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.
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.
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).
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!
I’ve thrown up a posts over the past couple of months (here and here) about potential changes for condo purchases using FHA loans. How about a change on FHA loans that is beneficial for everyone!
A new bill working its way through Congress would make mortgage insurance for FHA more like mortgage insurance for conventional loans.
Currently, FHA mortgage insurance is permanent unless the buyer makes a 10% down payment. When making a down payment as large as 10%, often buyers use a conventional loan. Maybe there is a case where someone still wants to do an FHA loan (for example, a foreclosure 3 years ago is OK on FHA loans but not OK for conventional loans), but often 10% down means a buyer is using a conventional loan for their purchase.
With FHA’s current permanent monthly mortgage insurance, it makes FHA loans much less competitive with conventional loans. The new bill looks to change this situation.
If passed, the bill would change the cancellation date on FHA mortgage insurance from “until the loan is paid in full” (meaning permanent for the life of the loan) to when the loan balance is 78% of the homes original value. Meaning, the mortgage insurance is no longer permanent.
The current set up with mortgage insurance on FHA loans really isn’t fair to the home buyer. They are way over charged paying mortgage insurance for the life of the loan, and the change could make FHA loans are more viable alternative for buyers making the minimum down payment on a home purchase.
Can’t decide if an FHA is right for you? Contact me and we’ll find out! If you are buying a home in the state of Georgia, I can also get you prequalified and ready to make an offer on your new home.
Finally, FHA mortgage insurance becomes more reasonable (and competitive) when compared to conventional loans. As recently posted on this blog, FHA mortgage insurance has been priced so high that it rarely made sense to consider using an FHA loan.
FHA mortgage insurance still has the one-time upfront premium, and is permanent if making less than a 10% down payment, but at least the monthly mortgage insurance payment is closer. Let’s take a look at how the new numbers compare to one another.
FHA – the monthly mortgage insurance rate is dropping from 1.35% to 0.85%. Using our same example of a $250,000 purchase price, the total loan amount would be close to $245,500. If you take 0.85% of that amount, you get $2,087, which is $174 per month.
Conventional – assuming the buyer’s credit score is 720+, the same $250,000 purchase price with 5% down would give us a monthly payment of $122 for mortgage insurance. When you take into consideration the fact that FHA loans have a lower interest rate, the difference in the total payment between the two is not much at all.
The buyers who could benefit the most from this are ones looking to make as small of a down payment as possible.
On the flip side, let’s say it is a first time homebuyer and they’d qualify for a 3% down conventional loan. The FHA loan may still be more attractive since the monthly mortgage insurance payment for an FHA loan is now lower than the monthly mortgage insurance payment for a 3% down conventional loan. Also, the interest rate would be lower on the FHA loan.
That is a lot to consider, which is why you should consult a professional who can ask you questions about your purchase, find out how long you plan to stay in the home, and if you plan on aggressively paying down the loan balance. The answers will ensure you choose the right loan for you situation.
Whether a first time home buyer or an experienced buyer, if you are buying in the state of Georgia, I’m happy to help. Contact me today to get started and we’ll get you into your new home.
In a recent post, I mentioned how buying a home using a conventional loan with a 3% down payment helps avoid ridiculously high mortgage insurance payments associated with FHA loans. What makes FHA mortgage insurance payments more expensive than conventional loans?
Due to the housing and foreclosure crisis, FHA continually increased their monthly mortgage insurance payments to help cover their losses from FHA insured homes that went into foreclosure. Prior to the crisis, the monthly mortgage insurance rate was 0.50% of the loan amount per year. After 5 straight years of increases, it is now at 1.35% of the loan amount per year.
Great. What does that mean?
Let’s take a look at some numbers comparing FHA mortgage insurance to a conventional loan with 5% down and also a conventional loan with 3% down.
FHA – on a $250,000 purchase price, the total loan amount for an FHA loan would be close to $245,500. If you take 1.35% of that loan amount, you get $3,313 for the year. Divide that out by 12 months, and the monthly mortgage insurance payment is about $276 per month.
Conventional 5% down – assuming the buyer’s credit score is 720+, the same $250,000 purchase price with 5% down would give us a monthly payment of $122 for mortgage insurance. The FHA loan is more than double that amount per month.
