Fairfax, VA – With the increased role FHA has taken in the lending world since 2007, FHA has experienced an increase of foreclosures which caused FHA to tighten lending guidelines, increase down payment requirements and institute minimum credit score requirements to qualify for an FHA loan.  Here are some changes that have been made or are on the horizon.

Credit Scores – A minimum credit score of 500 is required.  Borrowers with credit scores below 580 would have to put at least a 10% down payment on the property.  Although FHA has minimum scores of 500 and 580, most lenders have score requirements of at least 620 or higher.

Underwriting – Underwriting is a tool lenders use to document information about the property (value) and the borrower (income, credit score, debt).  The underwriting process is used to assess whether the borrower is likely to repay the loan.  Most lenders today use an automated underwriting system (LP - Freddie Mac or DO/DU – Fannie Mae) to get approval of the loan.   If the automated system flags the loan, a more in-depth manual underwriting procedure would take place to ensure the borrower qualifies for the loan.  The underwriter could require additional funds for cash reserves equal to one mortgage payment or explanations or documentation to further clarify certain aspects of loan file. 

Cash-out Refinancing – Is when a homeowner removes equity from the home in the form of a higher loan amount than before the refinance.  Currently a borrower can take up to 85% of the home’s current value.  Previously, this amount was 95% of the home value.  In order to be eligible for a cash-out, you must have excellent credit and have at least 15%  equity after the refinance. (Example: Value $100,000, Owe: $50,000, Equity available is $35,000 less any applicable closing costs.

Seller Concessions – This is a big one.  A seller concession is an amount that is negotiated in the sales contract that the seller will pay towards the buyers closing costs.  The FHA wants to slash allowable seller concessions in half, from 6% to 3%.  Some buyers want to roll in their closing costs, appraisals, etc. into the loan amount. This is not allowed with FHA loans. But this doesn’t ban concessions of over 3%.  What the new guidelines require is a dollar for dollar reduction in the home’s sale price and reduce the amount of the allowable loan.

Short Refinancing – If a borrower has no equity in their home,  they would be allowed to refinance into an FHA loan.  This is on the first loan only.  If there is a second mortgage, the two loans combined cannot exceed the current value of the home by more than 15% once the first loan is refinanced. Not every lender will allow a short refinance since the current service could be losing money by reducing the loan amount.

Why is FHA so popular today?

Credit score: FHA has always been a friend to the borrower with bruised credit. But up until roughly 1999 credit scores were not that integrated into the mortgage lending process. And FHA lenders were still manually underwriting loan files up intil the past few years.  FHA does not have a minimum credit score written into its guidelines, but it has allowed lenders to set their own minimum scores and some lenders are using the threshold in the range of 620 to 640 minimum score for FHA

Down payment: FHA currently has a minimum down payment amount of just 3.50% of the sale price. For a home in Vienna, Virginia selling for $700,000 this equates to a $24,500 down payment. Compared that to coming up with  $35,000 or $70,000 for a conventional loan.  But lets be more realistic with a sales price of say $350,000 the FHA down payment would be $12,250 verse a $17,500 or $35,000 for a conventional loan.

Seller concessions. Closing costs are still one of the biggest obstacles when getting a home loan. FHA allows 6% seller concessions where by conventional concessions typically stop at 3% of the sales price.  A seller concession is money the seller gives (negotiated) the buyer to pay all or part of the buyers closing costs.  There is talk that the 6% is to high and should be lowered to 2% of the sales price. Closing costs in Alexandria, Virginia are about 2.50%-3.50% of the sales price. This obviously depends on the rate and point structure of the loan.

Mortgage insurance: FHA has two mortgage insurance charges: Up Front Mortgage Insurance (added to the loan amount) and annual premium charge based on the down payment amount. The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount. This fee can be financed or paid out of pocket by the borrower at closing.  Most borrowers tend to finance the UPMIP by rolling the fee into their loan amount. FHA also charges an annual premium, paid in monthly installments, depending on the down payment 3.50% is .55% and 5% or larger down payment is .50%.  

Possible problems with the FHA program?

Having originated FHA loans all over northern Virginia for over 15 years I have never read anything about FHA being in trouble…until now.

Basically what’s going on right now is that there are justifiable rumors that the FHA’s reserves (capital) are hovering around dangerously low levels.

Congress has mandated FHA capital reserves to be 2%, at the moment the reserves have been speculated to be around .53% which is down from 6.5% in 2007. FHA reserves are consumed when FHA mortgages are defaulted on.

