premium can be financed

Loan amount: $195,000

Payment at 5 percent rate: $1,046.80

Add 1.15 percent mortgage insurance: $186.88 per month

Total payment: $ 1,233.68

While it looks like USDA is the better deal, there are some times when it isn’t.  An FHA borrower putting down 3.5 percent has $7,000 equity in the property right away while the USDA borrower has nothing. It takes over 43 months of higher FHA payments to make up that difference.

In addition, FHA imposes mortgage limits but does not state that your home cannot have features considered luxury items like swimming pools. FHA may allow you to buy a more expensive home than USDA. In short, USDA financing is similar to what FHA may become if the government decides to scale back its involvement in American mortgage financing — with its availability limited to low- to moderate-income borrowers purchasing modest homes.

The  FHA short refinance program hasn’t been wildly successful with mortgage lenders due to the requirement for mortgage holders to write off a minimum of 10 percent of the unpaid principal balance for each loan retired through the short refinance program.

We’ve previously observed that the complexity of the secondary mortgage market would likely quash the short refinance program, but House legislators backing legislation to kill the program note doing so would save tax payers money. How would cutting government-sponsored mortgage relief programs such as the Home Affordable Modification Program (HAMP) and the short refinance program impact taxpayers?

Protecting taxpayers, or not:  Do you have foreclosures in your neighborhood?

The problem with the short refinance program is that those owning the mortgage loans aren’t willing to write down mortgage balances by a minimum of 10 percent as required by FHA guidelines. Much of the reason for this rests with the nature of how mortgage loans are sold on the secondary mortgage market; groups of home loans are frequently grouped together and these groups of loans “securitized” and sold to organizational investors including mutual funds, and pension funds. Changing the mortgage balances and interest rates for such mortgage loans is difficult as it changes the value of home loans used to back the investment “securities.”

This is a simplified version of a complicated situation, but the Obama Administration has taken a simple stance toward protecting federal homeowner assistance programs. They’ve vowed to veto any legislation killing these programs. That’s good news, but how can mortgage holders and loan servicing companies be persuaded to see that preventing foreclosure is financially and ethically preferable to allowing families and communities to be ruined by the specter of homelessness, lost tax revenue, and the blight of vacant and abandoned homes?

Mortgage loans: Foreclosure costs money and depletes community resources

What happens to Joe and Jane taxpayer when their neighbors lose their home to foreclosure? Joe and Jane would likely be surprised to know that their neighbors were denied a loan modification through HAMP. Or worse, they contacted their mortgage company and could not get through, or never received responses to her requests for help. Joe and Jane’s neighbors finally abandon their home when they find work in another state.

Foreclosure impacts entire communities; local governments receive less tax revenue when home values fall, and public safety resources are tapped when vacant foreclosed homes attract crime or become unsafe. Meanwhile, homeowners with formerly good credit find that financial options and career opportunities are limited by their newly poor credit and public record of a mortgage foreclosure.

There must be a more fiscally sound method of addressing the problem of owing more on a mortgage than homes are worth than foreclosing such mortgages.  Not everyone who’s “underwater” on their mortgage and cannot sell or refinance is a “deadbeat.”  It’s time to find workable solutions to problems caused by devalued homes and homeowners experiencing long-term unemployment.

The word is out that FHA Commissioner David H. Stevens will be leaving his position within the next few weeks. A replacement has not been named.

Stevens was nominated to his post in March 2009 and has guided the FHA through difficult times with considerable skill.

He had the great advantage of actually having expertise in his field, not a quality to be assumed with all political appointees. Stevens’ background, according to HUD, includes having served as Executive Vice President, National Wholesale Manager at Wells Fargo Home Mortgage’s wholesale channel; Vice President of single family business at Freddie Mac; and, a 16-year tenure at the World Savings Bank, where he began his career. He was also the founding executive sponsor of the Women’s’ Mortgage Industry Network and while at Freddie Mac, he coordinated the first Latino joint venture initiative with Freddie Mac and Latino mortgage industry leaders.

The Marketplace Impact

The FHA, like all real estate and mortgage programs, has been impacted by the difficult market conditions experienced across the country. To his great credit, Stevens kept the FHA solvent, increased FHA reserves, maintained FHA loan requirement, dumped more than 1,500 lenders who did not meet FHA standards and has been an articulate spokesman for HUD, the FHA and the idea that we can prudently lend to entry-level borrowers.

