FHA Home Loans Refinancing

3 Common Concerns for FHA Mortgage Loan Programs in the Future


As thousands of mortgage lenders close out the year, many loan professionals have questions in regards to FHA home loan programs in the year to come. Here are some common questions we are getting:

1. Will FHA continue to increase the insurance premium on FHA loans? They do this to off-set the defaults and to help raise the level of the reserves, but it many cases the benefits of low interest rates are lost because of the higher mortgage insurance premiums that FHA requires monthly.

2. Will Congress mandate higher down payment requirements on FHA loans for first time buyers? Many loan officers are fearful that FHA will require a 5% down payment rather than a 3.5% down payment.

3. Will HUD increase the minimum credit score requirement on FHA mortgages? Right now people still have a chance of qualifying for a bad credit home mortgage loan if they have at least a 500 fico score. Most FHA approved lenders have imposed their own minimum credit score requirements. 580 and 620 seem to be common bench marks for many companies originate FHA home mortgages.

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2013 FHA Loan Requirements


There has been a lot of talk about Congress coming down hard on government financing with tighter 2013 FHA loan requirements in an effort to stem foreclosures and reduce delinquencies. In 2012 we witnessed the lowest interest rates ever recorded and importantly the housing sector has begun to turn the corner for the better.

Thousands of first time home buyers were able to utilize FHA to buy a home in their neighborhood. In most cases converting a renter to a home owner is good for the economy. Most of these consumers choose these government loans because the FHA down-payment requirements still only request a 3.5% from the borrower. Fannie Mae and Freddie Mac request 10 to 20% in most cases from first time home buyers.

Millions of struggling homeowners were able to refinance with government loans because the rates were low and the credit guidelines were more flexible. People like the FHA refinance requirements that only require 3.5% equity and a 96.5% loan to value ratio for underwriting purposes. People also like that 2013 FHA requirements still say the minimum credit score is only 500. Most lenders offering refinancing from Fannie or Freddie say that the minimum credit score is usually 680, with the rare exception allowing for scores as low as 640 for borrowers that have compensating factors.

We anticipate that there will be proposals from committees in Congress to raise the 2013 down-payment requirement to 5%, but our staff does not believe there is enough momentum to pass such legislation. The Federal Housing Administration has been helping consumers become first time home buyers since 1934 and we do not expect that to change in the next few years.

We do anticipate that there will be changes to FHA loan programs in the new year. We anticipate the minimum credit score will rise at some point in the coming year. We expect refinancing with FHA to remain aggressive as property values across the country are finally rebounding.


2012 FHA Loan Requirements


Getting approved for a FHA loan in 2012 may be difficult for some borrowers as HUD has made it clear with FHA guidelines. It is unlikely that 2012 FHA loan requirements will loosen up much, because the Federal Housing Administration is focused on increasing FHA reserves and decreasing FHA loan defaults. Many FHA lenders are concerned that tightening FHA requirements even more in the coming year could significantly hinder originations and the housing recovery as a whole.

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It’s no secret that many FHA companies in California, New York and Virginia are fearful that the reduced government loan limits will hinder the housing market rebound. There are so many borrowers on the loan limit bubble that lowering the 2012 FHA limits will have a negative impact.  HUD may accomplish their goal in decreasing defaults but you can expect a drop in origination in all of the high costs states like California, Connecticut, Colorado, Florida, Maryland, Massachusetts, New Jersey, New York and Virginia.

According to Shawn Downs, a FHA lender in Colorado, “First time home buyers have counted on FHA mortgages for decades, but as FHA requirements get more difficult, we are seeing less applicants qualify for this essential government home financing program.” Downs said, he noticed a decrease in eligibility for consumers seeking FHA financing.

