Archive for the ‘Loan Programs’ Category

FHA finally makes a change to mortgage insurance

March 1, 2023

FHA finally reduces the amount borrowers will pay on a monthly basis for mortgage insurance. This is something the writers here at The Mortgage Blog have clamored about for years now. What exactly did FHA do?

The change is the amount borrowers pay on a monthly basis. Assuming a borrower makes the minimum down payment, the annual premium is 0.85% (or 0.0085) of the loan amount. Then divide that figure by 12 for the monthly amount. The new figure for those making the minimum down payment drops to 0.55%…. a 30 basis point reduction.

Per the announcement, FHA expects this to save borrowers, on average, $800 per year. Some quick examples:

  • Using rough numbers, a purchase price at $300,000 would save about $600 per year
  • A purchase price of $350,000 would save close to $1,000 per year.

The $800 on average makes sense when looking at homes over $300,000.

FHA mortgage insurance is different than conventional in that the coverage amount (0.55%) is the same regardless of the credit score of the borrower. Mortgage insurance on conventional loans change depending on borrower’s credit score and the amount of the down payment. There are two situations where FHA mortgage insurance changes:

  • When making a 5% down payment (and not the minimum 3.5% down), the mortgage insurance drops to 0.50%
  • When making a 10% (or larger) down payment, the mortgage insurance premium stays the same, but the borrower no longer pays mortgage insurance on a monthly basis after 11 years.
  • In my 17 years in the mortgage industry, I’ve rarely had anyone get an FHA loan with a larger down payment. Almost everyone goes with the 3.5% option, so the mortgage insurance is fixed at 0.55% for the life of the loan.

The “permanent” state of the mortgage insurance is what I would like to see changed. Conventional loans eventually drop their mortgage insurance coverage. I think it should be the same for FHA loans too. There is no reason why someone should still be paying mortgage insurance after 11 years when they have a lot of equity in the home.

Yet beggars can’t be choosers. FHA mortgage insurance premiums were set at 0.85% and permanent for many, many years now. Hopefully this is a first step (and needed change), and maybe soon it can also go from “permanent” to 11 years max payment on mortgage insurance. One can dream!

Request to Extend Affordable Mortgage Access

February 16, 2023

The Mortgage Bankers Association (MBA) has officially requested that the Federal Housing Finance Agency (FHFA) expand income eligibility for certain low down payment loan programs. FHFA regulates mortgage giants Fannie Mae and Freddie Mac. The MBA sent a letter to FHFA specifically requesting changes to the Home Ready and Home Possible loan programs.

Home Ready and Home Possible currently provide interest rate pricing discounts and mortgage insurance premium discounts for borrowers whose incomes are less than 80% of the Area Median Income (AMI) where the subject property is located. These discounts apply to home buyers whose credit scores are 680+ and who complete a free online home ownership course. Lender pricing typically adjusts interest rates higher for borrowers with lower credit scores and those who are financing condos using loan amounts greater than 75% of the condo’s value. For Home Ready and Home Possible borrowers, these credit score and condo pricing adjustments are eliminated. Making these programs even more powerful is the fact that the discounts apply to borrowers who can make only a 3% down payment.

Saving enough cash for a down payment is one of the greatest challenges that homebuyers can face. Providing these interest rate and mortgage insurance discounts for loans with only a 3% down payment is a powerful tool for homebuyers without alot of available cash.

In the letter to FHFA, MBA requested that the agency expand Home Ready / Home Possible eligibility to borrowers with incomes up to 100% of the subject property’s AMI. MBA also requested that the income threshold be eliminated completely in low-income census tracts. This change would encourage homebuyers to seek properties in low-income areas. MBA president and CEO Robert Broeksmit stated, “Raising the AMI limits to expand access to these programs would still be beneficial as there are key features of Home Ready and Home Possible loans, such as a 3% down payment, that make homeownership attainable for historically underserved borrowers.”

I think an increase is warranted. When you look at 80% of the average income in an area versus the average home price, it eliminates many borrowers from qualifying for these programs. For example, in DeKalb County, the Home Ready / Home Possible annual income limit is $76,560. Some first-time buyers may qualify to buy an average-priced home, if they have no additional debt, but it is tight. By allowing the amount to go to 100%, more borrowers would qualify to purchase the average home price in the market with some additional debt. This is important as most first-time home buyers are in the Millennial/Gen Z demographic. These generations have additional student loan debt that previous generations didn’t have. Raising the income threshold to 100% AGI isn’t about buying more home. It is allowing first-time home buyers to purchase the average home in their area while having some additional debt obligations. If these programs are intended to help first-time home buyers, then let’s help them.

For reasons covered in a recent Mortgage Blog post, now is a great time to buy a home. If you want to buy a home in Georgia, give me a call and we can quickly determine which discounts you can obtain, and then set you on a path to home ownership.