One by-product of FHA success has been the ongoing clamor by the private sector to make the FHA less competitive. Unfortunately, such views have gained traction in recent months, not good news for individuals without executive bonuses.

Foreclosures

Of particular interest has been the FHA’s ability to hold down foreclosures under Stevens, a program which ought to be a model for the private sector.

There has been a lot of clamor regarding FHA delinquency rate. The Mortgage Bankers Association said the FHA mortgage delinquency level reached 12.26 percent in the fourth quarter of 2010. This compares with 5.48 percent for prime loans and 23.01 percent for subprime financing.

What’s not mentioned is the FHA cure rate.

In fiscal 2009 HUD reported that “82.7 percent of the HUD-held loans that are 90 days or more delinquent were brought under control.”

In fiscal 2010 the cure rate dipped to 73 percent, still a terrific outcome when one considers the unemployment rate and the relative inability of the private sector to duplicate such results.

Alternatively, the Bank of America, according to the HousingWire, “recently sampled 100 mortgages reaching 60 days or more delinquent, and found that only 14 of them qualify for a permanent modification through HAMP.”

“Assuming this position and the challenges addressed since I took office have been the most intense and significant in my career,” says Stevens. “It has been my honor to serve President Obama, Secretary Donovan, and the entire Administration. I am extremely proud of everything we accomplished to put the FHA back on stable footing.”

Fair enough.

With the end of the FHA short refi program plainly in view, it might be useful to take a look at who wins and who loses.

As explained earlier, the program allowed underwater borrowers to refinance provided the lender is willing to take at least 10 percent of the principal.

This sounds as though the lender is taking a beating, and no doubt that’s true. Equally true is that the program could have helped many lenders.

To understand why let’s take a look at the housing market. The Federal Housing Finance Agency home prices in November were 14.9 percent below their April 2007 peak and roughly the same as values in August 2004.

Home Values

The catch is that home values have not fallen equally. From November 2009 through November 2010 home values fell by an average of 11.2 percent in the Mountain states — Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico.

At the same time, home prices fell just 1.2 percent in Oklahoma, Arkansas, Texas, Louisiana — the South Central area.

So, if you’re a lender you might want to ask what’s better: To take a 10 percent loss or to take the vastly larger loss that might result if the property is foreclosed or the owner’s walk away.

For lenders there’s no good answer. Neither option is especially attractive.

The FHA loan guidelines for the short refi program might actually work for lenders read more

My husband is a loan officer specializing in very high-end home purchase and construction lending. He’s an excellent loan officer with over a decade of experience, a great rep,  lots of pretty award thingies on his wall and a ton of expertise in his chosen mortgage financing niche.

The joke in his office is that my husband cannot spell FHA.

FHA loans are different. Only an FHA-approved lender can originate, underwrite, approve, and fund an FHA mortgage. Anyone else will have to broker it, submit a package, and pray. You are better off going to the source — a lender that is continually monitored by HUD that has proven itself and works to maintain that valuable approval.

But within every FHA-approved lender are loan officers, some who specialize in FHA lending and some who rarely see these loans. Hint: You want the experienced ones. The experienced ones can tell you if a condo project would pass muster with FHA and how long it would take to get it on the approved list. The experienced ones can help your immigrant parents who never had a checking account get their first home loan. The experienced ones can help you decide whether accepting a new job offer would jeopardize your FHA loan approval, or tell you what your chances of loan approval 24 months into a Chapter 13 plan are.

Finally, there is a difference between the typical FHA home buyer and a jumbo mortgage buyer, or the experienced property investor. Your FHA loan officer expects to furnish plain English explanations of forms like “FHA Amendatory Clause” and likely expects to accompany you to the closing table to answer any last minute questions. A loan agent who works with seasoned real estate buyers may forget that most people are not that comfortable or familiar with the process, or may assume that you know more than you do. An experienced FHA mortgage originator is less likely to do that.

So when you shop for your next FHA mortgage, get several quotes from approved FHA lenders. Then talk to individual loan agents within the organizations and go with one who knows his or her stuff.

Much of mortgage reform centers on changes to risk retention for mortgage lenders. It makes sense that if the fact that those responsible for lax underwriting and silly products were able to leave investors and homeowners and taxpayers holding the bag last time around, requiring them to remain on the hook when they make risky loans is a good idea, right?

Unfortunately, many analysts feel that upcoming changes to risk-retention rules  could increase the cost of mortgages for a great many people and make FHA forever a honking huge fixture of the American mortgage landscape.

