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.

What was at one time a green light for bad credit mortgages may be at risk as HUD considers incorporating minimum fico requirements for FHA home loan programs for both purchase and refinance products.  HUD contends that their oversight committee will implement a minimum credit score requirement of at least 500 for FHA loan approvals.   Borrowers who are plagued with bad credit would likely be hindered by HUD’s policy mandate of applicants to have credit scores higher than 500 for FHA-home loan requirements.  Believe it or not, FHA has never had credit score requirements factored into the FHA underwriting guidelines.  According to Michael Fratantoni, of the Mortgage Bankers Association “It really is just reforming what FHA lenders and FHA loan guidelines have been doing for quite a while.”  FHA lenders had instituted their own minimum credit score requirement and many loan professionals did not know that Fico score restrictions did not come from The Federal Housing Administration. 

FHA has implemented several changes in regards to FHA requirements for mortgage companies to be approved to offer FHA loan programs.  This government finance giant has tightened FHA loan guidelines and made significant initiatives in an effort to reduce the risk of FHA loan defaults and home foreclosures across the nation.

According to HUD Commissioner David Stevens, they have made a concerted effort to enhance the public perception for responsible lending while also boosting FHA loan reserves that act as insurance for non-performing mortgage loans.  It is clear that the HUD Commissioner believes that the entity can carry out their plan to protect the FHA loan reserves that the likelihood of FHA to continue to offer affordable home financing programs is good.  FHA has been helping first time home buyers become homeowners with affordable low rate FHA loans since 1934.  It is no secret that HUD has been concerned that the FHA loan programs was in jeopardy of becoming extinct because of poor loan performance and loan companies pushing their subprime mortgage candidates to the FHA loan products.  A few years ago, FHA loan delinquencies started to increase, but so have defaults for nearly all types of home loan products.  Conventional, jumbo, home equity and even VA loan defaults have all risen over the last few years.  FHA loan policies continued to play an important role in helping our economy rebound as they remain the biggest advocate for affordable home financing and fair lending.

FHA has made several moves recently in an effort to raise the standards and FHA loan requirements for FHA lenders offering single-family home loans.  Most insiders believed that the Federal Housing Administration had targeted single family homes because of the FHA loan defaults.  However, for the first time in nearly forty years, FHA announced they would be tightening FHA guidelines for multifamily home loans. Menzo Case, the president and chief executive of Seneca Falls Savings Bank in upstate New York said, “We’re not surprised by anything nowadays.” Among the new FHA requirements, the government agency is poised to elevate the debt service coverage ratios while reducing the loan-to-value and loan-to-cost ratios.

Will FHA Loosen Loan Requirements for Borrowers?

According to George Kaganovich, a mortgage banker from iServe Lending in California, “Each time FHA tightens the guidelines it seems to pinch consumers as fewer borrowers have the opportunity to refinance into a better loan.” Kaganovich continued, “Many homeowners have come to depend on FHA for fixed rate refinancing so hopefully things will get easier for them soon.

FHA is also requiring additional verification of a property’s financial performance, an expanded review of the borrower’s credit and the pre-screening of certain mortgage applications to prevent certain loans that may not make ever close, but would create a bottle-neck in the processing departments.  Many FHA loan companies see these guideline changes as major obstacles for struggling borrowers, but they understand why FHA has raised the standards.

Americans continue to be supported by FHA home loan programs for refinancing and new home buying.  FHA loan programs are aggressive with little equity required for FHA refinancing.  FHA finance programs have opened up many home buying opportunities because borrowers only need a 3.5% down-payment to become homeowners.  FHA credit requirements are considerably more flexible than conventional lending allows.  In 2010 FHA guidelines have tightened but FHA loan limits remain robust and underwriters are still able to approve loans based on the borrower’s history rather than just their credit score.  FHA refinance loan programs have made an effort to reach out to distressed homeowners seeking a lower fixed rate mortgage payment to help prevent foreclosures.

• FHA Home Loans
• FHA Mortgage Refinance
• FHA Streamline
• FHA 203b for Cash Out
• FHA 203K for Home Rehabilitation

According to Jeff Moran, a FHA loan specialist with Bank of America  Home Loans in Orange County, “The Federal Housing Administration continues to reinvent themselves and consumers are benefitting because they can get financed cost effectively with low rate FHA mortgages.”

FHA mortgage rates are available at 4.75% on fixed 30-year loan terms.   There is no pre-payment penalty for early pay-off and if the FHA rates drop, you can always utilize the FHA streamline for rate and term refinancing.  What are you waiting for?  FHA loan programs are more appealing and more affordable than ever.

