Welcome to FHA Mortgage Guide.

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

FHA commissioner David H. Stevens is pushing for broader authority for FHA to enforce its lending requirements among all FHA approved lenders. The agency currently requests reimbursements from certain large lenders, but the commissioner brings up a strong point that all FHA lenders should be held to account for failing to observe FHA requirements for approving loans.

The commissioner also announced that FHA is increasing its annual mortgage insurance premiums, which are paid by borrowers by 0.25 percent effective April 18, 2011.

FHA mops up the mess and strives to maintain solvency

The collapse of the sub-prime mortgage market caused FHA market share to increase quickly; some FHA lenders were approving mortgages without regard for the agency’s loan underwriting requirements. The resulting mortgage defaults drained the FHA mutual mortgage insurance fund below legally required limits.

Mortgage loan servicing companies have further contributed to FHA financial woes by signing multitudes of foreclosure documents without properly reviewing the documents and circumstances leading to foreclosures. Commissioner Stevens holds that all errant FHA lenders and loan servicers should be required to reimburse the agency for poor loan origination and servicing practices resulting in FHA claims paid to lenders.

FHA policy: What is mutual mortgage insurance, and who pays for it?

FHA does not make home loans, but guarantees its approved mortgage lenders against losses arising from failing FHA loans. This guarantee influences mortgage lenders to underwrite home loans requiring lower down payments and less stringent credit requirements than conventional mortgage loans.

FHA collects premiums from borrowers of FHA mortgage loans and deposits the funds into its mutual mortgage insurance (MMI) fund. This fund provides funds for reimbursing FHA lenders for losses resulting from mortgage loan defaults and foreclosures. FHA does not rely on taxpayers for funding MMI reimbursements, but the fund fell below legally required levels a few months ago. This event has caused FHA to review and revise its policies in an effort to re-pad the MMI fund and actively reduce future losses associated with poor lending and mortgage servicing practices.

FHA is reviewing further changes to its mortgage insurance program with the goal of reducing the agency’s market share in residential home loans. Commissioner Stevens acknowledged in his testimony the importance of balancing FHA risk exposure with providing affordable home loans. It will be interesting to see what further changes will be made to FHA home loan programs in the coming weeks, and how or if such changes will impact home buyers and homeowners wishing to buy or refinance homes with FHA loans.

Just when you thought the fees were set for the next few years….

FHA Commissioner David H. Stevens  announced a new premium structure for FHA-insured mortgages. Don’t expect it to save you money — the change means an increase of 0.25 percent to your annual mortgage insurance premium (MIP).

This applies to all 30- and 15-year loans and it doesn’t matter if you put 80 percent down on your property purchase.  The upfront MIP will remain unchanged at 1 percent at least for now.  This premium change was spelled out in the President’s fiscal year 2012 budget and will affect new loans insured by FHA on or after April 18, 2011.  FHA Commissioner David H. Stevens explained,

“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market. This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”

This increase adds an average of $30 a month to what new FHA borrowers will pay.  While FHA doesn’t expect the change to impact home affordability for most borrowers, there’s no reason to pay it if you don’t have to. So those on the fence about refinancing or buying a home should get off fast. Unless they can’t find anything to do with an extra $360 per year.

A Philadelphia homeowner who had been paying his mortgage without incident for seven years was recently slapped with an ugly surprise when his lender decided to up his homeowner’s insurance coverage without his consent. Yes, the lender (which shall remain nameless here but you can read the story yourself) decided that maintaining coverage based on the property value would no longer satisfy it; instead it wanted the homeowner to place $1 million worth of coverage on a home he’d paid $180,000 for!

Why the discrepancy?  Well, it’s no surprise that home values have plummeted halfway to Hell, and that in many cases you could not sell a home for what it cost to build. In such situations, most lenders require a homeowner to insure for the home’s market value. But this lender wanted enough insurance to provide funds enough to rebuild the home exactly as it is regardless of what the property could fetch in a sale — and the home is a century old. Rebuilding it would be more like a restoration than a repair, hence the million dollar policy.

S0 the homeowner took exception to having his payment increased by $500 and sued the lender for violating the Real Estate Settlement Procedures Act (RESPA), winning $1,200, and the story continues.

If his loan had been with FHA, this would almost surely not have happened.

