In a few days, the government will be launch the latest mortgage relief effort with the FHA short refinance program targeting homeowners who are struggling with an underwater mortgage. The FHA short refinance program has also been called the Emergency Homeowner Loan Program.  The only catch for eligible homeowners is that they must have a stellar record of timely mortgage payments before qualifying for FHA refinancing under this program.  

Take advantage of Refinancing Underwater Mortgages with the FHA Short Refi Program

The FHA Short Refinance loan was created to assist distressed but responsible homeowners who owe more on their home loan than their house is worth because their local markets saw significant declines in property values. The FHA short refinance program will kick off on September 7th. FHA rates remain at record lows, so this should be a very popular loan program as approximately 35% of homeowners in the U.S. are said to have an underwater mortgage.

FHA will offer this mortgage relief opportunity to specific non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least 10 % of the unpaid balance of the first mortgage. The new mortgages would then be FHA-insured.  The borrower must have a credit score of at least 500 and the house must be the homeowner’s primary residence.

To be eligible for FHA’s Short Refinance program, a homeowner must meet the following criteria:

• Borrower must have a mortgage underwater (negative equity as mortgage is greater than property value)

• Homeowners must be current on their mortgage

• Borrower must live in their home (primary residence)

• Borrower must have a minimum 500 credit score

• Homeowner must have an existing non-FHA loan

• Existing mortgage lender must write down at least 10% of the unpaid balance

• Refinance the new FHA mortgage to a loan-to-value ratio of no more than 97.75 %.

In addition, the first mortgage being refinanced must have a maximum loan-to-value of 97.75 %.  Some FHA lenders are exciting with the government’s aggressive approach to help homeowners find a solution for refinancing underwater mortgage loans. Banks are more willing to negotiate with borrowers who delinquent on their first or second mortgage.  Many FHA lenders will not consider writing down loan balances or extending loan modifications unless homeowner can demonstrate that they can afford their home.  FHA Commissioner David Stevens said the government is “throwing a lifeline” to families, giving homeowners and lenders another tool to battle the problem of negative equity facing borrowers current on their mortgage.

First time homebuyers like FHA loan programs because the down-payment requirements are low, the lending fees are low and of course it doesn’t hurt that FHA rates are the lowest they have been in 50-years.  With record low FHA loan rates and home prices dropping, you would think that home buying would be exploding, yet the FHA home loan application volumes have been flat since the tax credit for first time homebuyers expired on April 30^th.  Needless to say there are still thousands of borrowers that have taken advantage of FHA refinancing and FHA lenders anticipate that thousands more will utilize FHA mortgage products this year while low interest rates are available.  FHA guidelines for refinance loans have already made significant changes in the last few years. 

HUD announced that The Federal Housing Administration plans to hike the annual fees it charges new borrowers starting September 7th, which would add about $300 million a month to the agency’s eroding cash reserves.  The insurance premiums are capped at 0.55 % of the value of a loan. Earlier this week, the Senate voted to raise the cap to 1.5 %. President Obama is expected to sign the measure this month.  But the FHA does not plan to raise the fees to the maximum level allowed, and it estimates that borrowers would pay about $38 more on average each month, agency officials said. The increase would not apply to current FHA loan holders. HUD said that raising the FHA lending fees will give the agency a much needed cash injection.  The fee structure revision only aligns its fee structure with that of private mortgage insurers, which were crowded out of the market as the popularity of FHA loan program increased.

Increasing the premiums is a quick way for the agency to elevate its loan reserves that have been dwindling down from the foreclosures and loan defaults. In the past, FHA has avoided raising loan fees because they feared that they were closing the door of opportunity for qualified borrowers.  In addition, many economists had warned that drastic changes to home financing would likely hinder recovery of the housing sector nationally. FHA already increased the upfront fees it charges borrowers earlier this year. Those FHA mortgage lending fees helped keep the agency cash-positive this fiscal year, with a net cash flow of $446 million as of June 30th.  

FHA Commissioner David H. Stevens said, “The premium is another important measure to help protect the FHA mortgage program.”  FHA asked Congress for authority to increase the annual fees.  The loan fee increase was included in a broad FHA loan reform bill that passed the House in June. But when the Senate did not act on it, the FHA pushed for a free-standing bill that would allow for passage of the premium increase before Congress began its August recess.

