Cool Tools News Spool

Category: Loan Guidelines

  • Use your real estate commission as your down payment

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    Today’s news spool is going to cover a couple loan guideline changes that may help you in your business.

    As I reported several weeks ago, FHA is changing its treatment of deferred student loans to be consistent with other loan programs. If a student loan appears on a homebuyer’s credit report without a corresponding payment, we can use 1% of the loan balance as the effective payment for qualifying the buyer. Previously, we had to use 2% of the balance. FHA originally said the effective date for the change was 6/30, but it recently clarified to say that lenders MUST start using the lower percentage on 6/30. We can (and we will) start using the lower amount immediately.

    If you’re buying a home, and you’re representing yourself in the transaction, Fannie Mae and Freddie Mac will allow you to use your commission on the transaction for a conventional loan.

    Fannie is a bit more restrictive. While you can use the commission to cover closing costs, you have to demonstrate sufficient funds to close not counting the commission, and your commission counts towards the limit on interested-party contributions. This is the percentage (like 6%) we quote you when you ask, “How much can the seller contribute towards closing costs.”

    With Freddie, the commission can count towards your funds to close. Additionally, you can use your commission to cover closing costs and down payment, and it does not count towards the contribution limit. Thus, you can get the seller to contribute the max towards your closing costs and use your commission to cover the rest.

  • How will trended credit data affect your homebuyers?

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    Fannie Mae has announced that this summer it’s going to require that lenders start using “trended” credit data to qualify borrowers. What in the world is trended credit data and how will its use affect a homebuyer’s ability to qualify for a mortgage?

    Currently, a credit report is a snapshot in time of one’s credit usage. The report shows current account balances, limits, and minimum payments. A trended credit report shows how those amounts have varied over the last two years. Thus, it augments usage with insights into credit habits. Do you pay off your credit cards each month? Do you pay more than the minimum balance? A trended report will reveal these habits.

    TransUnion claims credit scores based on trended data will increase the number of what it calls prime and super-prime consumers by more than 3 million. Analysts expect those who pay off their credit card debt every month will see their scores rise. Other winners may include folks whose trended data shows their revolving balances decreasing over time.

    While Fannie is clear about the use of trended data, it’s not clear how it’s going to happen. Trended data is being built into the newer credit scoring models, specifically FICO 9. Fannie and Freddie still require lenders’ use of credit scoring models that are generations older than FICO 9.

    We can hope that the trended credit data announcement means Fannie is finally going to update its credit model. If it does, it may lead to a larger pool of potential homebuyers. Reports indicate the new models reduce the score penalty for medical collections and do a better job of scoring those who use credit sparingly.

  • Take advantage of new loan limits

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    While Fannie Mae and Freddie Mac left the conforming loan limit for single-family homes at $417k in 2016, HUD raised the FHA loan limit in 4 TX metros. Remember that FHA sets an area’s loan limit based on 115% of the area’s median home price.

    Median home prices rose in Texas last year, so loan limits rose in Austin, Houston, Dallas/Ft. Worth, and Midland. Austin’s limit rose slightly to $333,500 for a single-family home. Houston’s limit also rose only a little to $330,050. The DFW limit took the prize for the largest increase, rising $24k to $334,650, now the highest in the state. Midland also had a sizable increase, rising to $285,200. The limit in San Antonio didn’t change, remaining at $316,250.

    Remember that these limits apply to the entire metro area including surrounding counties. The FHA loan limit remains at the minimum, $271,050, for the rest of the state.

  • FHA changes will disqualify some homebuyers

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    The new FHA handbook is now in effect, and I think you’re going to find the new loan guidelines reduce your pool of potential homebuyers.

    I discussed the changes in the treatment of student loans last time. This time, I’m going to detail other changes that may trip up some of your potential buyers.

    – An insufficient funds notice on a bank statement used to require a letter of explanation from the buyer. FHA wanted assurance the buyer didn’t make a habit of writing bad checks. An NSF now will force us to manually underwrite the loan. The main effect of this is a lower maximum debt ratio, meaning the buyer cannot afford as much home.

    – If your buyer was laid off in the last two years and had to take a lower-paying job, he’ll have difficulty qualifying for an FHA loan. FHA seemingly expects people’s income to rise every time they change jobs. Washington obviously didn’t experience the recession the way the rest of us did. I’m hopeful we can use letters to explain situations beyond your buyer’s control, but it remains to be seen how underwriters will apply this guideline.