Here is what HUD has to say about hazard insurance coverage and FHA home loans:

“While HUD does not require (borrowers) to carry hazard insurance, the office does permit (lenders) to require it.” However, the lender must escrow the funds for hazard insurance if it’s required (meaning it must collect them on a pro-rated basis each month and then pay the premium each year).  When the lender escrows the insurance, it must renew the same type of policy that had been carried previously. So FHA lenders don’t get to arbitrarily change your home’s insurance coverage or impose expensive forced-placed policies on you.

Bloggers like me almost always point out the by-the-numbers savings as the main FHA advantage. But there are other protections that government-backed loans provide that private-sector lenders won’t. That has become a lot more apparent in these days of robo-signing, foreclosures and dirty tricks than it was in the past.

A few days ago we reported that the new Obama mortgage plan would increase the cost of FHA mortgages while reducing maximum loan sizes.

But would such changes be so terrible? Would borrowers really suffer?

The answer is yes, more or less. It’s the “more or less” that’s interesting.

Let’s start with loan limits. Under the Obama plan the current loan limit should be reduced from $729,750 — the amount for a single-family residence in a “high cost” area — to $625,500.

Truth is, most borrowers won’t care. In December, HUD reported that 133,603 FHA forward mortgages worth $26.4 billion were endorsed. This means the typical FHA loan had a principal balance of $197,600.

Mortgage Insurance Premium

The deal with the MIP is different. Here’s why: read more

When seniors opt to take out Home Equity Conversion Mortgages (HECMs) against their homes, they are required to get reverse mortgage counseling from HUD-approved professionals before they can close the deal. And the loans are supposed to be safe — the lender pays you, after all, and any remaining mortgage must be retired before funds can be dispensed.  So how did an FHA audit discover that 5 percentof its reverse mortgages are in danger of foreclosure?

According to a letter sent last month to FHA lenders and mortgage servicers, advances made by lenders to cover unpaid taxes and insurance from homeowners with reverse mortgages are putting the FHA insurance fund at risk. So now  FHA is conducting an extensive national audit to determine the exact extent of the delinquent payments and will likely have to foreclose on the properties.

But doesn’t FHA have a policy designed to avoid reverse mortgage foreclosure? (Answer: yes)

On January 3rd, HUD issued guidance for lenders in its Home Equity Conversion Mortgage Property Charge Loss Mitigation letter. The letter states that if several missed payments occur, the lender may pay the property taxes, insurance, and other charges from the mortgage proceeds if available. However, once the available funds dry up,  the lender is obligated to advance its own corporate funds to protect HUD’s interest in the property. Then the lender is supposed to ask the borrower to reimburse it.

In any event, foreclosure cannot occur unless “all applicable loss mitigation strategies have been exhausted” and only then does the lender get to submit a claim to HUD. “While it is HUD’s goal to avoid foreclosures as a result of unpaid property charges, mortgagors must comply with the terms of their mortgage, and mortgagees must comply with FHA requirements including the regulations as clarified in pertinent policy issuances.” Mortgagor means the borrower, and mortgagee means the lender.

HUD is getting tough

According to preliminary numbers from a non-profit credit counseling group, about 5 percent of  reverse mortgages (about 30,000 total) are delinquent now. HUD may be realizing that foreclosure may be necessary in order to avoid putting the entire FHA program at risk.

Throwing Grandma out?

People with parents who have reverse mortgages should take note — if there is any chance that your parents could neglect to pay their property expenses and end up in trouble with the foreclosure police at FHA, encourage them to set up their loan so the taxes and insurance are escrowed; that is, paid by the lender from the proceeds so delinquency does not occur. Alternatively, pay the charges yourself or at least check with the county (in most cases public property tax records are available online) to verify that the taxes are being paid on time.

The White House released a white paper stating proposals for winding down Fannie Mae and Freddie Mac, the two government sponsored enterprises that have largely funded mortgage lenders by purchasing the majority of their newly originated home loans. If Fannie and Freddie go away, how will this affect the Federal Housing Administration (FHA)? The agency could grow, or may shrink if the current administration and legislators are determined to reduce government’s role in U.S. mortgage lending.

Hypothetical demise of Fannie Mae and Freddie Mac: Would FHA grow, or diminish?

Although critics point out that government currently has too large a role in U.S. home loans, it’s unclear what would happen to the FHA if Fannie and Freddie are liquidated. It seems likely that the government would continue to play a significant role in working with lenders and communities in support of affordable housing and home loans, but the administration is suggesting changes that could make home loans less affordable for first time buyers with little cash and moderate income families currently depending on FHA for buying homes or refinancing existing mortgage loans. Changes to FHA guidelines as proposed in the white paper include:

–Reducing FHA maximum mortgage amounts: FHA loan amounts are currently in line with Fannie Mae and Freddie Mac’s maximum mortgage amount of $417,000 for conforming mortgage loans, but the agency also approve mortgage limits as high as $729,750 in established high cost areas. If Fannie and Freddie lower maximum loan amounts, it’s likely that FHA will also do so.