Once again this week, FHA loan rates fall to record levels.  Qualified borrowers can qualify for a 30-year fixed rate at 4.25%. Yet, HUD is considering even more changes to FHA guidelines for purchase mortgages and FHA refinance options. HUD has been talking about implementing a minimum credit score requirement of 500 for FHA mortgage loans.  In regards to FHA purchase loans, borrowers with credit scores below 580 would be required to make a down-payment of at least 10% rather than the 3.5%.  Many FHA lenders have already taken steps like these with minimum credit scores and higher down-payments.  In regards to FHA refinancing, many lenders have been requesting more home equity in situations when the borrower’s credit is in question.  FHA credit has always been paramount to FHA lending.

Will a Minimum Credit Score Requirement Hinder the Ability for Americans to Refinance with an FHA Mortgage?

Over the years, FHA credit has been a great alternative to subprime lending because FHA would consider borrowers with low credit scores if they had compensating factors.  These types of FHA loans were manually underwritten and in most cases would be required to have cash reserves equal to at least one monthly mortgage payment.  Rumor has it that HUD is considering reducing the ability for FHA refinance opportunities if the mortgage balance is greater than the home values.

HUD is set to roll out a few new policies that could significantly affect the way some FHA lenders originate mortgages nationally.  FHA invited public comment on several of these policy changes in an effort to bolster FHA loan reserves.   According to FHA Commissioner David Stevens, “Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important ” to FHA’s success.

There has been a lot of talk about FHA home loan programs in recent months.  It has been no secret that HUD has tightened FHA guidelines in an effort to stem foreclosures and FHA loan defaults nationwide.  The Federal Housing Administration already tightened the FHA streamline program so FHA customers can no longer finance closing cost with the streamline refinance loan.  Many of the FHA borrowers with good credit have been able to find FHA lenders offering no cost FHA streamline refinance offers.  This is the situation in which lenders are paying streamline closing costs in an effort to win the borrower’s business.  In most cases no cost streamline loans are approved for borrowers that have a high credit scores and low debt to income ratios.

With FHA rates still be recorded at all-time lows it’s hard to understand why low fixed mortgage payments are not enough of a motivation for first time homebuyers.  Yet sluggish reports continue to be reported weekly with low FHA purchase loan activity. The housing sector continues to wait to see if the home buying market can rebound since the expiration of the first-time homebuyer tax credit.  The FHA has remained aggressive with the FHA loan guidelines as borrowers still only need to come up with 3.5% of the down-payment.

The FHA has promised to lower allowable seller concessions (the percentage sellers can take from the sales price of a home to fund closing costs).  FHA will reduce seller concessions from 6% to 3%. According to an announcement in January, the current level of 6% exposes the FHA to excess risk by creating incentives for appraisers to increase the value of these homes. The change will take place in “early summer,” according to the FHA, but a spokesperson said no specific date has been set.  The FHA closing costs include fees for origination, attorneys, appraisal and inspections, title search, title insurance, credit reports, and more. FHA down payment assistance is not included as a closing cost.

As we have reported in recent articles, FHA defaults had increased to a level that put the FHA loan programs in jeopardy so FHA guidelines could be tightened.  The Department of Housing and Urban Development announced new measures will help FHA reduce foreclosures, control risk, continue supporting housing recovery  The Federal Housing Administration Commissioner David Stevens today unveiled three specific policy changes to strengthen the FHA’s capital reserves while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities.

In addition to earlier steps taken to manage its risks and to boost reserves, FHA is proposing to update the combination of credit and down payment requirements for new borrowers; reduce seller concessions from six to three percent; and tighten underwriting standards for manually underwritten FHA mortgage loans.  “These are the latest in a series of changes to allow the FHA to manage its risk better while continuing to support the nation’s housing recovery,” said Stevens.”

FHA guidelines could be tightened more for purchase and FHA refinance programs.

1. Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA home financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10%. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.

2. Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to 3% will bring FHA into conformity with industry standards.

