FHA announced new changes to FHA loan guidelines in an effort to improve its depleted cash reserves.  A few days ago, HUD announced tighter FHA guidelines with multiple changes to FHA underwriting.  A recent article revealed that FHA requirements may actually penalize borrowers with poor credit.  The FHA Mortgage Lending Blog believes that the Federal Housing Administration will expand mortgage refinance guidelines later this year.

FHA will enable borrowers to continue financing the upfront MIP. The agency also will pursue legislative authority to allow flexibility to bring the annual premium, which borrowers pay on a monthly basis, higher. Also, seller concessions will be reduced to 3% from 6%. Frank Black, who managed a Wells Fargo branch in California said, “After reviewing the changes to the FHA requirements, I believe FHA lenders will agree that the new rules make sense and are needed to keep the government financing alive. A few years ago, many brokers and lenders took advantage of FHA underwriting by pushing the envelope with risky home loans.”

Visit the FHA Mortgage Lending Blog and read the original article > FHA Mortgage Guidelines 10% Down for Low FICOs.

The FHA home loan guidelines should see significant changes in 2010.  Look for credit score and down-payment requirements to rise.  FHA rates for January 4th, 2009 are down as the conforming thirty-year fixed mortgage rate is right at 5%.  The conforming fifteen year fixed mortgage rate is at 4.45% and the conforming 5/1 ARM is up slightly to 4.14%.  The 10 year treasury rate yield has pulled back slightly today which is a strong indicator that mortgage rates are going to be stable to down.  It will be interesting to see how FHA mortgage rates and the 10 year treasury rate yield move over this first week of January.

FHA loan programs have offered opporunities for millions of Americans over the last few years.  2010 will see new FHA requirements for FHA lenders and qualifying for FHA loans could become more difficult for cash strapped borrowers.

FHA announced new FHA guidelines coming 2010:

– HUD will increase “up front” cash required on a FHA home loans.

– HUD will increase compliance and hold FHA lenders accountable for losses associated with loans that do not meet FHA standards. As of December 8th the FHA this year has suspended eight lenders and withdrawn approvals for 270 others.

– HUD cut allowable seller concessions to 3% from 6% in a move to limit incentives to inflate appraised values. The move reduces the money the seller can contribute to a buyer’s closing costs, discount points and other concessions without impacting the buyer’s mortgage.

– HUD is raising the minimum credit score for new loan applicants. The FHA has yet to determine the minimum “FICO” and may factor in the down payment.

– The FHA will develop a “lender scorecard” on HUD’s website that summarizes performance of FHA lenders that make FHA loan offers.

– FHA proposes to increase the required lender net worth to ensure accountability. HUD is proposing an initial increase in the net worth requirement, from $250,000 to $1 million in the first year, and at least $2.5 million after three years.

– A proposed rule would hold approved FHA Lenders responsible for loans originated by mortgage brokers. Brokers will no longer receive independent FHA approval for origination eligibility.

– The FHA is requiring that FHA lenders submit annual financial statements.

– It is bringing streamline refinance loans into line with other FHA origination guidelines. Changes include requirements for payment history, income verification and capping the 125 % loans for LTV.

– The FHA will reduce the period for which an appraisal is valid to four months from six to 12 months.

FHA home loan programs continue to soar in popularity. HUD reported that the FHA loans during the first part of August were receiving about 10,000 applications per day. “The Federal Housing Administration,” says the Wall Street Journal, “hit by increasing mortgage losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.”

According to MarketWatch, “Once the home financing market started to collapse,” says, “the government decided the FHA should try to prop up the market.” The FHA loosened their credit guidelines some but not as far as the subprime lenders had in previous years. FHA guaranteed loans with a down payment as small as 3.5% and grant homeowners more access to take out cash refinance loan. In the last five years, Congress doubled the maximum FHA loan to $729,750.” FHA mortgage rates continue to reports fixed 30-year rates around 5.25%.