Under the Dodd-Frank act, lenders will be required to retain capital reserves equal to five percent of all but the safest mortgage they originate.  The safe loans to be exempted from this risk retention are called “qualified residential mortgages” or QRMs. Rumors bounding round the Hill say that in order to be designated a QRM, a mortgage will max out at 80 percent of the home’s value or purchase price.  This means that those that do not have a down payment of at least 20 percent will be subject to increased mortgage rates in addition to private mortgage insurance to make up for the risk retention on the part of the lender.  The Treasury, the Federal Reserve, the FDIC, the FHA, and other regulatory and governmental agencies are responsible for defining a QRM.

The exception to the QRM rule is that if a loans is issued or guaranteed through government agencies it is exempt from the rule. As it says here:

‘‘(G) provide for—‘‘(i) a total or partial exemption of any securitization, as may be appropriate in the public interest and for the protection of investors;
‘‘(ii) a total or partial exemption for the securitization of an asset issued or guaranteed by the United States, or an agency of the United States, as the Federal banking agencies and the Commission jointly determine appropriate in the public interest and for the protection of investors, except that, for purposes of this clause, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation are not agencies of the United States;
‘‘(iii) a total or partial exemption for any assetbacked security that is a security issued or guaranteed by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of a State or territory that is exempt from the registration requirements of the Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 U.S.C. 77c(a)(2)), or a security defined as a qualified scholarship funding bond in section 150(d)(2) of the Internal Revenue Code of 1986, as may be appropriate in the public interest and for the protection of investors; and
‘‘(iv) the allocation of risk retention obligations between a securitizer and an originator in the case of a securitizer that purchases assets from an originator, as the Federal banking agencies and the Commission jointly determine appropriate.

As FHA mortgages would be exempt from QRM, you can see that demand for them will likely become even more skewed toward these loans than it already is as a result of the rule change.   FHA only requires a down payment of 3.5 percent (10 percent for those with lower credit scores) but folks with less than 20 percent down may well choose an FHA mortgage in order to avoid higher mortgage rates resulting from the risk-retention requirements, depending on how those loans — with their private mortgage insurance and risk-based pricing adjustments added to QRM premiums — stack up against FHA mortgage pricing. Lately, though, even without the QRM differential, FHA mortgages are on average cheaper than conventional loans.

This change could put the FHA in a tough spot as it is already under-capitalized and was never meant to insure the volume of loans that it does these days.  The VA and USDA could also see increased loan origination volume, putting a taxpayers in the mortgage business more than ever.

The House Financial Services Committee has agreed to end the FHA’s short refinance program for homeowners facing foreclosure. The vote was 33 in favor and 22 against the proposal. To become law the bill must also be passed by the House, the Senate and then signed by the President.

Under the FHA Refinance Program Termination Act HUD will no longer be able to provide assistance under its short refi program.

The short refi program was introduced last year to help borrowers with good credit but negative equity. It required first lenders who participated in the program to write-off at least 10 percent of the principal debt. Lender participation was voluntary, lenders were not forced to write off principal amounts.

No Impact

If HUD is going to lose an FHA mortgage plan than this is surely the one to lose. As we have pointed out, the short refi concept has simply read more

FHA recently announced an increase of 0.25 percent for mortgage loans assigned FHA case numbers issued on or after April 18. Details of the premium increase are contained in HUD Mortgagee Letter 11-013, and confirm that no increase to the up-front mortgage insurance premium, or UFMIP, is scheduled.

The UFMIP is currently set at one percent of the original mortgage amount before the UFMIP or other costs are added. In this instance, a $200,000 FHA loan would require a UFMIP in the amount of $2000 to be paid at closing or added to the mortgage loan amount.

FHA torn between providing affordable home financing and replenishing falling cash reserves

FHA is struggling with diminishing cash reserves used to pay mortgage insurance claims on defaulted and foreclosed FHA loans, and maintaining affordable home loan programs. FHA administrators are betting on the idea that the one quarter percent increase for annual mortgage insurance premiums charged to borrowers won’t inconvenience homeowners as much as it will help FHA.

HUD, the federal agency that oversees FHA, is predicting that increasing the annual mortgage insurance premium will add $3 billion annually to the mutual mortgage insurance fund. This projection is based on current loan volume estimates. The annual mortgage insurance premium for FHA loans is pro-rated monthly and added to monthly mortgage payments along with funds required for paying property taxes and hazard insurance premiums.