    – If your buyer has income from a part-time job, we can use that income for qualifying only if the buyer has a two-year history of receiving the income.

    – This last change is going to drive parents nuts. Under the old handbook, if a parent gifted a child down payment money, we generally asked for a copy of the cancelled gift check and the child’s updated bank statement showing the available funds. Under the new handbook, we also need a bank statement from the parent showing the withdrawal of the gift funds. Now, the only one who’s going to see the parent’s bank statement is the lender, but I’ve run into many parents who were suspicious when we asked for a copy of the cancelled check.

    The new handbook offers many other changes, but I think these are the ones you’ll find cause the most heartburn.

  • FHA changes may hurt your first-time homebuyers

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    The new FHA handbook is now in effect, and I think you’re going to find the new loan guidelines reduce your pool of potential homebuyers.

    That said, probably the biggest change is a mostly positive one. The old handbook allowed for a lot of underwriter discretion. With FHA suing lenders to buy back defaulted loans, many lenders had instructed their underwriters to adopt conservative interpretations of the guidelines. In contrast, in the new handbook the guidelines are more black and white. Very little is left to underwriter discretion.

    Unfortunately, some of those black and white rules are even more conservative than what underwriters were applying before the new handbook and are likely to prevent some marginal homebuyers from qualifying.

    A change likely to impact many first-time homebuyers concerns student loans. With the previous rules, FHA would allow us to ignore student loans that were deferred greater than 12 months. The new rules eliminate this exemption. All student loans must be considered in a borrower’s debt ratio.

    Student loan servicers often don’t report a monthly payment for a deferred loan, and the new rules say we must use 2% of the loan balance if the servicer won’t report a payment. Fortunately, loan servicers typically will provide a payment based on the loan’s current balance if the borrower asks, and this payment typically is closer to 1%.

    The change makes FHA more consistent with conventional loan programs. However, Fannie Mae allows us to use 1% of the loan balance if the servicer won’t report a monthly payment.

    FHA still provides one advantage over conventional loans. It allows the use of the actual payment for income-based student loan repayment plans. These plans often have payments that are less than 1% of the loan balance.

    Next week we’ll look at several other significant changes.

  • Qualifying for mortgage easier with new student loan guidelines

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    Given all the media coverage about student loan debt keeping millennials out of the home purchase market, I thought it would be good to review some updated loan guidelines from Fannie Mae and USDA concerning this type of debt.

    One important point to remember is that both loan programs treat deferred student loans the same as loans in active repayment, meaning we have to include the loans in our debt calculations.

    Also, the guidelines recognize that income-based and graduated repayment plans, which have become popular, may not provide an accurate estimate of the loan’s impact on the borrower’s finances because the payment may rise. As a result, the guidelines require that we use a fixed percentage of the loan balance in our debt calculations.

    On a very positive note, the updated guidelines cut that fixed percentage from 2% to 1% of the loan balance. This is a big deal because it reduces the impact of student loan debt by 50%. Further, if the actual payment is less than the 1% calculation, the guidelines state that we can use that payment, but only if it fully amortizes the loan. If the actual payment is greater than 1%, we must use the actual payment.

    While USDA already has implemented the new guidelines, the changes won’t apply to Fannie loans until 4/1.

  • Will Collateral Underwriter disrupt your closing?

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    Fannie Mae is making some changes to how it analyzes appraisals, and the effects could impact your closings.

    In Dec, Fannie announced the elimination of the old 15/25 standard for comparable sales. Fannie expected appraisers to use comps that required no more than a total 15% net adjustment and 25% gross adjustment. The change is good news because I bet we’ve all worked on transactions in markets where those numbers just didn’t work.

    I suspect Fannie relaxed this standard because of this second, more important change. On Jan 26th Fannie will make its Collateral Underwriter available to lenders. The Collateral Underwriter or CU is a risk management tool for analyzing appraisal quality. In 2011 Fannie began accepting appraisals electronically and has aggregated data from millions of appraisal reports. It now uses this data to analyze appraisals for risk.

    On its surface this doesn’t sound like a big deal. CU automates the process of analyzing appraisals, which could be a good thing. The concern lies in how the analysis occurs. It’s reported that the CU results will include up to 20 comparable sales ranked by perceived risk. This will include the appraiser’s comps, which also will be assigned a risk ranking. What does it mean if the appraiser’s comps aren’t the ones CU considered the lowest risk? We don’t know yet. Expectations are that appraisers will be asked to respond to the CU results and to justify why they didn’t consider the lowest risk CU comps.