FHA increased its down-payment requirement to 3.5 % from 3 % last year? FHA also campaigned hard for Congress to drop down-payment assistance plans to mitigate insurance risks and reduce claims. Many mortgage brokers want FHA to expand their credit criteria and FHA guidelines even more. Is that realistic with the current climate of delinquencies, loan defaults and home foreclosures?

Don’t categorize FHA home loans in the subprime lending section. The credit score averages for FHA loans suggest just the opposite.  HUD released new credit score data figures indicating that the average FHA customer has a credit score of 670. HUD clearly releases the credit score information because it wants to show Wall Street and the mortgage insurance companies that thetypical borrowers for FHA mortgage loans is qualified for home financing.  FHA loans still have no credit score minimums.

According to HUD, FHA guidelines still “do not have minimum credit score requirements.” However HUD does stipulate that past credit history is considered when underwriting FHA home loans.  FHA guidelines are based on the borrower’s ability and willingness to repay the mortgage loan.  “FHA lenders are empowered to make a credit determination based on the merits of each borrower.”  FHA lenders have the ability to disregard low credit scores if the borrower demonstrates significant compensating factors that outweigh the bad credit.  Do wholesale FHA lenders like B of A, Wells Fargo, Countrywide, Chase or SunTrust ignore credit scores and extend no credit requirements to brokers and loan officers?  NO –That is the myth…HUD does not have minimum credit score requirements but most FHA lenders have implemented their own credit score minimums in an effort to mitigate risks and reduce default ratios.  In most cases, if a borrower has a FICO score below 500 than the FHA underwriter typically requests an additional 10% of home equity or for a down-payment to show the applicant’s compensating factors.

o    Credit Score Average for FHA Loans is 670

o    Average Credit Score for Home Buying is 695

o    Credit Score Average for FHA Refinancing is 662

FHA loans have significantly aided homeowners, new home buyers and lending professionals during the mortgage crisis.  FHA loans continue to provide affordable home financing and fixed rate refinancing with little equity and minimal down-payments required.

Nick Timiraos recently wrote an article outlining how U.S. housing officials are in the process of planning that would essentially allow some first time home buyers to purchase a house by paying little money upfront. With this FHA loan, 1^st time buyers could benefit from an $8,000 income tax credit towards their down payment on loans backed by the Federal Housing Administration. The idea is to enables new home buyers to “monetize” the tax credit. Right now, home buyers must wait until they file their taxes to receive the credit.

The FHA is finalizing a program that would allow approved FHA lenders, non-profits, and state and local governments to fund short-term loans that could be used as down payments to be repaid once the borrower received the tax credit. Once they received their tax credit, they would pay off the short-term loan and put equity into their home.  The FHA requires a minimum 3.5% down payment on loans backed by the agency, which means that buyers could put little or nothing down on homes up to $230,000. “It is close to having nothing down,” says Thomas Lawler, an independent housing economist.

The proposal, hailed by home builders and Realtors, is drawing some comparisons to the no money down programs that the FHA has worked to shut down. Congress ended a program last year that allowed home sellers to fund down payments to home buyers through nonprofit groups, and the FHA has blamed that program for an outsized share of loan defaults. Under that mortgage program, nonprofit groups would “gift” the 3% minimum down payment to a home buyer, often funded by the seller of the property. Buyers would move into the home without paying any of their own money for the down payment.  “We remain concerned that the lenient underwriting standards, low down-payment requirements and now the ability of FHA borrowers to purchase a home without putting any of their own equity into the purchase is creating a tremendous risk for the program and taxpayers in the future.”

Several states, including Pennsylvania and New Mexico, had already instituted similar programs. Housing Secretary Shaun Donovan outlined the plan Tuesday during a speech to the National Association of Realtors. “We think the policy is a real win for everyone,” he said.  Congress approved the tax credit in February’s stimulus bill, which provides up to $8,000 for first-time home buyers on a new or existing home. The tax credit expires December 1st.

John Taylor, President & CEO of the National Community Reinvestment Coalition, testified on the introduction of H.R. 703 and the need for a broader-scale loan modification program such as FHA Hope for Homeowners and Homeowners Emergency Loan Program (HELP Now).