FHA estimates that the increased annual mortgage insurance would add about $30.00 per monthly mortgage payment, but the actual annual premium amount paid by individual borrowers varies depending on FHA loan amounts and and down payments.

Gas, groceries and FHA mortgage payments: Going up, anyone?

With escalating food and gas prices, the news about increasing FHA mortgage insurance premiums appears to be par for the course. FHA has to adhere to legislative regulations requiring it to maintain a certain level of cash reserves on hand, while also honoring its commitment to providing affordable home ownership options for moderate income Americans.

FHA has also taken on a larger market share of mortgage loans due to its ability to refinance up to 97.5 percent of current home value. This has provided an escape route for homeowners who would not otherwise qualify for refinancing to lower mortgage rates through no fault of their own.

What remains to be seen is how increasing FHA fees and costs for every day living expenses will impact the ability of moderate income buyers and homeowners to qualify for home purchase and refinance mortgage loans. We’re hoping that rising prices of everything from food to FHA loans won’t interfere with promising signs of an economic recovery.

It sounded like a nice idea when HUD announced a new FHA mortgage effort last summer: the short refinance program would help troubled homeowners get better rates and terms, including folks with credit scores of not more than 500.

A fine idea. A decent thought. A program which in a nation of 300 million people has so far produced just 40 loans since October 1st.

The catch is that looking at some local markets you have to wonder why there isn’t more demand for this program — from lenders. read more

In potentially good news for homeowners struggling with mortgage loans of more than their homes are worth, the Federal Housing Administration, popularly known as the FHA, and other government agencies are close to settling with banks and mortgage lenders over improper foreclosure procedures. The Washington Post cites an unnamed official in reporting that a nationwide investigation led by Iowa’s attorney general, is close to reaching a settlement allegedly requiring errant lenders to provide remedies to homeowners who were denied foreclosure prevention options including loan modifications. Under FHA guidelines, lenders are required to comply with FHA programs for preventing foreclosure of FHA insured home loans.

FHA loan programs protect mortgage lenders and homeowners

Although FHA does not directly provide mortgage loans, it insures loans made through its network of approved lenders. Mortgage lenders agree to abide by FHA guidelines for underwriting, approving, and servicing loans originated under its programs. Homeowners with FHA loans are protected by FHA regulations requiring lenders to work with borrowers toward saving their homes and preventing foreclosure. FHA is liable to mortgage lenders for losses caused by mortgage defaults and foreclosures, which explains its motivation for reducing such costs when feasible.

FHA foreclosure prevention options include temporary forbearance, repayment plans, mortgage loan modification, approving short sales, and accepting deeds in lieu of foreclosure. FHA also cooperates with government initiatives including the Making Home Affordable modification and refinance programs.

Settlement impeded by complex housing finance industry

The pending settlement between government agencies and mortgage lenders is being delayed by the complexities of the housing finance industry. This includes how mortgage loans are sold on the secondary mortgage market; Freddie Mac, Fannie Mae, and investors are interested parties in the settlement, which could allow for mortgage write downs and penalties that would be used to reimburse victims of wrongful foreclosure.

Additional stakeholders in any proposed settlement include private mortgage insurance companies and the Veterans Administration, which are also liable for reimbursing lenders for defaulted mortgage loans. Each entity has its own interests, requirements and bottom line to protect; this complicates the process of reaching a final settlement.

Preventing foreclosure: Don’t procrastinate

When financial difficulties occur, it’s essential not to procrastinate. Call your mortgage lender right away, or seek help elsewhere. Mortgage lenders may not provide assistance until your mortgage payments  become one to two months delinquent, but contacting  your mortgage lender or a housing counseling agency immediately demonstrates your cooperation and interest in saving your home.

Homeowners wanting assistance with their mortgage loans can contact FHA approved housing counselors for more information about foreclosure prevention options.

One way that FHA loans make buying a home easier is that their guidelines allow gift funds from relatives to help with the down payment on a home. A gift can be cash or home equity.

For example, parents call sell a home to their child and the child can purchase it with an FHA loan without a down payment as long as the sales price is at least 15 percent less than the appraised value of the property.

