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.
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.
The government approved ameasue to increase FHA insurance premiums for FHA home loans. While this could appear to be a responsible move to bolster FHA lending, it will no doubt prolong the housing crisis, because borrowers will be less likely to buy home if their monthly mortgage payments rise. To a first time home buyer, raising the mortgage insurance premiums is no different than raising the interest rates because either way, their monthly payment rises.
The U.S. House of Representatives on Thursday approved a bill to shore up the finances of the cash-strapped Federal Housing Administration while also backing a measure to raise the loan limits for FHA-backed mortgages used to develop some apartment buildings. In a 406-4 vote, lawmakers approved legislation to strengthen the finances that back the FHA loan programs by giving it authority to nearly triple the annual fees it charges to borrowers, known as mortgage insurance premiums.
In related news, lawmakers did strike down a proposed amendment to require borrowers who buy a home with a FHA loan to put more money down. Minimum down-payments will remain still 3.5%, but lawmakers pushed a new plan that would require FHA to examine down-payment requirements every year and submit a report to Congress. New Jersey Republican Representative Scott Garrett introduced a new proposal to increase the down-payment minimums to 5%. This provision had not been expected to pass but did force members of the committee to vote against tightening FHA guidelines. This could pose a political problem for the members who voted against raising FHA lending standards at a time when the mortgage industry is under scrutiny to improve its credibility nationally. The FHA is required to maintain at least 2.0% in capital reserves, but FHA reserves equal to just 0.53% of the value of the thousands of outstanding FHA home loans that they insure.
The new bill gives the FHA authority to increase annual FHA mortgage insurance premiums that are paid out by the borrower over the term of the home loan to a maximum 1.5%. That’s up from the current 0.55% maximum, though the FHA says that if the measure becomes law it would gradually raise the premium–first to 0.85% or 0.9%. To become law, the measure still faces approval by the Senate before President Barack Obama could sign it into law. A Senate version has not yet been introduced. If the FHA is granted authority to raise the annual premium, FHA has said it would lower a separate upfront premium from the current 2.25% to offset those costs. The upfront premium is paid all at once at the time the loan is issued. HUD has made a concerted effort to tighten FHA home loan programs and it appears they will continue to make changes until the FHA loan default problem goes away.
Representatives Anthony Weiner, a Democrat from high-priced New York and Republican Gary Miller from high-priced Southern California, sponsored the amendment, approved by voice vote, to increase the loan limits for buildings to be developed into rental apartments.
FHA Commissioner David Stevens has repeatedly expressed confidence that the agency’s Capital Reserve Account would return to levels above 2% as recent changes to FHA underwriting standards would bring an additional $5.8 billion to FHA coffers. Since over 75% of the FHA loan business comes from first-time home buyers most of the down payments are made at the 3.5% minimum. The government has made FHA the center focus in their efforts to help the housing sectors rebound. Since the 2006 mortgage crisis, FHA has increased their mortgage market-share over 30% of for home financing but the FHA reserves have dropped to dangerously low levels. .
FHA home loans have been an icon for first time home buying since 1934. This government home financing initiative has been bolstering homeownership for decades with low FHA mortgage rates and fair lending criteria for all Americans. The Wall Street Journal reported that the Federal Housing Administration is in serious talks with HUD to raise the insurance premium in an effort to raise the dwindling FHA loan reserves. After FHA loan defaults have dropped for three straight months for FHA mortgage loans. If that trend holds, the agency could avoid burning through the FHA reserves, which are estimated to fall sharply over the coming years. Still, the FHA’s commissioner, David Stevens, says “there’s plenty of room for caution.” Clearly, FHA mortgage financing has not recovered enough to not be concerned about it’s future.
Are FHA Loan Programs at Risk?
As the economy continues to weaken, FHA will likely see more FHA defaults that could drain the FHA reserves even more. I would expect FHA loan requirements to continue the trend of tightening. This will limit the number of eligible borrowers to qualify for a FHA refinance that would lower their monthly mortgage payment and prevent home foreclosures for thousands of distressed homeowners.
Most industry insiders are forecasting additional losses because it has a much bigger exposure to housing today than it did when the housing market tanked three years ago. Even if the HUD continues to amend FHA loan guidelines to stem the FHA defaults, it is likely that the annual audit will uncover the fact that that the Federal Housing Administration continues to operate on low reserves. Let’s face it, if this great loan program was managed by the private sector the FHA loan program would be shut down. One bright spot is that the FHA’s finances are performing better than anticipated. In the last six months, FHA reserves have covered $6 billion that came from the loan defaults, but they had forecasted to pay $8.7 billion for loan defaults. Should we cheer because the FHA loan program is preforming better than anticipated or be critical of a federal loan program that is failing in a failing economy?
People have been asking me recently if FHA offers any home equity loan programs for home repairs and improvements. Even in a recession, making home improvements is still important to most homeowners and the FHA 203K loan provides the opportunity for homeowners to finance home improvements. We are seeing a home remodeling trend because homeowners would rather not spend their money upgrading to a more expansive home. In years past borrowers had used second mortgage loans to finance home improvements, but qualifying for an equity loan is difficult. In most cases to qualify for a second mortgage a borrower would need a combine loan to value under 80%. That means that even after the new home improvement loan the borrower would have 20% home equity left in their property. In today’s housing market equity is hard to find.
A popular alternative to a home equity line of credit is the FHA 203K. A few years ago HUD rolled out a new type of FHA refinance. The 203K enables FHA borrowers to get access to funds for home rehabilitation to pay for the proposed home improvements.
Like FHA loan programs, the FHA 203k loan has its limitations and is subject to FHA loan limits is the lowest of these three calculations:
Borrowers existing mortgage on the property plus rehabilitation and certain closing costs.
Present property value plus rehabilitation costs.
110% of the improved value multiplied by FHA’s 96.5% maximum loan-to-value ratio.
FHA mortgage rates are subject to change and the borrower is subject to FHA loan requirements.
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