FHA Expands Eligibility

July 26, 2022

The Federal Housing Administration (FHA) recently published guidance to mortgage lenders with the goal of expanding mortgage eligibility for borrowers who experienced a pandemic-related employment gap or income reduction. FHA defines a COVID-19 related economic event as “a temporary: (1) loss of employment, (2) reduction of income, and/or (3) reduction of hours worked during the Presidentially-Declared COVID-19 National Emergency.” FHA representatives have stated that this change will benefit salaried workers, hourly workers, and the self-employed who were affected by COVID-19.

The key requirement for the new FHA guidance is that the borrower’s current income must be “stable.” Stable income has long been a requirement for FHA loan approval. In my opinion, since the major negative economic impacts from COVID-19 happened roughly two years ago and employment rebounded pretty quickly, this new guidance seems too late to have a major impact on loan approvals.

For salaried workers, we underwrite income using current pay stubs. An employment gap over 12 months ago has never really been an issue, so I don’t see this helping salaried borrowers at all.

For hourly workers, if we have twelve months of consistent verifiable income (using pay stubs and W2 forms), we can underwrite and verify income. So again, I don’t see this change as really helping hourly workers now because if they have earned consistent income for 12 months, low income or an employment gap from 2 years ago should not be an issue anyway.

This guidance could be helpful for self-employed borrowers whose income was negatively impacted by the pandemic. FHA underwriting for the self-employed requires verifying two years of income documented on tax returns. If a borrower’s income dropped in 2020 but then rebounded in 2021, I assume that this new guidance will allow us to discount the impact of the lower 2020 income and focus more on the higher 2021 income for underwriting. That could help some borrowers. (Note that since we are more than halfway through 2022, underwriters will want to verify that 2022 income is consistent with 2021 income, using a year-to-date profit and loss statement.)

Ultimately, I think FHA has good intentions with this new guidance, but I don’t expect it to have a significant impact. If FHA really wants to help home buyers, I think they should lower their mortgage insurance premiums and make the monthly insurance premiums temporary for all borrowers. (Right now, FHA monthly mortgage insurance is permanent for borrowers who make less than a 10% down payment.) In my opinion, this change would benefit more borrowers. (Read more about this topic in a recent Mortgage Blog post.)

If you want to buy a home in Georgia, give me a call and let’s discuss your loan options to determine the best mortgage for you. We will review interest rates and mortgage insurance premiums based on your circumstances, and then decide if your best mortgage option is FHA, conventional, VA or even non-QM. It’s still a competitive market with more buyers than sellers. We can help you win the contract with a TBD underwrite to make your offer more attractive to sellers.

More guideline changes from FHFA

October 19, 2021

FHFA is now allowing rental history to be included for qualifying purposes on buyers. This is new and in the process of being implemented. Here is how it could work:

  • the borrower’s must be be first-time homebuyers
  • pay a monthly rent of at least $300
  • purchase the house as a primary residence
  • consent to sharing 12 months of their bank statement history to verify rent payments.
  • Lenders must obtain a verification of asset report from one of Fannie Mae’s approved vendors to include with the borrower’s file. 

While this is FHFA’s recommendation, lenders could add overlays to the requirements (in other words, more requirements). What is an example of an overlay? Here is an easy on on FHA loans:

  • Before Covid, some lenders would approve an FHA loan with a credit score at 580. FHA will still accept those loans if they receive automated underwriting approval.
  • Even though still acceptable, during the first year or so of Covid, most lenders increased their FHA credit score requirements to as high as 680. Most have gone down some to 640. I am not aware of lenders still doing FHA at a 580 credit score.

That is an overlay.

Again, this rental history is new, so unsure of how it will officially work. Something I would expect to see added, for example, is proof of when rent is due. A bank statement only shows when a payment is made and not when a payment is due. I’d expect a copy of the rental lease agreement to be required as an overlay to this.

Regarding the change, Fannie Mae says this change is not relaxing credit standards. Instead, it’s looking for reliable indicators of the borrower being able to meet our credit standards. The thought process is if rent is being paid on time, then a mortgage will be paid on time too.

How much of an impact will this make? According to Fannie Mae it would have allowed a little more than 10% of buyers who were denied be able to purchase a home. Let’s see how this gets rolled out and how much of an impact it will have. Implementation of something new like this is always…. interesting.

New FHA guidelines for student loan payments

July 6, 2021

FHA continues tweaking its guidelines this year. Still hoping FHA will change its requirement of mortgage insurance being permanent. Until then…. this recent change is a good one!