What to Expect for 2012 FHA Requirements

  • Purchase home mortgages will continue to rise because FHA rates remain at record levels.
  • Refinancing with FHA loan originations will fall because property values remain sluggish across the country.
  • HUD will loosen FHA guidelines for appraisals as they realize 2 appraisals is too costly going forward
  • FHA will continue to require full income documentation. Don’t expect stated income loans anytime soon.
  • Fixed loan terms will be offers with 30 and 15-year mortgage rates.
  • Congress will pass a bill repealing the Dodd-Frank Mortgage Act but don’t expect Obama to sign the bill into order.
  • FHA loan rates will rise but remain affordable throughout 2012 and 2013.
  • HUD will stop raising FHA insurance premiums.
  • Applications for FHA loans will rise dramatically as traditional lending parameters remain difficult.

Off the record many mortgage executives are saying they believe it will get worse before it gets better. Look for FHA loan programs to shift their focus back to first time home buying in 2012, but don’t bet on it. Check with our lenders today for the latest updates on 2012 FHA loan requirements.


How to Qualify for a FHA Loan


With less stringent government loan qualifications than most conventional mortgage products, many people are turning to FHA loan programs.  FHA home loans are popular for first time home buyers, because they only have to come up with a 3.5% down payment.  However, no matter how many homes you have owned, you may be eligible for a mortgage with FHA.  How to qualify for a FHA loan is a big question for home owners who have not used these great mortgage products.  All borrowers must be able to document their income and employment.  Unlike some other home purchase loan options, applicants are usually allowed to use gift money for FHA down payment requirements.

FHA Loans Are an Attractive Option for New Home Buyers

If you want to know how to qualify for a FHA loan, start with collecting the documents you need.  Borrowers must be able to document their income to qualify for these government insured home mortgages.  You have to have been employed for the last two years, and it is best if it was with the same employer.  Your income from the last two years must have remained the same or increased.  You do have to come up with a 3.5% down payment, but applicants are usually allowed to use gift money for FHA down payment costs.  These minimal requirements mean FHA is popular with people searching for a first time home buyer loan.

However, though FHA home loans are popular for first time home buyers, they are also popular for those with past bankruptcy or foreclosure. Knowing how to qualify for a FHA loan when you have had one of these can be very empowering.  Your bankruptcy had to have occurred at least two years ago; three years for a foreclosure, with perfect credit since the occurrence of either.  Since borrowers must be able to document their income for at least the past two years, employment is a must.  If someone wants to help you get back on your feet financially, applicants are usually allowed to use gift money for FHA down payment, and you only have to come up with a 3.5% down payment.


US House Contemplates Increasing 2012 FHA Down Payment Requirements


Will Congress mandate an increased down-payment requirement for FHA home loans in 2012?  FHA rates remain at record lows, but default rates are high and the mortgage insurance premium has been raised so many times that it really brings into question the future of FHA mortgages especially for new home buyers. The U.S. House Financial Services Committee has drafted legislation that would, among other things, increase the FHA down-payment requirement to 5% and prohibit borrowers from financing their closing costs. The 2012 FHA requirements for home financing continued the tradition of a 3.5% down-payment.  FHA guidelines were tightened dramatically over the last few years and for the first time the government finance program implemented a minimum credit score.

Berman went on to share the MBA’s opinion on the matter, saying, “The current minimum down-payment of 3.5% for borrowers with fico scores of 580 or above and 10% for borrowers with credit scores of 579 and below permits borrowers to have appropriate “skin in the game” while providing credit-worthy homebuyers with an option for entering the home buying market. Maintaining the existing minimum down-payment requirements, while requiring strong underwriting standards, such as full documentation and income verification, allows borrowers to responsibly become, and stay, homeowners.”

What Impact Will Higher FHA Down-Payment Requirements Have on the Sluggish Housing Industry?  

The Mortgage Bankers Association is not the only industry group to oppose the down-payment hike. Ron Phillips, President of the National Association of Realtors, shared similar sentiments in his prepared remarks. “NAR strongly opposes raising down-payment requirements for FHA loans.” The correlation between down-payment and loan performance is significantly less important than the linkage to strong underwriting, which FHA continues to have. FHA’s foreclosure rate remains less than conventional mortgages, so we don’t believe changes to the down-payment would do anything but disenfranchise many creditworthy homebuyers”.