3. Tighten underwriting standards for manually underwritten FHA home loans. When using compensating factors in the underwriting process, FHA lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.

Many homeowners with FHA mortgages are experiencing hardships and getting approved for an FHA loan modification can be a wise financial move if qualifying for refinance loan has already been ruled out.  2010 FHA loan guidelines have tightened; so many borrowers simply don’t meet the requirements for a FHA loan qualification along the traditional refinance route.  Fortunately, many FHA lenders are extending FHA mortgage relief with loan work-outs, forbearances and FHA modification options.  Like a mortgage refinance, the goal of a FHA loan modification is to save money with a lower monthly payment.  In order to lower the monthly payments, lenders are lowering the FHA rates or extending the terms.  In some regions in where home values have plummeted, borrowers have been successful achieving a principal reduction.  Getting a FHA loan modification approved is much more common than a principal reduction, so don’t hold your breath for your FHA loan company to lower your mortgage balance even if you home loan is underwater.

Qualifying for a FHA Loan Modification

As you may already know, qualifying for a FHA modification plan is different than a FHA refinance qualification.  FHA refinance guidelines allow borrowers to qualify for a rate an term refinance with a debt to income ratio up to 45% in most cases.  (Max DTI ranges 36% – 45%  for FHA refinancing)   Whereas the debt-to-income ratio on a FHA loan modification seems to be between 70 and 100%.  Some lenders will lower the payment automatically to a 38% debt to income ratio, so for some borrowers their mortgage payment is reduced significantly. 

FHA Refinance Guidelines Limit LTV to 96.5%

The loan to value requirements are much different as well.  FHA refinance guidelines enable borrowers to refinance up to 85% on cash out loans and 96.5% on rate and term refinancing.  The FHA loan modification agreements seem to be extended to borrowers who are underwater with loan to value levels that exceed 100%.  (ie. borrowers owes $350,000 on mortgage but home is valued at $300,000).  

The other important underwriting issue with FHA home refinancing is payment history.  FHA refinance guidelines typically require no late payments on the mortgage for the last 12 months.  However, on a case by case basis, underwriters may approve a borrower for FHA refinancing with one 30-day late payment if they have compensating factors.  The FHA loan modification is usually approved to borrowers who are 30-days late or more.  It’s tricky because if you asked the lenders if being late on the mortgage was required for a FHA modification approval they would say “No.”  However, we see a pattern of FHA loan modification agreements being extended to distressed borrowers who are behind on their mortgage payments. 

Both refinance and loan modification solutions continue to help millions of borrowers across the country achieve FHA mortgage relief.  If you are experiencing some financial hardships that are making it difficult for you to afford your mortgage payment, it is strongly recommended that you seeking financial consultation and move forward with one of these loan relief solutions.

Unless you are in the military, FHA offers the best home financing for first time homebuyers.  New home buyers like FHA home loans because they only need a 3.5% down-payment and low FHA rates ensure affordable monthly payments.   FHA mortgage rates have dropped to record levels in 2010 so first time home buyers may qualify for 30-year fixed rate mortgages with rates as low as 4.375%. 

Affordable FHA Home Financing with the Lowest Rates Ever!

Home sales prices have tumbled in many regions of the U.S. so utilizing an FHA home loan to purchase a foreclosure or short sale may prove to be a wise investment.  Congress is considering to raise the minimum down-payment on FHA first time home buyer loans from 3.5 to 5%, so time is of the essence.

FHA guidelines enable borrowers with less than perfect credit to still qualify for home financing if the applicant has notable compensating factors.  FHA requirements continue to demand verifiable income documentation like W2’s, tax returns and pay-stubs.  The Federal Housing Administration has never allowed stated income home loans and with the high defaults rates, it’s doubtful the administration ever will.  This can pose an obstacle for many self-employed borrowers, but FHA home mortgage loans are not for everyone.

Loan Advice for First Time Home Buyers

The $8000 first-time homebuyer tax credit is no longer available but with FHA home loan rates as low as 4.375% a person could become a homeowner on a $300,000 house for under $1,500 a month.  Home prices and FHA interest rates are sure to rise soon so home financing with an FHA mortgage make sense today!