Currently, FHA is strict when it comes to student loan payments. It isn’t as simple as using what is shown on someone’s monthly statement. If the student loan is in an income based repayment plan, the monthly payment must still be an amortizing payment (meaning, the loan will still be paid off in its allotted time frame). If not, then the qualifying payment defaults to 1% of the student loan balance. If a student loan is in deferment, again, use 1% of the balance.

Contrast this with Conventional loans handling of income based repayment plans. Even if the payment is $0, as long as it is in writing from the student loan company, then $0 can be used for loan qualifying.

If a student loan is in deferment, then a borrower can be qualified using 0.5% of the current balance as the payment OR the actual payment once out of deferment (must be in writing from the student loan company).

FHA caught up to the trend of Conventional loans and will now have similar guidelines:

  • if a loan is in deferment, then only 0.5% of the balance is required for qualifying
  • income based repayment plans are allowed so long as it is confirmed in writing
  • the payment on an income based repayment plan no longer needs to be an amortizing payment

This is great news for buyers looking to use an FHA loan for their home purchase while balancing their purchasing power with student loan debt.

Looking to purchase a home? Have student loans and wonder how it will impact you? If you are buying in the state of Georgia, contact me today! In a few minutes, we can answer many of your questions and have you one step closer to home ownership!

Appraiser requirements change for FHA loans

June 15, 2021

The House Financial Services Committee has passed a bipartisan bill related to FHA loans in hopes of making it easier for home buyers to use FHA loans to purchase a home.

One change I’ve personally been hoping for with FHA loans is allowing FHA mortgage insurance to eventually be removed from the loan. As has been the case for several years now, FHA mortgage insurance is still permanent.

So what is the recent change?

The bill reduces the number of hurdles which appraisers currently face before they are allowed to perform appraisals for home purchases financed by an FHA mortgage. Federal standards set for FHA appraisers would be brought in line with the federal minimum requirements already in place for other home mortgages, particularly those purchased by Fannie Mae and Freddie Mac.

This would help address the current shortage of certified appraisers that some parts of the country are facing. The lack of appraisers for FHA-insured mortgages has a disproportionately large impact on first-time homebuyers, low- and moderate-income households, and people of color.

“The process of purchasing a home is already difficult enough for first-time, low-income, and minority homebuyers. They do not need the added challenge of finding a certified appraiser,” said Rep. Brad Sherman who sponsored the bill. “This legislation is a commonsense revision to current appraisal requirements which will make FHA mortgages accessible to more Americans.”

So a common sense change made for FHA loans…. perhaps another common sense change would be allowing mortgage insurance to fall off once 20% (or 22% or 25%) equity is reached. Anything is better than the current “permanent” status FHA loans require.

Decreasing Use of FHA Financing

March 24, 2021

A recent National Association of Realtors (NAR) economist blog noted that 24% of first-time home buyers obtained FHA financing in January, while 59% obtained conventional mortgage financing.  This is very interesting as it contrasts the picture painted in my blog post from September 2019.  That post noted that 75% of Millennial home buyers obtained FHA financing.  While not all first-time home buyers are Millennials, the recent data still appears to be a significant change from only about 18 months ago.

FHA mortgages once attracted many first time home buyers with a 3.5% minimum down payment.  But beginning in 2014, home buyers could obtain conventional loans with only a 3% down payment.  FHA loans also appeal to home buyers with lower qualifying credit scores.  Conventional interest rate pricing charges higher interest rates for lower credit scores.  Because FHA pricing places less emphasis on the borrower’s credit score than conventional loans, FHA pricing was often more attractive to buyers with credit scores less than 700, especially when those buyers could only make a small down payment.

Note that “standard” conventional loans with a 3% down payment require the borrower to pay a higher interest rate and mortgage insurance premium as compared to 5% (or more) down conventional loans.  But conventional mortgage giants Fannie Mae and Freddie Mac began offering special loan programs (called Home Ready and Home Possible, respectively) to home buyers whose annual income falls below a threshold (currently about $65,000 in the Atlanta area) and with credit scores of 680+.  With these programs, 3% down conventional loans become very competitive with FHA loans for buyers who qualify.

When a buyer qualifies for the Home Ready / Home Possible program discounts, they can save money in two ways as compared to FHA financing.  First of all, conventional loans do not require up-front mortgage insurance.  FHA loans require a 1.75% up front mortgage insurance premium that is typically rolled into the loan amount.  Secondly, when the borrower’s equity reaches 20%, the conventional loan mortgage insurance can be cancelled, even when the borrower initially made only a 3% down payment.  Borrowers who use FHA mortgages with less than a 10% down payment must pay monthly mortgage insurance premiums for as long as they own the mortgage.  The monthly FHA insurance premium is 0.85 for all loans with less than 10% down payments.  That is about $177 per month on at $250,000 mortgage.  The fact that such a large insurance premium is permanent makes many buyers consider conventional loans more favorably.