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NCRC’s John Taylor Testifies on HR703 with Improvements for FHA’s Hope for Homeowners  

We need the federal government to exercise its authority to purchase troubled assets in an effort to fight off the foreclosure crisis and the need for enhanced consumer protection through comprehensive anti-predatory lending legislation.  HUD continues to enhance FHA loan programs to meet the needs of homeowners.

In a recent Washington Post article written by Kenneth Harney last weekend introducing new mortgage fee increases, for FHA loans and stricter down payment rules and higher credit score requirements from HUD, Fannie Mae and Freddie Mac as soon as April 1st.  According to the article, “Most major FHA mortgage lenders are already pricing in these higher fees, effectively raising costs to borrowers immediately and reducing the impact of housing stimulus efforts from Congress and the Obama administration.”

Falling FHA Mortgage Rates

The new FHA loan guidelines mean that even borrowers with good credit scores will be charged more for a mortgage loan unless they can make a down-payment of 30% or more.  Even someone with a 739 FICO -- once considered a platinum guarantee of the best rates available -- will get dinged with a quarter-point add-on.  Harney points out, fico scores in the upper 600s were deemed good enough for prime rate home financing just a couple of years ago. Now some borrowers with credit scores of 720 to 740 may not be enough to prevent an add-on fee to their FHA home loan, especially if they are buying a condominium or town home.

Potential home-buyers need to do all they can to increase their credit score and to accumulate enough funds for a more substantial down-payment, both moves which make good financial sense anyway.  But the best home loan solution is the basic FHA mortgage: Apply for an FHA loan, which requires a down-payment of just 3.5% and in most cases has lower credit score requirements.  FHA mortgage rates remain at record levels with national lenders reporting interest rates as low as 5.25% on 30-year fixed rate mortgages.

“In today’s weakened economy where access to credit is being restricted, we need to make home mortgages more available to households throughout the country, and especially in high-cost areas,” said Preston. “These new FHA loan limits will ensure HUD can to continue aid distressed homeowners with safer home refinancing featuring secure fixed rates from affordable government-insured loans that enable many first-time buyers take advantage of today’s buyers market”

FHA mortgage loan limits were increased recently back to 2008 FHA loan limits in high cost housing areas, too -- to a maximum of $729,750 in some areas. Visit the FHA website to check the FHA loan limits for your area.  This website enables consumers to look up the maximum FHA mortgage limits for your area or several areas, and then list them by state, county, or Metropolitan Statistical Area.

FHA continues to carry the mortgage industry on its back in 2009.  FHA may have eliminated the FHASecure refinance product, but Hope for Homeowners will help distressed homeowner who have no equity and a mortgage that they can no longer afford.  FHA home loan products still allows cash out refinance loans to 95% but now they will need to appraisals to meet HUD’s new FHA guidelines for cash out refinancing above 85% loan to value. 

Borrowers with low credit scores may still qualify for bad credit mortgage refinancing, even if they were recently turned down by another lender.  FHA continues to expand its loan product base, whether it’s a first time homebuyer loan, FHA streamline or Hope for Homeowners, FHA mortgage rates are low and the terms are usually fixed with no penalty for early pay-off or refinance.  Bloomberg Interviews with HUD Secretary Steven Preston

Watch FHA Loan Video >

HUD confirmed recent reports by issuing a formal letter confirming that the government will no longer off  FHASecure refinancing products. The FHA mortgagee letter, 2008-41 confirmed that the refinance program will completely disappear on December 31.  “Maintaining the program past the original termination date would have a negative financial impact on the MMI Fund that would have to be offset by either substantial across-the-board single family program premium increases or the suspension of FHA’s single family insurance programs altogether,” the letter reads in part.  Effective December 31, FHA reiterated that they t will not issue any new case numbers for FHA lenders looking to refinance distressed homeowners with FHA Secure refinance loans.  HUD however, will honor all FHA loans for which a lender has already completed a loan application and requested a case number prior to December 31^st , they said.