Some thoughts on the street to rebuild reserves, FHA could play with one or both premiums to increase their revenue. Let’s face it, one person’s tax or charge is another person’s income or revenue.  FHA could raise the upfront premium to as high as a maximum of 2.25%. It could also raise the annual fee, but the total premium could not exceed 3% under current congressional limits. The UPMIP has been over 3.00% before but I doubt it would go that high again. The outcry from NAR and MBA would be huge.

Federal Housing Administration (FHA) has implemented significant changes for streamline refinances . These changes will affect all FHA streamline loans across the country and in the northern Virginia area, Vienna, Virginia, Alexandria, VA, Fairfax and the surrounding cities and county’s. These changes take place on all FHA case numbers ordered on Wednesday, November 18, 2009 or later.

The changes are:

1. New seasoning requirements (length of payment)
2. Payment history standards
3. A net tangible benefit test (The loan has to be good for the borrower, imagine that) 
4. Revised remaining equity (Combined Loan To Value requirements)
5. Elimination of the abbreviated loan application
6. Additional certifications and verifications

1. Changes about length of payment history or what we call loan seasoning:

Seasoning: At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.

2. Payment History. At the time of loan application, the borrower must exhibit an acceptable payment history as described below.

Less than a 12 month payment history, the borrower must have made all mortgage payments within the month due. 

For borrowers that have a 12 month payment history or greater two points must be present: 
    Experienced no more than one 30 day late payment in the preceding 12 months
    Made all mortgage payments within the month due for the three months prior to the date of loan application.

3. Net Tangible Benefit: Basically, no more refinancing to just to refinance a client to generate fees. This is a good thing. It must be determined that there is a net tangible benefit (actual savings to the borrower) as a result of the Streamline Refinance transaction. Net tangible benefit is defined as follows:

Refinancing a fixed rate loan to a to fixed rate loan or ARM (adjustable rate mortgage loan) to ARM: A minimum 5% reduction in the total mortgage payment.

A fixed rate loan to an ARM loan: The new ARM rate must be at least 2% less than the current Fixed rate loan

ARM to Fixed: The new Fixed rate may not be more than 2% above the current ARM rate

Streamline refinancing to ARMs will be restricted on investment properties and second homes.

4: Have a second mortgage or Home Equity Line Of Credit?

All loan amounts can only addup to 25% more than the value of the property. 

5: Elimination of the abbreviated loan application. A complete loan appliction must be taken to include residence, income, and work history.

6. Certifications and Verifications: 

Must include a signed and dated cover letter certifying that the borrower is employed and has income at the time of loan application. This will be followed up with a phone call prior to closing to verify you are still employed.

Assets: If assets are needed to close, the funds must be verified and documented correctly

Changes to FHA streamline program are not for the ease of the consumer. And the changes are not for the better. In fact, most FHA loan holders will not like the changes.

The US Dept of HUD recently announced that it will be making new revisions to FHA streamline refinance guidelines.

Effective November 17, 2009, taking advantage of today’s historic low interest rates will be more difficult for consumers who currently have an FHA loan to refinance and wish to use the FHA streamline refinance program.

Can you believe the changes are not making it easier to refinance an FHA loan?  Below are some of the key changes as complied by Jeff Thomas and Lending-Solutions.net:

Seasoning (length of time loan is open):

You now must have made 6 payments on time to qualify.

Payment history:

If you have had the loan for less than 12 months, all payments must be on time.

If you have had the loan for more than 12 months, only one payment could be 30 days late but not in the last 3 months.

Net tangible benefit for the borrower:

As determined by the lender, not the borrower. The lender must determine that there is a benefit to the consumer for completing the refinance

Maximum Combined Loan-to-Value (How much equity is left in your home):

If a 2nd mortgage is on the property, a maximum combined loan-to-value of 125% is allowed. (The maximum allowed over the value of the home is 25%).

New Maximum Mortgage Amount for Streamline Refinances WITHOUT an Appraisal:

You can no longer roll in all of the closing costs on an FHA mortgage refinance loan.

Discounts Points can no longer be rolled into the loan; with or without an appraisal. If charged, this fee must be paid out of pocket.

Money needed for closing:

If money is needed to close the refinance transaction, these funds must be verified prior to closing. (Hint – finds must be in your account at least 120 days prior to closing.  

Income and employment:

Certification that borrower is employed and has income.

The lender must verbally verify that you are employed at the job you stated on the application.

Loan application:

Elimination of abbreviated Uniform Residential Loan Application (URLA).

The traditional full loan application is now required to be completed and signed.