With home prices falling to year lows and interest rates lower than they have ever been, buying a home is very appealing with 3.5% FHA down-payment requirements.


FHA Credit Score Requirements for Refinancing and Home Buying


Due to an increase in FHA loan defaults, the Housing of Urban Development has been considering changes to FHA credit guidelines by implementing credit score minimums. With the government instituting the Dodd-Frank mortgage reform bill there is increasing pressure for HUD to mandate new guidelines with FHA minimum credit scores. Since 1934, FHA credit guidelines have never mandated any credit score requirements so the proposed changes could have a significant impact on government home buying and refinancing.

FHA Remains the Best Loan Program for Credit Score Flexibility

2013 FHA loan requirements have tightened for lenders as their net-worth requirements have increased and loan companies have more liability for their FHA home loan originations. Because of these changes in home financing legislation, FHA underwriting has become more critical of credit scores and delinquent loan payments. It’s clear that HUD is mandating more responsibilities for borrowers, appraisers and FHA lenders in an effort to reduce foreclosures and loan defaults while increasing FHA reserves. Some of the new rules are likely part of a compromise to politicians looking to have material to campaign on, but most of the revised 2011 FHA requirements are being implemented to improve the FHA loan programs for consumers. HUD remains committed to offering loans to borrowers with all types of credit from all types of neighborhoods.

In most cases, to qualify for maximum financing on new home loans, applicants need to 580 credit score or higher. If a borrower with a credit score between 500 and 579 has the ability to put down a significant down-payment of at least 10% then exceptions can be made and with the right qualifications the purchase loan would be approved. The same could be said with a mortgage refinance loan, if the borrower has credit scores between 500 and 579 and they get two appraisals documenting at least 10% equity in the home.Last year, HUD announced new changes for 2011 FHA guidelines including minimum credit scores needed for certain FHA loan programs. In the past, FHA was the only loan product that did not have minimum credit scores. However, most Approved FHA lenders and banks incorporated their own minimum credit score requirements on loans that were insured by Federal Housing Administration. The FHA credit guidelines continue to be more lenient than conventional credit guidelines as FHA will allow lower credit scores for borrowers who have compensating factors. For example if a borrower had a low credit score because of a medical collection a few years ago that they were able to document, the likelihood of being approved by a FHA underwriter is good if there are compensating factors like additional equity and strong income. With FHA being the last bad credit mortgage loan left on the on the planet, many consumers and loan professionals are nervous about the proposed 2011 FHA credit guidelines.

  • 85% Max Loan to Value 500 – 579 credit scores with FHA 203(b) for cash out refinancing
  • 96.5% Max Loan to Value 580 + for refinancing with the FHA streamline
  • 90% Max Loan to Value 500 – 579 credit scores
  • 100% FHA financing with no down payment required with FHA 203(h) for Disaster Victims
  • 115% FHA Streamline 203(k) for Limited Home Repairs and Rehabilitation

According to HUD’s 2013 FHA guidelines, Applicants must have a fico score of at least 500 to be eligible for home buying or refinancing with FHA. However, we are hearing that many borrowers with sub-500 credit scores are still being approved for FHA loans as long as they have very strong compensating factors that are signed off by direct endorsed underwriters who have the ability to make exceptions. The reality is that HUD is tightening FHA refinance guidelines in 2011 and credit seems to be more important than in previous years. Let’s not hit the panic button yet. The chances remain good, that FHA will remain the loan of choice for borrower with past credit problems as FHA lending has always made it a priority to be flexible with credit, equity and affordability.


More Requirements for Approved FHA Lenders


Usually, mortgage professionals are concerned that borrowers will be given too strict of requirements to qualify for FHA loans and other mortgage options.  Many in the mortgage industry were taken aback, therefore, when it was announced recently by HUD that FHA requirements for FHA lenders was about to become stricter.  There is now a push for increased responsibility on the part of approved FHA lenders.  Since January 1, 2011, the requirements to become an approved lender of FHA home loans are now slightly different.  The changes in 2011 FHA requirements will be explained here.

