FHA Loans category archives

If you haven’t heard, FHA announced on February 14th that it is raising the annual mortgage insurance premiums, also known as the FHA monthly mortgage insurance. These changes are mentioned in Mortgagee Letter 11-10 and become effective on or after April 18th, 2011. The new change is 25 bps more.

I have already heard that some of you think this will hurt the housing market and our economic recovery. Why the changes? HUD wants to strengthen the FHA’s Mutual Mortgage Insurance Fund, known as the MMIF. Think about it this way. If FHA doesn’t become pro-active now and FHA disappears in the future, then where do you think we would be regarding financing options. 

Keep in mind that Fannie Mae has a pricing change that goes into effect on April 1st, 2011.  Pricing Hikes for Conventional Loans in April 2011  That many lenders and investors have already made this change to their pricing.  Also, there is no change to the Upfront Mortgage Insurance Premium of 1 percent for FHA loans, just the monthly premiums have been changed.

Old verse New Monthly Mortgage Insurance Changes

This chart is from Mortgagee Letter 11-10 – Annual Mortgage Insurance Premium Changes -

As you can see by the red arrow, indicating that this goes into effect on April 18th, not April 4th.  So what does this all mean to those refinancing or buying new homes with a FHA mortgage?

This is based on a $250,000 sales price and the end result is that it would cost the buyer $50.26 more in their total monthly mortgage payment. You can also look at it from the flip side when qualifying buyers. This could lower the new buyers purchasing power by about $9,000. Meaning, instead of the $250,000 purchase price in the example, they can now afford a $241,000 home.

This new change is for your primary 1 to 4 unit properties. This change does not affect Title 1 loans, the HECM loan (reverse mortgages – which I am writing about tomorrow), the HOPE loan, and a few other types of FHA loans. This can also be found in the new FHA mortgagee letter 11-10.

There are also new changes to how one would have to request a FHA case number, cancellations of FHA case numbers, and a few other issues. These changes can also be found in the new FHA mortgagee letter 11-10.

Here is a quick breakdown of different purchase prices just to give you an idea how much more your mortgage payment will increase because of the new FHA monthly mortgage insurance change. In simple math, your mortgage payment will go up $10 per month for every $50,000.

Government loans, such as those backed by Fannie Mae, Freddie Mac, and the FHA, are slated to get more expensive and harder to qualify for, assuming changes recommended by the Treasury are implemented.

The agency released their recommendations for a complete overhaul of the mortgage market today, essentially calling for less attractive government-backed mortgages to restore the largely absent private market.

Among the changes they’d like to see are higher down payment requirements for Fannie and Freddie backed loans (10% down) and costlier annual mortgage insurance premiums on FHA loans (up .25%).

That, along with higher guarantee fees on loans securitized by Fannie and Freddie, should get the private market for mortgages up and running again.

Additionally, Treasury has recommended that the conforming loan limit fall to $625,500 from the current elevated level of $729,750 in the most expensive regions of the country on October 1, 2011.

All of these measures are aimed at reducing the government’s share of the mortgage market, which could prove a burden to taxpayers if not dealt with.

But the move could push mortgage rates higher, which are already at 10-month highs, according to the latest release from Freddie Mac.

And the fear is that such changes could throw a wrench in a possible housing recovery later this year.

The report noted that more than nine out of every ten new mortgage are guaranteed or insured by the government.

(photo: thetruthabout)

College is getting more expensive and based on what I have seen since I was twenty, I don’t think the costs of college are going to go down anytime soon.  So if  you happen to be a parent that is sending one of your kids off to you already know that it is going to be expensive regardless if it is Sanford Brown or Stanford.  But what you may not know is that there is an FHA loan program that may be able to help you lessen the financial blow by saving some money on rent while Junior is there.

Enter the FHA Kiddie Condo loan.

FHA Kiddie Condo Definition

The FHA kiddie condo loan is actually not an “official” FHA loan program – it is actually a way of describing something that FHA allows called a “non occupying co-borrower”. Since the implementation of the non-occupying co-borrower rule, enough parents used the program to buy their college student a condo that the nickname of FHA kiddie condo loan has stuck.

FHA Kiddie Condo Program: General Guidelines

When getting an FHA loan, if one or more of the borrowers will not occupy the property as their principal residence the following rules will apply:

• Maximum loan-to-value will be 75% unless the borrowers are related by blood, marriage or law (except for rare circumstances) or for properties that are 2-4 unit properties
• Everyone who is on the loan, must sign the loan documents and is fully liable for repayment on the loan
• Everyone who is on the loan must meet the credit score guidelines set by the lender
• Rules are established so that parents can’t develop a portfolio of rental properties

With the rising costs of college and the recently depressed price of real estate, it may make more sense than ever to look into the FHA Kiddie Condo loan as a way to make sure you get the best bang-for-your-buck.  If nothing else, it may be your child’s first finance-related course – taught in the real-life school of hard knocks.