Are you considering your first home purchase?  Be sure to explore all the loan programs available to you, including conventional and FHA mortgages.  Give me a call and I’ll help you compare your options to determine which will give you the lowest total payment, considering both the interest rate and the mortgage insurance components.

No guideline relief for self employed buyers

January 12, 2021

Covid-19 upended a lot of things in 2020. Mortgage wise, it really tightened lending guidelines as unprecedented amounts of people were laid off and/or furloughed. Profits for almost all businesses dwindled, which impacted self employed buyers. With vaccines on the horizon, there may be relief from Covid. As of now, there is still no relief on the tightening guidelines for self employed buyers.

Whether refinancing or buying, those qualifying with self-employed income will still need:

  • Tax returns filed for 2020: copy of 2019 and 2020 tax returns along with proof of 2020 filing.
  • Tax returns not filed for 2020: copy of the 2019 and 2018 tax returns. Also need a profit and loss statement for 2020.
  • Copy of the three most recent business bank statements for a cash flow analysis.
  • The bank statements need to support the deposits referenced on the P&L

Not fun.

So who is considered self employed? We all know the obvious – sole proprietors, business owners, 1099 contract employees, but what if you only own a percentage of the business? Once an individual owns 25% or more of a business, they are considered self employed for underwriting.

Thinking about purchasing a home in Georgia this spring? Are you self employed? It is always a great idea to speak with a loan officer early to make sure everything is in order. Due to Covid, it is even more imperative for self employed buyers (and those simply looking to refinance) to start early. The last thing anyone needs to do when buying a home is assume things will be ok.

We know what happens when someone assumes… they wind up homeless 😦

Contact me today. I’ll help you get started and ensure all is in order for your home purchase.

2021 FHA loan limits

December 7, 2020

As expected, FHA announced their increased loan limits for the coming year. Unlike conventional loans, the increase is not as dramatic.

Remember, FHA maximum loan amounts depend on the area where a home is being purchased. The maximum allowed amount in New York City would not be the same as rural Alabama. For metro Atlanta counties, the new limit will be $412,850 (up about 3% from 2020).

To find out the max FHA loan in your area, try this page on HUD’s website.

It is nice the FHA loan limit went up for the coming year, but we didn’t see the same increase conventional loans got… FHA loans basically got a standard cost of living adjustment. Still some is better than nothing.

While home buyers can begin using the raised limits now, I think we can all say 2021 can’t get here fast enough!

Good News for (Some) Home Buyers!

July 16, 2020

As a loan officer, I really like the Home Possible and Home Ready conventional loan programs.  For eligible borrowers, these programs offer discounted interest rate pricing and discounted mortgage insurance premiums.  To qualify, home buyers must make a down payment between 3% and 20% and complete an online homeownership class.  Borrowers must also earn an income of 80% or less than the area median income for the census tract where they will buy a home.

I think these programs are such good deals that I have recommended (1) borrowers who planned to make a 20%+ down payment actually make less than a 20% down payment to qualify for the lower rate and (2) spouses or domestic partners put only one person on the loan application to keep income lower to qualify for the discounts (that’s perfectly legal and within guidelines, by the way!!)  The discounts are especially powerful for people wanting to buy condominiums, as these programs allow the buyer to avoid the expensive “condominium price adjustment” in the interest rate calculation.  The Mortgage Blog has covered these programs in the past.

So, what’s the good news?  On July 12, Freddie Mac updated its Home Possible Eligibility Tool to reflect the new 2020 area median income limits issued by the Federal Housing Finance Agency (FIFA).  Approximately 87% of counties will experience AMI increases in 2020.  That means that more home buyers can now qualify for these great loan programs.

I checked the tool for some addresses in the Atlanta Metro Area.  Before July 12, the Home Possible annual income limit in these areas was $63,360.  Now the annual income limit is higher at $65,760.  I also checked Fannie Mae’s Home Ready website and found the same adjustment.  While the income increases are not huge, every little bit helps, right?  Home buyers earning $64,000 to $65,000 now can take advantage of these great programs, whereas they could not before July 12.

I recently talked with a first-time home buyer.  She said another lender suggested she get an FHA mortgage.  I recommended that with her 740 credit score and qualifying income, the Home Ready / Home Possible programs would be much better for her.  She could get a similar interest rate with a 3% down payment, and she could avoid the FHA up-front mortgage insurance, which would cost her over $4,500.  She agreed with me.

Do you know someone who wants to buy their first home in Georgia?  They need to find a mortgage lender who will explore all loan options to find the loan that best fits their own unique situation.  Tell your friend or coworker to call me.  I’ll make sure we structure the loan and their application to take advantage of the best loan program available.