New FHA Rules for 2011

The first major change in FHA requirements to become a lender is increased responsibility.  The announcement was made last April that FHA lenders were going to need to step up how much they care about the performance of their borrowers and when delinquency rates increase.  This is because, with thousands of sub-prime borrowers who flocked to approved FHA lenders, these lenders ran out of available reserves.  By caring about the performance of their borrowers, defaulted loans should decrease so lenders can maintain more reserves.

Another way to make sure FHA lenders have more reserves is to increase the interest rate on the private mortgage insurance that is reqred when borrowers take out an FHA mortgage.  That way, if clients do default, the lender will have made more money in the process.  This is not one of the new FHA requirements, but rather the response of approved FHA lenders to the requirement that they maintain more reserves to distribute to borrowers.  Another response to ensure their reserves are full was to raise the down-payment requirement to 3.5%.  The more money lenders can obtain upfront, the fewer losses will be experienced if a borrower defaults on the loan.

Even with the responses of FHA lenders to make sure they have more reserves and increased responsibility, these are still very valuable loans to obtain.  Approved FHA lenders know this, which is why they do not want to lose their approved status.  One of the greatest downsides for lenders in regards to new FHA requirements is that it is now more difficult to get licensed for FHA lending in multiple states.  The bottom line is that more members are likely to be attracted to the idea of getting an FHA loan and the available funds of approved lenders must be sufficient to provide borrowers with what they need to get into the home of their dreams.


Higher FHA Mortgage Insurance Threaten Refinance and Purchase Loan Benefits


With FHA mortgage insurance premiums rising, many people are begginning to notice that the benefits of FHA refinancing and home buying are being trimmed as monthly insurance payments begin to rise. FHA lenders and consumers are getting a little nervous about the hike on insurance premiums for FHA loan programs. As many of you have already heard, HUD is ready to implement increased insurance rates for FHA mortgage loan products.

So what do higher insurance premiums mean for FHA borrowers? If you are happy with your existing FHA mortgage and you have no intention of refinancing, it means nothing because your current insurance rate is locked in. However, if you are a borrower who currently has a FHA rate of 6% could refinance into a 5% loan and not save any money. The reality is that higher monthly insurance payments can swallow savings quickly. This is causing many homeowners and potential borrowers to rethink sitting on the sidelines for FHA interest rates to fall, because it won’t benefit them to refinance if the monthly insurance rates rise.  Therefore we have seen an increase in FHA loan applications in recent weeks.  The Lead Planet, a mortgage marketing company from San Diego reported that FHA applications were up over 10% in recent weeks.  The surge of FHA refinancing is coming in from borrowers seeking new home financing and rate and term refinancing.

How will Higher Rates Impact the FHA Streamline Refinance Program?  Many loan professionals believe that it puts this popular program at a severe risk, because with higher insurance rates, the benefits disappear.

With the housing market in shambles and rates going up, you have to question the timing of FHA’s plan to raise the monthly mortgage insurance premiums. But the trend of rising FHA rates also presents added incentive to refinance an FHA loan sooner rather than later. If you refinance now, you will not only lock in a low FHA mortgage rate, but the lower monthly mortgage insurance payment.  Don’t forget that the FHA streamline refinance program does not allow borrowers to finance the closing costs, so you will need to come to the closing table with cash or find a lender that is offer a no cost refinance. Many FHA lenders are now offering special incentives for refinancing, but make sure that you compare the rates on both options. FHA streamline refinance rates remain very affordable, but expect to pay .125 or .25 higher for the no cost option.


FHA Loan Requirements for 2011


Affordable interest rates and reasonable FHA requirements continue to raise the popularity of this government mortgage program that was founded in 1934.  If you are looking for a first time house buyer loan, or if you are coming back into the home buying market after a few years of renting or even unemployment, then there is a good chance you don’ t have the full capital necessary to finance a home on your own with FHA. One of the tools at your disposal is the Federal Housing Administration. The FHA is essentially the only remaining sub-prime lending service still in practice, after the housing bubble crisis of 2007. Here, we’ll go over some of the FHA requirements for 2011, as well as some FHA loan guidelines to keep in mind.