Photo credit: Wikipedia

My previous blog suggested that the Homepath Renovation loan can be a better option than a 203K streamline.  Which I still believe but wanted to go into more detail on the costs associated with the two programs. 

The actual closing costs between the 2 programs are pretty similar so to break down those costs may be a bit overkill so I will focus on the major differences.

Downpayment:  FHA requires a 3.5% down payment while the Homepath Renovation loan only requires a 3% down payment.

Interest rate: You will almost always find that and FHA 203(K) loan will have a lower rate compared to Homepath.  However that lower rate comes at a cost.  The 203(K) loan requires 1% upfront mortgage mortgage insurance to be charged.  That fee is typically financed into your loan amount.  Your loan amount will be higher.

In the example I provided (Total Cost Analysis),  the FHA loan amount is increased by $3,008 and your monthly payments are based on the higher loan amount.   In Addition, (using the same Example) the fha loan also requires monthly mortgage insurance of $225.67 per month.  Mortgage insurance is dropped on an FHA loan when the loan balance reaches 78% of the original loan to value.  Mortgage insurance will remain on the example I provided for roughly 124 monthly payments ($27,983.08), unless the borrower pays additional to principle.

The homepath loan would require the consumer to pay 2.125% in points, which will add an additionl $6,393.85 to the closing costs associated with the homepath loan.  If you do not have enough in assets to cover this additional costs then the 203(K) loan will be your better option.  If you do have the assets the home path loan may be the better option.

Difference in Principle Balance

The first difference you need to account for is your principle balance.  Initially your loan balance will be $1,414.45 higher with the FHA loan (meaning you have less equity in the home with an FHA loan than a homepath loan).  The difference in the loan balances will get closer with each payment because of the difference in the rates.  You will be making a bigger principle payment with the 203K loan (but you have a higher loan amount).  The balance will be roughly the same after the 42nd payment.

Read the rest of this entry »

Energy Efficient Mortgages have not been used or talked about much, because many loan officers and or lenders don’t know much about them. One could easily associate this type of mortgage with a FHA 203-k loan. But that would be a very bad assumption, because there isn’t much more to an energy efficient mortgage, than to a regular FHA mortgage, as opposed to the paperwork and understanding that goes into a 203-k loan.

Saving money monthly is the key to any mortgage program, especially when it comes to an Energy Efficient Mortgage, also known as EEM loans.  Unless you are having a new home built that could be an energy efficient home, in many cases, the older home probably won’t be up to the current standards, which could cost you hundreds of dollars monthly.

Quick history about EEM’s -  Congress started a pilot program in 1992 demonstrating the use of energy efficient mortgages, known as EEM’s. (Energy Efficient Mortgages) EEM’s recognize that reducing utility expenses will allow a homeowner to pay a higher mortgage payment to cover the cost of the energy improvements that were financed into the mortgage. A good reason behind the EEM’s program is that it offers homeowners who couldn’t initially afford the cost of these energy saving improvements out of pocket, giving them the chance to finance them. These loans can be both done when purchasing a new home or when refinancing. FHA has adopted this into their financing options which allows a borrower to :

• save money monthly
• incorporate the improvement costs into the mortgage
• these improvements are installed after the loan closes
• this program allows you to use normal FHA guidelines with FHA mortgages

How does the Energy Efficient Mortgage program work?

The maximum amount of the portion of the EEM for energy improvements is the lesser of 5% of:

• the value of the property
• 115% of the median area price of a single family dwelling
• 150% of the conforming Freddie Mac limit.

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Eligibility Requirements

• Properties that are eligible are One to Four unit existing and new construction properties.
• Borrowers are approved through the normal FHA mortgage guidelines for obtaining a mortgage.
• The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is the lesser of 5 percent of the property’s value, depending on 3 different equations. Please refer to these changes above.
• To be eligible for this mortgage, the energy efficient-improvements must be cost effective, meaning that the total cost of improvements is less than the total present value of the energy saved.
• The cost of the energy improvements and the energy savings must be determined by a home energy rating report which is done by a home energy rating system (HERS) or energy consultant. The HERS report usually costs from $250 to $350 and can be paid by the seller, the buyer, or sometimes included into the mortgage.
• The energy improvements are installed after the loan closes. The money is placed into an escrow account and is released once an inspection verifies the improvements are completed and that the savings will be achieved.
• Because of this program, the final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements. Here is a list of the FHA max mortgage limits.

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EXAMPLE :

***I am not using a particular credit score and all closing costs are the same for either loan example.***

As you can see, it’s not a huge savings, but it does add up. Just in 1 year you saved $1,135.20. And the cost of the energy improvements that were added onto your mortgage now become a tax write-off.

