FHA home financing has played a crucial role in helping Americans become homeowners and they have been offering mortgage products since the Great Depression. Today, FHA home loan programs support almost 35% of the home financing market. FHA is the home financing arm of the Housing and Urban Development Department. It oversees Fannie, Freddie, FHLB and other mortgage lenders and provides mortgage insurance on loans made by the FHA lenders for lower-income and first-time buyers.
Is FHA Home Financing Getting Better?
FHA now insures about 5.4 million 1-family mortgage loans at a combined value of $675 billion, making it the world’s largest insurer of mortgage loans. HUD continues to offer FHA refinance and purchase loans in all 50 states.
Together with Fannie and Freddie, the FHA backs 90% of new American home loans. FHA mortgage programs have received a lot of criticism recently, because of the depleted FHA loan reserves and increased foreclosures but the agency was the only financing company that stepped up to fill the void when the subprime mortgage market crashed in 2006. FHA again stepped up in 2008 when conventional mortgage lenders and private insurers were squeezed by the credit crunch. FHA lenders remained focuse on improving the housing markets by providing better FHA home loans in 2011.
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 30th. 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.
The FHA streamline loan is a popular refinance option for homeowners that already have an FHA mortgage. The FHA streamline refinance has been popular because the FHA interest rates are low, the closing costs are affordable and the refinancing process is simplified compared to the long drawn-out measures of traditional refinancing. Borrowers need less paperwork, as income documentation and appraisal requirements are often reduced with FHA streamline refinancing.
It is no secret that the Federal Housing Administration has made significant efforts to make sure that qualified borrowers really want the FHA streamline refinance loan. Recently, FHA enacted big changes for the FHA streamline guidelines. Now borrowers that want to lower their interest rate with the FHA streamline must pay for closing costs out of their pocket. FHA does not allow borrowers to finance any closing costs when streamline refinancing. That means in most cases that FHA borrowers are covering the $2,000 to $3,000 in lending costs from their savings.
Did FHA go too far in tightening the Streamline Guidelines?
The thinking behind the streamline tightening is that by requiring borrowers to pay the closing costs out of their pocket that they will think twice before refinancing and loan defaults will decrease. FHA streamlines have never allowed cash out and they have not been a problem for defaults and foreclosures. With depreciating values nationwide it would appear that FHA is protecting themselves and borrowers from increased mortgage balances that would come from a borrower financing the lender fees and closing costs into their FHA streamline loan. For example, before the streamline guideline change if a borrower had $300,000 mortgage balance, it would be $303,000 after the refinance. If a borrower refinanced once a year, after a while the balance would be $320,000 and with declining values, this increases the risk as more homeowners would be underwater with their mortgages.
The No Cost FHA Streamline Solution
There are approved FHA lenders that are offering no cost mortgage refinance opportunities for a select group of borrowers. If you have good income and high credit scores above 700, there is a good possibility that you may qualify for a no cost streamline refinance in which the lender is paying for the closing costs on their end. This way you do not have to come out of pocket to cover the closing costs and your mortgage balance would not go up because you are not financing fees that FHA will not allow anymore anyways. Qualifying for no cost FHA streamline loans will take some shopping online to find a credible FHA lender that offers these unique refinancing incentives, but clearly it will be worth it financially in the long run.
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.
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