To document this gift, your fairy godparents must write a letter to the lender that includes the following information:

1. Name, address, and phone number of the donor

2. The amount of the gift of equity

3. The letter must include a statement that the equity is a true gift; that is, no repayment is required

4. The donor must specify his or her relationship to the buyer read more

By now, you probably know that FHA is raising its monthly mortgage insurance premiums. Again. But the trend of rising interest rates also presents added incentive to refinance an FHA loan sooner rather than later. That’s because if you want to take advantage of the easier and cheaper refinancing through the FHA streamline refi program, you need to pass the Net Tangible Benefit test. This is to prevent homeowners from being talked into refinances that strip their equity without doing them much good financially.

Here’s the scoop:

Streamline refinance from an adjustable rate mortgage:

1. If the new mortgage is a fixed-rate loan, its interest rate cannot exceed that of the current mortgage by more than 2 percent.  So if you are paying in the 3 percent range your new fixed loan can’t be much more than 5 percent.

2. If you’re refinancing to a new ARM, your new payment must be at least 5 percent lower than your old payment. So if your principal, interest, and mortgage insurance is $1,000 a month, your refinance payment can’t exceed $950. The new, higher mortgage insurance premiums could make that figure harder to hit.

3. If you’re refinancing to a hybrid ARM, say a 5/1 loan with a rate fixed for five years, your new loan must have an interest rate at least 2 percent lower than that of your current loan.

Streamline refinance from a fixed-rate mortgage:

1. If refinancing to a fixed-rate loan, your new mortgage payment must be at least 5 percent lower than your current payment.

2. If refinancing to an adjustable rate mortgage, your new interest rate must be at least 2 percent lower than your current mortgage rate. Why would you refinance to an ARM from a fixed rate? If you plan to sell in the next few years, it could be smart, since FHA ARM interest rates only increase at a rate of 1 percent per year.

3. If refinancing to a hybrid ARM, your new payment must be at least 5 percent less than your current payment.

Streamline refinance from a hybrid ARM:

The rules depend on whether you refinance while the hybrid ARM is still in its introductory (fixed) period, or during its adjustable phase. If it’s still fixed, the guidelines are identical to those of the fixed rate mortgage refinance. If it’s in its adjustable phase, the guidelines mirror those of the ARM streamline refinance.

FHA streamline refinances are a cheap and easy way to lower your monthly payments and/or rate. So check with some lenders and see if you can’t save by pulling the trigger on a streamline refinance now.

With the FHA raising annual mortgage insurance premiums after April 18th, borrowers with an interest in financing or refinancing with an FHA loan need to consider the benefits of acting quickly.

At first it may seem as though a mere .25 percent increase in the annual mortgage insurance premium (MIP) is not a big deal. It is. According to FHA Commission David H. Stevens, “the annual MIP increase would generate an additional $2.5 — $3 billion annually.”

You can do your part to give the government an additional few billion dollars, or you can keep the money in your pocket. How? read more

Adam Quinones at Mortgage News Daily threw out a suggestion that may have some merit and solve a couple of problems.

We have a serious problem with housing inventory that needs work –  foreclosures, rentals, and reverse mortgage property that went unmaintained or has been vandalized.

There is a dearth of construction financing in the U.S. Fannie Mae and Freddie Mac no longer touch it. Lenders like CTX Mortgage are out of business. This down-at-heels housing could be converted to safe shelter for the folks who need it (perhaps after losing their own homes to foreclosure).  And those best equipped to take on these projects are the experienced investors who have fixed and flipped or fixed and rented for years.

I’m not saying that they should get to finance investor homes with 3.5 percent down, or that they shouldn’t pay a higher rate for insuring their mortgage. But if such financing were available, it would go a long way toward relieving the blight on the landscape of many of the hardest-hit cities in the country. While government agencies and charitable organizations are about to purchase rental housing with HUD funds, they aren’t the most efficient delivery system for large-scale housing solutions. read more

The latest numbers from the Mortgage Bankers Association show a substantial improvement in FHA loan quality with both foreclosures and delinquencies down significantly.

For the fourth quarter overall, the MBA says that seasonally adjusted delinquencies went from 9.13 percent to 8.22 percent.

___The delinquency rate decreased from 6.29 percent to 5.48 percent for prime loans.

__ The delinquency rate for subprime loans fell from 26.23 percent to 23.01 percent.

___ FHA mortgage delinquency levels dropped from from 12.62 percent to 12.26 percent.

___ The VA delinquency rate decreased from 7.44 percent to 6.67 percent.

Foreclosures

News on the foreclosure front is mixed read more