Congress granted the FHA loan program an exemption that could put the federal mortgage loans at risk. The American Banker reported that the FHA loan volume could see increased market-share boost from regulatory reform, because of exemptions that are tied to FHA mortgage loans.  FHA home mortgages are insured by the government and are fully exempt from the recent landmark legislation risk-retention requirement.  The mortgage reform bill was finalized by the conference committee last week requires mortgage originators to retain at least 5% of the credit risk in loans they securitize unless the assets meet a “qualified mortgage” test. All loans backed by the FHA, the Department of Veterans Affairs or the Rural Housing Service will automatically meet that test.  Senior director of industry relations for IMARC David Kittle said, “FHA loan programs gets a pass.”  Kittle continued, “Does it give them an advantage? Well, sure. Anytime you are carved out of something that can be onerous for everybody else, then certainly you benefit.”

Most home mortgages securitized through Fannie Mae and Freddie Mac will also be eligible for securitization without risk retention. Seeing that Fannie and Freddie are holding over 95% of the mortgage notes in America, this hardly seems like reform.  Glen Corso, managing director of the Community Mortgage Banking Project said “I believe chances are very good that in the future almost every mortgage that Fannie and Freddie either buy or securitize will be qualified mortgages under the risk-retention provision.”   Without an exemption, mortgage companies will have more obstacles when they sell home loans to Fannie or Freddie. Clearly this gives FHA lenders an advantage but doesn’t this make FHA home loans more of a risk?  FHA mortgage rates are at record lows and the FHA defaults have been decreasing, so why Congress would give the Federal Housing Administration a pass on risk is beyond me.  If the FHA loans fail, the American taxpayers are on the hook, thus jeopardizing the FHA loan program.

The FHA loan defaults have been rising the last few years and the FHA reserves have dipped to dangerous levels.  The FHA refinance loans continue to play a major role in helping borrowers with adjustable rate mortgages convert to a fixed interest rate loan that provides a more affordable monthly payment.  A lot of work has been done to improve FHA home loan programs and reduce the FHA foreclosures.  The Federal Housing Administration have worked with FHA lenders and it appears they have made the necessary changes in the FHA loan programs to reduce the risky FHA mortgage loans and get back on the path for a healthier financial outlook for this government run mortgage program.  Last fall industry analysts had forecasted weak performance for FHA loans in 2010, but the portfolio performance has been much better.  The Housing and Urban Development Secretary Shaun Donovan made these comments as the Obama administration renewed their commitment to stabilize the housing market.

Notable Changes to FHA Loan Programs

• FHA Streamline Refinance – FHA changed the streamline guidelines to not allow borrowers to refinance lender closing costs.  If borrowers want the FHA streamline, they will have to pay for closing costs out of their pocket.
• FHA Home Loan – FHA increased the down-payment requirements from 3% to 3.5%.
• FHA Cash Out Refinance –FHA reduced the LTV from 95% to 85%, so borrowers who want to receive cash in their refinance must have at least 15% home equity left after the refinance loan.
• FHA 203K – Home Improvement Financing has been expanded for home rehabilitation and energy efficient initiatives.

Delinquencies on FHA-backed loans did increase to 12.4% in May from 11.7% in April, but were lower than the13.6% from the previous year.  Donovan said, “Overall FHA loan performance is somewhat better than was predicted when the actuarial review was completed” in the fall of 2009.” However, the Home Affordable Modification Program (HAMP), offers incentives to FHA lenders to modify loans for distressed homeowners, has been widely criticized because the results have been so poor. The recent HAMP statistics released Monday show that slightly more than 10% of eligible borrowers received a loan modification that became permanent.

Have you heard of the “Green Mortgage Loans” that FHA is offering borrowers?  FHA offers an energy efficient home loan that enables borrowers to finance home improvements in an effort to promote environmentally friendly appliances and energy systems in the home.  These loans also can be used in conjunction with the FHA 203k rehabilitation loan insured by FHA. These energy efficient mortgages encourage home buyers or homeowners seeking a refinance to modernize their house by financing the improvements into their home loan.  

The energy efficient home mortgage loan is available to borrowers who don’t necessarily need to refinance, but just need help financing some repairs in the home.  HUD insures the FHA loan for loss on any improvements the homeowner makes. This unique FHA mortgage can be as small as $7,500, or as large as $25,000. While this home improvement financing option is helpful to many Americans, it is not for everyone.  These FHA loan programs pose a higher risk to the FHA lender, so in most cases they will require a higher credit score than other FHA home loan products.