Cool Tools News Spool

Category: Loan Programs

  • 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.

  • USDA up-front fee increasing; reason unclear

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

    by G. Steven Bray

    USDA is raising its guarantee fee for the Rural Development home loan program on Oct 1st. The Rural Development program is one of the few no-money-down loan programs. It’s only available in areas USDA considers rural in nature, but that definition includes a lot of exurbs of major TX cities.

    The guarantee fee is up-front mortgage insurance due at loan closing. Most borrowers choose to roll the fee into the loan amount rather than pay it at closing.

    The fee is rising from 2% to 2.75% of the initial loan amount. On a $150k home, that will raise the monthly payment by about $5.50 at today’s interest rate.

    The reason for the change is puzzling. USDA claims the increase is to cover old loan losses. However, we’ve been told USDA has a low default rate, and in 2011 it claimed loan losses were declining. USDA recently testified to Congress that the guaranteed loan program has a negative subsidy, meaning that it’s charging more money than it needs to cover losses. Thus, it sounds like the increase really is just another way the administration has found to raise money for the general fund, and this time the tax falls on rural homebuyers.

    USDA is not changing its monthly mortgage insurance rate, called the annual fee, which remains 0.5% of the loan balance.

    Please note that USDA will apply the change based on the date it commits to the loan, not the date the borrower applies. In order to beat the change, a homebuyer really needs to find a home this month as it generally takes about 30 days from contract signing to USDA loan approval.

  • New USDA maps effective Feb 2nd

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

    by G. Steven Bray

    The long delayed new USDA maps go into effect on Feb 2. We talked about these news maps in my Sep 8th blog, which you can find in the archives. The main changes are around the Austin and DFW metros and amount the removal of some exurbs from eligibility. Remember that USDA bases eligibility on the date it receives a complete loan file. For most lenders, this will be a couple weeks after loan application. So, homebuyers need to act soon to beat the changes.

    USDA also implemented other significant changes to its rural development program at the end of last year. Some of the highlights are:

    – USDA increased the program’s monthly mortgage insurance rate, called the annual fee, from 0.4% to 0.5% of the loan’s balance. Even with the increase, the RD loan program still compares very favorably to FHA. Both should have roughly the same interest rate, but USDA requires no down payment and has lower monthly MI.

    – If a homebuyer can document that his current home no longer meets his family’s needs, he doesn’t have to sell his existing home as long as it isn’t financed with a USDA loan. Unfortunately, the homebuyer has to qualify with both house payments as USDA will not allow rental-income credit.

    – USDA will allow lenders to escrow at closing for minor repairs. This could increase the number of homes eligible for USDA financing. Check with the lender before you execute a contract as USDA doesn’t define “minor repairs” and some lenders may not be set up to handle escrowed funds.

    – Finally, the RD program now can be used to purchase homes with pools. However, the appraiser will be instructed not to attribute any value to the pool. Thus, unless the homebuyer has the funds to pay the difference between the appraised value and the contract price, it still may be difficult to use an USDA loan in these situations.

  • House flipping just got harder

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

    by G. Steven Bray

    FHA has never been a big fan of house flipping due to fraudulent flips that saddled it with big losses in years past. As a result, it instituted a rule that in order for a buyer to use FHA financing, the seller must have owned the house for 90 days prior to signing a purchase contract.

    During the housing recession, FHA decided to waive this rule, allowing sellers to flip houses after owning the property for as little as 30 days. The waiver allowed real estate investors to make tidy profits selling thousands of rehabilitated homes to FHA buyers.

    The waiver expired on Dec 31st. For any purchase contract signed after that date, the old 90-day rule applies. FHA says the dangers of house flipping outweigh the benefits for first-time and minority homebuyers – those dangers being that flippers will sell poorly renovated homes at inflated prices to unsuspecting buyers. Of course, investors disagree and point out that the house flip rule only raises the cost of renovated homes. Flippers say they can rehabilitate a home in 45 days. Having to hold the home for an additional 45 days just increases the flippers’ holding costs, which get passed along to the buyer.

    If you’re working with investors, this change affects the pool of potential buyers. While they won’t be able to sell to FHA buyers for 90 days, they can sell to buyers using conventional financing as Fannie and Freddie only require a seller to own a home for 30 days.

  • 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.

  • New USDA mortgage maps could take effect in Dec

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

    by G. Steven Bray

    We talked a while back about the new USDA guaranteed housing maps and how the changes could impact suburban areas in Texas. Implementation of the new maps was delayed when Congress funded the government using a continuing resolution back in Sep. The continuing resolution expires Dec 11th, and the expiration ends the delay for the new maps.

    Or does it? Some folks in the real estate industry have suggested given the results of the mid-term elections that Congress will pass another short term continuing resolution and leave funding the government to the next Congress when Republicans will control both chambers. If that happens, these folks expect Congress to extend the current maps yet again.