**** My examples in the cost of improvements and your monthly bills, will vary depending on several different factors, such as age of air conditioner or heating, lighting fixtures, etc, etc. And also depending on what you pay per month. I only used these figures as examples.****

Reminder : There are special and certain tax credits both nationally and locally. For tax purposes, there is a $1,500 tax credit until the end of the year. Not sure if the government is going to extend this. There are also state credits and sometimes credits given by your utility companies. Just be careful though, because sometimes you have to use those they recommend when doing the energy inspection report.

Here is a link to a list of the past mortgagee letters for everything about Energy Efficient Mortgages.  FHA Energy Efficient Mortgages – Mortgagee Letters

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Energy Efficient Mortgage Series

Energy Efficient Mortgages – EEM loans – Part 1 of 2 – FHA loans going ‘Green’

Energy Efficient Mortgages – EEM loans – Part 2 of 2 – VA loans going ‘Green’

Since FHA decreased the UFMIP (up front mortgage insurance) premium and increased the Monthly MI (mortgage insurance) premium, I have seen an uptick in the number of Homepath renovation loans I am originating and I thought I would share why.

Whenever you make a comparison between loan programs you have to start with some Assumptions or a scenario:

Purchase Price:                    $200,000

Cost of Renovation:            $30,000 (if the cost of Renovation exceeds $30,000 no need to compare Homepath is not an Option)

Fico Score:                              660 (if your Fico score is less than 660 no need to compare Homepath is not an Option)

Property Type:                     Single Family or Condo (If the condo is non-warrant-able and cannot be FHA Approved no need to Compare FHA is not an Option)

Max Financing:                     FHA 96.5% LTV and Homepath 97%

What is the Difference in the rates? 

Homepath:With the above scenario I would have to charge 5.25% with 2.125% in points.  The homepath program has a number of loan level price adjustments that total 5.375% in points which include: 1.25% for loan to value and FICO score, 3.625% for No MI, .50% for 97% Loan to Value.  Those adjustments can be paid in cash as additional closing costs or paid by the lender by charging a higher rate.  The highest rate on my rate sheet today is 5.25% and that will allow me to pay 3.25% of the 5.375% in LLPAs leaving 2.125% that will need to be charged as points.

FHA 203(K) Streamline: With the above scenario I would be charging a rate of 4.75% with 0 points.  FHA does require UFMIP of 1% that is typically added to your loan amount in addition to requiring an additional .5% down payment. 

So…The real difference is about .50% in a rate and .625% in  points!  the monthly payment is about $100 less per month with the Homepath loan than the 203K streamline.  Closing costs and paperwork between the two programs are pretty similar.

Take a look at this Total Cost Analysis that I prepared comparing the two programs.

Why would someone have two FHA loans at the same time? Here are the reasons and the exceptions that may allow someone to have 2 concurrent FHA Loans.

• Increase in family size – There must be an increase in family size in which their current house can’t support the new family member(s). You will have to prove the increase. Also, you must have 25 percent equity in your current home or pay it down to 75% LTV (loan-to-value).  An FHA approved appraiser must be used to determine such new value.
• Relocation – If the borrower is relocating and it is established that they aren’t in reasonable distance from their current property. Keeping in mind that reasonable can be defined differently from any lender.

Note – If that borrower(s) returns back to the same area, they are not required to re-establish residency in that property in order to have another FHA insured mortgage.

• Vacating a jointly owned property – A borrower my leave a property and be eligible for another FHA loan if the co-borrower is to stay in the same property that is being vacated.

A good example of this is because of a divorce and that the vacating spouse needs to buy a new home.

• Non-Occupying co-borrower – If someone previousily co-signed for a family member or relative while using a FHA loan.  This type of FHA loan is called a non-occupant co-borrower loan. This borrower would still be eligible to purchase their own home using a FHA mortgage.

Without meeting any of these requirements, a potential borrower would not be approved for a second FHA insured loan.

Today’s Mortgage Definition is: FHA 2/1 Buydown

FHA 2/1 Buydown — A Simple Definition:

An FHA  2/1 buydown is an option when getting an FHA loan where you can “buy down” the interest rate for a period of 2 years by putting a lump sum of money into a buydown account that will supplement the payment schedule on the loan for 2 years.  The payment the borrower will pay in the first year of the loan will be calculated on an interest rate that is 2 percent lower than the “note rate”.  In the second year of the loan, the payment that the borrower will make is calculated on an interest rate that is 1% lower than the note rate.  After the first two years have passed, the remaining 28 years of payments are calculated at the note rate.