The FHA loan requirements for 2011 are fairly straightforward, but understanding them is important to ensure you don’t waste your time if they are not met. One of the first requirements you’ll want to understand is your credit score. Previously, the FHA did not require any type of credit check for loans, but the 2007 sub-prime lending crisis changed that. Beginning in 2010, borrowers must have a credit score of at least 500 or higher in order to qualify for an FHA loan. To qualify for a 3.5 percent down payment program, the borrower’s credit score must be at least 580. Bad-credit refinancing is not as easy as it was a few years ago; however, FHA continues to make exceptions for borrowers with less than perfect credit who have compensating factors.  The main difference is that the FHA underwriter in 2011 may require more equity. Someone with low fico scores may get approved at 90% or 95% LTV, rather than 96.5%.

However, there is a caveat here. The FHA loan requirements are actually lower than those the requirements set by most lenders. Because the FHA does not actually give out the loans themselves (they are given through FHA approved lenders), the requirements of the lender takes precedence over those set by the FHA. This means that if you meet the FHA requirements for 2011 but not those of the lender, then you will not qualify for that lender’s loan. Most FHA approved lenders require a credit score of at least 620, although each lender has its own minimum.

A few FHA loan guidelines to keep in mind are what type of down payment you will have to make, as well as what the ratio of your debt to income is. The typical minimum down payment for an FHA loan is 3.5 percent, which is the smallest down payment available aside from USDA home loans and VA loan programs. There is, of course, the option to place a larger down payment. Your debt to income ratio is a comparison between your gross monthly income (before taxes) and the amount of money you spend on the various debts you have.


New Rules for Approved FHA Lenders


For years mortgage professionals have been concerned that FHA guidelines and FHA loan requirements would significantly tighten for borrowers.  That’s why many in the mortgage industry were taken by surprise when HUD announced that new rules were coming for FHA mortgage lenders. The new FHA rules could have a dramatic effect on FHA refinancing and purchase volume.

Since January 1st the process of getting approved for an FHA home loan is a little different. In April of 2010, HUD announced that FHA lenders will have more responsibility for lending starting in 2011. The idea was introduced to make independent loan companies to care more about performance and delinquency rate than in previous years.

HUD explained the changes this way: First, “Approved FHA lenders currently assume liability for all the loans they originate and or underwrite,” said HUD. “While mortgage brokers will continue to be able to originate FHA home loans through their relationships with approved lenders, they will no longer receive independent FHA eligibility approval. These new rules aligned FHA with Fannie Mae and Freddie Mac and made an effort to raise the number of brokers and lenders to become eligible to sell FHA mortgages while providing for more effective oversight of brokers by FHA-approved lenders.”

HUD continued, “Lenders, brokers or other third-party originators, already approved by FHA, will be authorized to continue to originate FHA mortgage loan programs through the end of the calendar year without sponsorship of an approved FHA lender. Commencing January 1, 2011, however, the origination authority will end.”

Approved FHA Loan Requirements

You can pretty much see what’s going on here. Since HUD is seeking the risk reduction of loan defaults they have tightened FHA guidelines over the past eighteen months and changed the insurance premium calculations. In addition, the government agency has banned thousands of FHA lenders who were unable to meet the raised FHA standards and new rules. In a way, this eliminates borrowers’ options because there are less FHA lenders in 2011, but in the end if it strengthens the FHA loan performance then maybe it is a good call.  If the rates continue to decline the FHA streamline refinance program could take a lot longer to close, because there may not be enough FHA lenders to handle the volume.

The other concerns FHA lenders have is implementation of the Dodd-Frank Mortgage Reform Act this summer is bound to make originating loans more difficult as the government mandates tougher loan restrictions with tighter underwriting guidelines for conforming and FHA guidelines.



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