    However, I think that’s far from certain. Recent media reports indicate Republican leaders are considering agreeing to fund the government for the remainder of the fiscal year rather than risk a game of fiscal chicken with the president that could result in a government shutdown.

    This issue is particularly urgent given that any USDA applications that haven’t been approved by the end of the month will have to start the application process again. If your customer is using a USDA loan and expects to close in the next month, pay attention to the loan status. If Congress doesn’t extend the maps, you could find USDA pulling the eligibility map out from under your contract.

    I’ve included a link to the USDA eligibility Web site at the end of my blog. From it, you can view both the existing and new property eligibility maps.

    USDA Eligibility Web site

  • USDA will stop accepting mortgage applications

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

    by G. Steven Bray

    We’ve talked in the past about the pending changes to the USDA rural development mortgage program. In order to implement the changes in its computer system, USDA has decided not to accept applications during the last week of Nov. The reason stems from the large backlog of applications in many states. USDA doesn’t feel it can maintain two processing systems, so it will process the applications it receives by the 21st under the old system. It will process applications it receives starting on Dec 1st using the new system. During the last week of Nov, USDA will play catch up.

    Given that the outage period is during Thanksgiving week, I hope the impact will be minimal, except on the USDA employees who get to work overtime. However, there is one area of concern. USDA acknowledged that if it is unable to work through the backlog of applications, any that are not processed will be returned to the lenders unapproved. For these applications, borrowers would have to sign new documents, and lenders would have to underwrite the applications again before submitting them to USDA for approval. This potentially could add another week or two to the loan processing time.

    The takeaway from this is that if you have a customer using a USDA loan, and you want to close in early Dec, encourage all parties to act with urgency. You want USDA to receive that loan package well before the Nov 21st cutoff date, if possible.

  • FHA doing away with pre-payment penalty

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

    by G. Steven Bray

    For those with an FHA mortgage, an unpleasant surprise may await when they sell their homes. FHA charges interest one month at a time. That means even if the sale closes on the 15th of the month, FHA calculates the mortgage payoff through the end of the month. For a $200,000 loan balance, Uncle Sam is going to dip his hand into your seller’s pocket for another $400.

    FHA enacted this rule to protect investors who buy mortgage-backed securities, who currently have the right to demand full-month payments of interest even when a loan pays off at the beginning of a month.

    But this runs contrary to other government loan products and Fannie and Freddie mortgages. When the CFPB released its Qualified Mortgage rule, it labeled this practice a pre-payment penalty and instructed FHA to do away with it by Jan of next year for FHA loans to remain qualified mortgages.

    Well, not wanting to seem overeager, FHA will wait until the last minute to enact the change. Any FHA loan that closes after Jan 21, 2015 will prohibit this practice. When a borrower pays off the mortgage, the payoff will include only interest through the funding date.

    All I can say is finally. The industry has asking for this for years. The funny thing is that in its announcement concerning the change, HUD suggested it was only lender greed that caused these extra interest charges and that the change would “prohibit mortgagees from charging borrowers interest” after payoff. What a bunch of bull. You and I both know that this had nothing to do with lenders. It’s what FHA required. I wonder if our government ever will take responsibility for anything.

  • FHA says it won’t lower MI

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

    by G. Steven Bray

    A big issue of late for all real estate industry professionals has been the dearth of first-time homebuyers. Analysts have suggested a number of possible reasons for this from excess student loan debt to millennials’ unwillingness to make a commitment. Today, we’re going to discuss another possible reason: higher FHA mortgage insurance rates.

    In Apr, 2013, FHA raised its mortgage insurance rate for the 5th time since 2010. As we’ve discussed in the past, the changes have priced some homebuyers out of the market. NAR claims the higher rates prevented 125,000 and 375,000 renters from qualifying to purchase a home last year.

    The reason for the changes was simple. Due to lax loan standards during the last decade, the FHA Mutual Mortgage Insurance Fund was going broke. To shore it up, FHA figured it would raise prices. For homebuyers with good credit, the FHA MI rate is now more than double the rate offered by private MI companies. So, homebuyers who can cobble together a 5% down payment have moved over to conventional loans. Those who can’t are paying the higher FHA rate or sitting on the sidelines.

    Unfortunately, first-time homebuyers are those least likely to have down payment money, and recent analysis shows that the vast majority of FHA borrowers are first-time homebuyers. Thus, a logical conclusion would be that higher FHA MI rates are reducing the number of first-time homebuyers.

    FHA has indicated it has no intention of reducing its MI rates any time soon. The only relief we may see in the near term is a reduction for first-time homebuyers who receive homebuyer counseling. Longer term, industry pundits think FHA may finally reduce the rates once its insurance fund recovers to its Congressionally-mandated level. Watch for the FHA actuarial report later this year for FHA’s projection of when that will occur.