The FHA Secure refinance was born in the summer of 2007, administration officials suggested at the time that the refinance program could help 240,000 delinquent subprime mortgage holders avoid foreclosure. But by December of last year, four months after its introduction, the government loan program only had endorsed 266 loans for borrowers that were delinquent at the time of mortgage refinancing, forcing HUD officials to redefine the program with a wider net for any at-risk borrower, delinquent or not.  FHA officials have maintained steadfastly to the press that such a focus was always the intent of FHASecure.

Regardless, the program never seemed to gain much traction with key Democratic lawmakers, who pushed to create the Hope for Homeowners program that went into effect the past October. Part of that was because the Bush administration attempted to leverage FHASecure as a bargaining chip during negotiations over the Emergency Economic Stabilization Act of 2008, suggesting that the program could handle at-risk and underwater borrowers without the need for a $300 billion expansion to the FHA program under the Hope for Homeowner proposal.

FHA recently announced revions to their Hope for Homeowner product that is designed to offer “short refinance” loans to distressed homeowners fighting to stop foreclosure.

o    Write-Down: Participating FHA mortgage lenders must agree to a reduction in principal to achieve the 9 % loan-to-value requirement.

o    Prepayment penalties and fees related to default or delinquency must also be waived for this loan modification program.

o    Premiums: Lenders must pay the 3% upfront premium from the proceeds of the refinance. Borrower pays 1.5% premium annually.

o    Shared Appreciation and Equity: Borrower must share newly created equity with FHA when the property is sold or the loan is refinanced. FHA’s share in the equity is reduced from 100% to 50% in 10 % increments over first five years. After five years, the homeowner and government each will share in 50 % of the equity. Borrowers must also share any future appreciation 50/50 with FHA upon the sale of the property. The program’s governing Board will establish standards for sharing future appreciation owed to HUD with second mortgage holders.

o    The FHA Hope for Homeowner refinance program runs from October 1, 2008 through September 30, 2011.

o    Servicer Liability: Amends the Truth in Lending Act (TILA) to create a fiduciary duty for mortgage servicers to “maximize the net present value of the pooled mortgages in an investment to all investors and parties having a direct or indirect interest.” The duty does not supersede servicing contracts. It also would deem servicers to act in the best interests of all investors if the servicer implements a refinance or modifies a loan through the HOPE for Homeowners plan.

QUESTION: How soon can we anticipate the Hope for Homeowner program to be up and running with FHA home loans?

ANSWER:  FHA will be working with a Board established under the law to make the program operational and issue guidance by October 1, 2008. FHA’s ongoing program, FHA Secure Refinance continues to help with a loan program designed for refinancing homeowners who are struggling since their adjustable rate mortgage reset.

QUESTION: How is credit approval being defined for FHA mortgage lenders?

ANSWER:  Credit approval is defined for loans scored through FHA’s Mortgage Scorecard TOTAL as Accept/Approve on or after October 1, 2008. For those FHA home loans manually underwritten, credit approval is defined as the date the Direct Endorsement Underwriter approves the loan, as indicated by the DE signature on the Mortgage Credit Analysis Worksheet (MCAW) or L1008 oan Transmittal form.

QUESTION: What if we re-score the loan through an AUS/TOTAL?

ANSWER:  For those FHA loans that are re-scored and result in a downgrade to Refer — requiring the lender to manually underwrite the loan — credit approval is defined as the date the Direct Endorsement Underwriter approves the loan, as indicated by the DE signature on the MCAW or LT. For those loans that are re-scored and remain an Accept/Approve, the date of the last scoring would be the date used to determine the credit approval.

QUESTION: How will this change affect systems such as FHA Connection?

ANSWER:  Hard system edits will be implemented to facilitate the implementation of this new prohibition.

QUESTION: What if the credit was approved prior to October 1, 2008 but the loan closes after October 1, 2008? Is it eligible for insurance?

ANSWER:  Yes, so long as the credit was approved before October 1, the home loan is insurable.

QUESTION: Can municipalities and other government agencies continue to offer down payment assistance loans after October 1?

ANSWER:  Yes, provided that the assistance is in the form of a second mortgage. There is no combined loan to value restriction, where a 2^nd mortgage is provided by a government agency.    Information source – Mortgage Bankers Association