    Let’s hope that it stops there and that appraisers won’t be asked to include the lower risk comps in their analysis. The concern here is that CU has no standardized way to determine neighborhood boundaries. Thus, the lowest risk comps could from a nearby, lower-quality neighborhood.

    It also isn’t clear how the tool defines risk. Price certainly plays a factor, which again could favor lower-priced, lower-quality comps.

    Later in the year, Fannie will embed the CU results into its underwriting software, which will mean the results will be available earlier in the loan process. Until then, I expect appraisals will take a little longer, at least until folks get used to managing this new risk management tool.

  • Fannie/Freddie bringing back 3% down mortgage

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    I guess FHFA Director Mel Watt was serious about allowing lower down payments. Fannie Mae announced today it immediately will start buying mortgage loans with down payments as low as 3%. I haven’t heard all the details yet, but let me tell you what I have seen.

    First, I don’t know of any lenders yet that are offering the loan program. That may take a couple weeks. And I wouldn’t be surprised to see significant credit overlays to make qualifying a little harder that what I’m going to summarize below. Lenders still are skittish of buy backs and figure homebuyers with little skin in the game are more likely to default.

    But let’s assume lenders step up. Fannie says it will accept credit scores as low as 620, but the program is only available to first-time homebuyers, being those who haven’t owned a primary residence in the past 3 years. I understand the program has income limits, but I don’t have details at this time. And, of course, the program requires mortgage insurance, but that shouldn’t be a problem as several PMI companies say they’re willing to insure the loans.

    Freddie also has announced it will resurrect a 3% down program, but it won’t start until 3/23. Freddie’s program will be more restrictive. It will limit the program to those who never have owned a home and will require homebuyer counseling. It also may require higher credit scores.

    Follow my videos for further details on the programs and for information about lender adoption.

  • Return of 3% down payment mortgage

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    If FHFA Director Mel Watt has his way, we’ll have 3% down conventional loans again soon, but he’ll have to overcome criticism that lower down payments represent a return to the policies that led to the housing crash.

    Watt said the loan program he envisions would have tougher requirements, such as stronger credit histories or housing counseling, and Fannie Mae’s CEO claimed the new Dodd-Frank regulations will ensure borrowers can afford to repay the loans.

    Some independent analysis supports the safety of the proposed program. An Urban Institute study found that credit scores were a much better predictor of default risk than down payment size. It concluded that allowing loans with down payments less than the current 5% limit should have a negligible effect on default risk.

    Critics point out that it’s not the ability to repay that concerns them, but the ability to weather another decline in home values. It’s undeniable that having “no skin in the game” was a factor in some homeowners strategically defaulting on their underwater mortgages.

    Still others worry that this is “just the camel’s nose under the tent.” They say it’s naive to think this won’t lead to a further erosion of underwriting standards over time.

    However this plays out, I think Watt is being politically astute in sharing his plan with various interest groups and Congress. FHFA can change the minimum down payment requirement without Congressional approval, but I suspect Watt would like the cover that a broad consensus would give him.

  • Misinformation hurts 1st-time homebuyers

    For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

    by G. Steven Bray

    I see this statement way too often. “People have a hard time qualifying for a mortgage because they cannot afford the 20% down payment.” I see it in newspaper articles, which is unfortunate, but I also see it in articles written by industry insiders who should know better.

    Wells Fargo recently conducted a survey of homebuying attitudes, and 44% think a minimum 20% down payment is needed to buy a home, and respondents cited a lack of these funds as one of the biggest obstacles to buying a home. This astounded me. The same survey showed 68% think now is a good time to buy a home, yet the previous stat suggests almost half of them are sidelined because they don’t know they can qualify with as little as 3.5% down (and zero down for the military and for rural properties).

    Another survey result that caught my eye is 64% of respondents think someone must have very good credit to buy a home. This one didn’t surprise me as much because of media reports, but it still disappoints. The statement is true only when compared to the mid-aughts when lenders abounded for borrowers with 500 credit scores. Today, most lenders will accept credit scores of 620, which is truly fair credit, and I’ve seen a couple niche lenders that will allow as low as 580.

    I encourage you to help me educate potential homebuyers, especially first timers. Let’s get these folks back in the market. There are lots of good resources out there, and our Web site isn’t a bad place to start.