Although the 2/1 buydown isn’t widely used, it can be a very useful financial tool for people who expect their income to increase after a brief period and want to stretch a little bit to get into a larger/nicer home.  I personally had a 2/1 buydown for my first condo that we bought in college where we expected to be able to “graduate and get real jobs” about 2 years after we initially bought the condo.

FHA 2/1 Buydown — An Expanded Definition:

FHA 2/1 buydowns are a fairly small percentage of the overall number of FHA loans done and while it used to be true that you could qualify at the reduced interest rate, this is no longer the case.  When getting an FHA loan, if  you want to participate in the 2/1 buydown program you must qualify at the note rate that will be on the loan.

The general criteria that must be present when doing an FHA 2/1 buydown include:

• The mortgage must be a purchase-money mortgage, not a refinance of an existing mortgage.
• Buydown funds may come from the seller, lender, borrower or other party.  Funds from the seller or any other interested third party are considered seller contributions and must be included in the six percent limit on seller contributions.
• The mortgage must be a fixed-rate loan on an owner-occupied residence.
• The buydown must not result in a reduction of more than two percentage points below the interest rate on the note.
• The buydown must not result in more than a one percentage point annual decrease in the interest rate. The borrower’s payment may only change once per year.

In all honesty, I don’t entirely know why there aren’t more FHA 2/1 buydowns done in the current housing downturn.  When done correctly, they can be a great tool for first time home buyers to stretch a little bit to get into a home and leave a little bit of money left over each month to help fix the place up.

Will FHA 2/1 buydown accounts start to gain momentum?

Only if people know about them.

Good news for the housing market. Both the House and the Senate passed H.R. 3081 the other day. This extension allows Fannie, Freddie, and FHA to loan in High Cost areas without charging extremely high rates, formerly known as jumbo or super jumbo mortgages.

What this means is that the normal conforming loan limits for Fannie, Freddie, and FHA remain at $417,000. Loans over $417,000 would fall into the next category, which many just call Jumbo loans. With this new extension, loans can still be sold on the secondary market up to $729,750 with the loan guarantee and insurance programs to continue backing these loans in markets with the highest cost of living. Without the extension, these loan amounts would fall under such terms as true non-conforming loan limits which in recent years have come with a much higher cost to the borrower. The conforming loan amount of $417,000 would also have reverted back to the 2009 limits. The impact of that would mean a $400,000 loan would have been more expensive and sometimes not allowed by FHA depending on the state and the county limits.

Conclusion: In a struggling economy, this opens up borrower access to affordable long term fixed rates. This cap of $729,750 is extended to September 30th, 2011. Without going through, it would have expired at the end of this year, and resulted in increased interest rates. How much of an increase?

Example : Right now, on a FHA loan, you are looking at about an extra 1.5 points more for any loan over $417,950 to $729,750. If you didn’t want to pay the extra 1.5 points, the rate would be about another 1/2 percent higher. In many cases, the higher the loan amount, the more points or rates would drop. Why? It’s called “profit margin”. If we were to keep the playing field leveled, the same profit for each loan, then as mentioned, the cost of the rate should decrease some.

Without the extension, rates could climb through the roof and the guidelines could become additionally strict. I base this opinion from 2007 when we didn’t have these loan limits extended. It was a much larger risk on the secondary market for private investors. Another impact was the fact that there was no funding from the government to back such risks and higher loan limits. In 2007 and 2008, the rates on such loan amounts in these higher rate ranges were about 1.25% to 1.75% higher. This could have definitely made the process of home ownership more cumbersome for the average person living in high cost areas such as New York City, San Francisco, and similar markets.

For such loan limits, here are some links:

• FHA maximum mortgage loan limits
• Loan limits for Fannie and Freddie

Today’s Mortgage Definition is: FHA Required Repairs

FHA Required Repairs — A Simple Definition:

Many times when buying a house that has previously been a distressed property (either a short sale or a foreclosure), at least a few repairs will be required.  According to FHA, there are required repairs and repairs that are not required in order to have the property qualify for FHA financing.

FHA Required Repairs — An Expanded Definition:

At the broadest level, a required repair is anything that represents a risk to the health and safety of the occupants or the soundness of the property.  A few examples of required repairs include (but are not limited to):

• Inadequate access from the bedrooms to the exterior of the home
• Leaking or worn out roof
• Structural problems such as foundation damage caused by excessive settlement
• Defective paint surfaces on homes that were built prior to 1978
• Defective exterior pain surfaces in homes built after 1978
• Evidence of wood destroying insects that have not been treated by a pest control company yet

When the appraiser is writing up the appraisal, if any of the above conditions exist on the property the appraiser will note it in the appraisal and the underwriter will require that the condition be repaired before the loan will be approved.

When buying a home and planning on getting an FHA loan for the property, be sure to be aware what kinds of repairs are required repairs… it can help you avoid surprises in the financing process.