–Charging 0.25 percent more for FHA mortgage fees: This would either add to the up-front mortgage insurance fee paid at closing, or increase the annual mortgage insurance amount that is pro-rated monthly and added to monthly mortgage payments.

–Increasing the minimum down payment for FHA loans from 3.5 percent to 5 percent: This proposal has been brought up before, but lawmakers supporting methods for providing affordable home ownership are protesting this idea on behalf of homeowners who rely on low down payment mortgage loans for buying their first homes or refinancing existing mortgages on homes that have lost most of their value.

The Administration states that these ideas are presently “talking points,” but how FHA will be impacted by changes to Fannie and Freddie and its own lending requirements can go either way. FHA could become a larger agency and guarantee sales of mortgage loans to secondary market investors as well as guaranteeing home loans for FHA mortgage lenders, or FHA could diminish its role in US housing and mortgage lending.

If FHA loans disappear, it’s doubtful that moderate income borrowers will have many, if any choices for financing and refinancing their homes.

In a report to Congress, the Obama administration says the time has come to “wind down Fannie Mae and Freddie Mac and shrink the government’s current footprint in housing finance on a responsible timeline.” A big part of that footprint involves FHA home loans, which the government wants to make smaller and more expensive.

FHA Changes

In terms of the FHA, the plan suggests that the current loan limit should be reduced from $729,750 — the amount for a single-family residence in a “high cost” area — to $625,500. (This is also the current maximum loan amount for FHA-insured reverse mortgages.)

A second change would revise FHA guidelines and raise the annual insurance premium from .90 percent for most borrowers to 1.15 percent.

Under the new system FHA loans would be less attractive than today. Given today’s current mortgage rates, present loan limits and attendant insurance costs borrowers with an interest in an FHA mortgage may want to consider financing or refinancing now rather than later.

Politics

The FHA has the authority to increase the annual mortgage insurance premium to as much as 1.5 percent. This is in addition to the up-front mortgage insurance premium which is now at 1 percent. In effect, the higher premium is a done deal, if that’s what the Obama Administration wants.

The revised loan limits are a different story read more

Bank of America recently made the news when it announced that it would be discontinuing its profitable reverse mortgage product. The change is intended to free up resources so the bank can focus on making traditional mortgages and processing mortgage modification applications. Others, however, speculate that the move is a preemptive strike meant to head off potential criticism that could come from selling a controversial product.

Peter Skillern, executive director of the Community Reinvestment Association of North Carolina, compared reverse mortgages to subprime loans. Home Equity Conversion Mortgages (HECMs) are unlike subprime mortgages for several reasons.

First, with subprime mortgages, people whose credit has been damaged in a poor economy pay a much higher interest rate, while with reverse mortgages, borrowers’ credit rating has no effect on their rate. Interest rates are similar to those charged for normal prime mortgages — unlike subprime products which impose rates several percentage points higher than prime loans. read more

Lurking in the background with some real estate sales has been an effort by developers and Wall Street entrepreneurs to create something known as private transfer fees. This is as good an example as you can find to understand why FHA guidelines are so valuable to borrowers.

Well, okay, what about FHA loans? read more

FHA mortgages confer several advantages when used for 2-4 unit properties.  By purchasing a duplex, tri-plex, or four-plex, you can use FHA financing for rental housing. Here are some important considerations:

You have to live in one of the units

FHA is not in the business of guaranteeing mortgages for investors. But it has no problem with people who purchase multi-unit property as primary residences.

Your mortgage limits are higher

For example, in California’s Placer County, the FHA mortgage limit for a single family home is $580,000.  However, the limit for duplexes is $742,500, triplexes is $897,500, and fourplexes is a whopping $1,115,400. And yes, as long as you don’t need a non-occupying co-borrower you can still finance 96.5 percent.  I can’t think of any other way to finance investment property at that loan-to-value ratio.

Understand though that there are some limitations on these maximums. Three- and four-unit properties, regardless of occupancy status, must be self-sufficient (i.e., the maximum mortgage is limited so that the ratio of the monthly mortgage payment divided by the monthly net rental income, does not exceed 100 percent). The calculation is made by taking the appraiser’s estimate of fair market rent from all units, including the unit chosen by the borrower for occupancy, then subtracting the appraiser’s estimate for vacancies or the vacancy factor used by the jurisdictional Home Ownership Center (usually this is about 25 percent). read more

Late last year we described the growing issue of lender layering, the process of adding qualification requirements above FHA guidelines. As an example, rather than needing a 580 credit score to get an FHA loan with 3.5 percent down a lender might require 620 or 640.

The issue arose when the National Community Reinvestment Coalition alleged that lenders were engaging in discriminatory practices when layering FHA loans.

The logic of the NCRC complaint goes like this:

Because FHA loans are 100-percent insured there is no additional risk to the lender when using the FHA credit score requirements.

“This decision is arbitrary,” says John Taylor, president & CEO of the National Community Reinvestment Coalition, “because the loans are 100% guaranteed, whether the borrower’s credit score is 580 or 780. That means the loans with lower credit scores don’t pose additional risk to the company, so there’s no legitimate business defense for this across-the-board practice.”

The catch, said the NCRC, is that the use of layering with FHA loans is also discriminatory because as credit score requirements are raised members of minority groups are less likely to qualify for financing.

In response, HUD launched an investigation of 22 lenders in December.

One of the lenders not named in the NCRC report was Quicken Loans. However, Quicken says that while it has demanded higher credit scores than required by FHA rules, it’s now changing that practice:

“In an effort to make homeownership possible and more affordable for families across the country,” says Quicken, it has announced that it has “eased the minimum credit score necessary to qualify for an FHA loan to 580. This change allows more consumers to qualify for an FHA loan, as previous guidelines required a minimum credit score of 620.”

“There are folks who have steady incomes, and a solid payment history but were temporarily affected by the economy or a life event in some way. These challenges can lower their credit score significantly. We believe that a credit score, on its own, is not the sole arbiter of a person’s credit worthiness,” said Bob Walters, Chief Economist at Quicken Loans. “This change will open up credit to a significant group of people and allow them to again have access to purchase or refinance a home.”

Quicken points out, correctly, that more than appropriate credit scores are required to obtain an FHA mortgage or any mortgage, including down payments, certain debt-to-income ratios, etc.

The move by Quicken essentially will end FHA layering. The reason is that other lenders cannot possibly claim layering is required when Quicken — which says it’s “the nation’s largest online retail mortgage lender and among the five largest overall retail home lenders in the United States” — makes loans without such a requirement.

As to the NCRC, it ought to be congratulated for making the FHA loan process more open to everyone.

Do you have debt skeletons in your financial closet? Will they come out to haunt you when you apply for FHA financing? Many Americans hit by the recent recession and perhaps with a stint of unemployment under their belts may find their credit reports a little worse for wear.

Fortunately, FHA underwriters are guided by rules that say a mortgage applicant’s overall pattern of payment is more important than a few isolated instances. Its handbook says,

When analyzing a borrower’s credit history, examine the overall pattern of credit behavior, rather than isolated occurrences of unsatisfactory or slow payments. A period of financial difficulty in the past does not necessarily make the risk unacceptable if the borrower has maintained a good payment record for a considerable time period since the difficulty. When delinquent accounts are revealed, the lender must document their analysis as to whether the late payments were based on a disregard for financial obligations, an inability to manage debt, or factors beyond the control of the borrower, including delayed mail delivery or disputes with creditors.

If your credit history shows years of  on-time payments, followed by several months of late payments, followed by a year of good behavior, and your credit scores fall within an acceptable range, you can probably get approved for a mortgage. But if an aggressive creditor took you to court during your unemployed days and obtained a judgment, or you have a couple of collection accounts, do you need to pay these obligations off before you can get an FHA mortgage?

Court-ordered judgments do have to be repaid before you can get an FHA mortgage in most cases, because in many states a successful plaintiff can place a lien on your property if you fail to make good on a judgment. In some jurisdictions, if you have been making regular payments as agreed to someone who won a judgment against you, you may be approved for an FHA home loan.

FHA does not require that collections be paid off as a condition of mortgage approval. However, your lender has the option of imposing stricter requirements. If that is an issue, have a conversation about it very early with your loan agent when you are shopping for your next FHA mortgage.

In any case, when applying for a mortgage, NEVER pay off old collections or charge-offs — that can worsen your credit score by turning an old event into a new one. If your lender wants a collection paid as a condition of funding your mortgage, you can pay it.