Conventional 3% down – again, assuming a 720+ credit score and a $250,000 purchase price with 3% down, the monthly mortgage insurance payment would be $222. That is about 25% less per month compared to an FHA loan.
The monthly mortgage insurance payments for conventional loans can be noticeably lower than FHA loans. I haven’t even got into the fact that all FHA loans come with an upfront mortgage insurance premium of 1.75% of the loan rolled into the loan amount (about $4,200 rolled into the loan amount on a $250,000 purchase price). Nor have I covered how, in most cases, FHA mortgage insurance is permanent.
I encourage my clients, when they qualify, to use a conventional loan to purchase a home because conventional mortgage insurance is typically lower per month, there is no upfront premium, and the mortgage insurance is not permanent. That said, sometimes an FHA loan is still the way to go.
Looking to buy a home in the state of Georgia but are unsure if you should use a conventional or FHA loan? Contact me today to get started. I’ll go through the pros and cons of each, and we’ll run the numbers to see which option makes the most sense for your specific situation.
Now that we’ve talked about the aspects of a mortgage payment, let’s focus on the mortgage options. There are so many mortgage options from which to choose – how do you decide which loan is best for you?
To contact any of us at Dunwoody Mortgage Services, click here!
At the beginning of 2013, I wrote a blog post mentioning how the government wants to pull back (not out) of the mortgage industry in terms of the number of loans they insure. One way they hope to accomplish this (as mentioned in the post earlier this year) is to increase the mortgage insurance premiums on FHA loans. See the link above for the full post.
Another sign the government is attempting to scale back is the recent announcement that FHA maximum loan amounts will be reduced. Expect to see the counties with the highest FHA loan limits of $729,750 to reduce by roughly 14% to $625,500. The reduction in other areas/counties of the country has yet to be determined. FHA also announced that areas where the housing market has not recovered as much will not see a reduction in the maximum loan amount.
This is actually a good sign for the housing market and mortgage industry overall. The government stepped in and expanded the availability of FHA loans during the housing crisis. Now that housing prices across the country are recovering and loan guidelines have loosened a bit for conventional loans, FHA insured loans are not as critical to the housing market.
With those two things in mind, the goals of FHA right now are to:
reduce the number of loans they insure
replenish their reserves that were depleted due to all of the foreclosures
concentrate on borrowers that are still underserved
How does this news impact those looking to buy a home? First, realize that a LOT has changed in terms of FHA loans, minimum down payments for conventional loans, minimum credit score requirements for both FHA and conventional loans, etc. In short, if you haven’t spoken with a licensed mortgage originator about the changes, an FHA loan may not even be the best avenue to explore anymore.
Second, expect a rush of buyers into the market this coming year. In the metro Atlanta area, there was a housing shortage for almost all of 2013. Now is the time to plan and get prequalified to get a jump start on the housing market for 2014. If you are buying in the state of Georgia, contact me today to get the prequalification process underway.
I’ve often wondered why many people who talk with me about buying a home assume they need a 20% down payment. Since staring in the mortgage industry in 2007, I’ve always been able to offer a conventional loan with a 5% down payment to my clients. The only exception was a couple of months in early 2009 when the minimum down payment for conventional loans in Georgia was 10%.
From the sound of this CNN Money article published yesterday, it seems 5% down conventional loans are something new. The article says that several large banks are loosening the purse strings, offering loans with down payments that are as low as 5%.
What is frustrating about this article is that I can and have been able to offer conventional loans with as little as 5% down. Guess what? So have those same large banks. I don’t understand why media news and broadcast stories make it sound as if the only way to get a conventional loan is to come with a 20% down payment.
So we are all on the same page, here are some standard guidelines when it comes to the minimum down payment:
– Conventional Loan: you need a 5% down payment and a 620+ credit score. There is PMI on the loan, but the down payment is only 5%.
– Lender Paid PMI Conventional Loan: you can also qualify for this program with a 5% down payment and a 620+ credit score. There is no PMI monthly payment, but the interest rate is going to be higher than a 5% down conventional loan with monthly PMI payments.
– FHA loans: you need a 3.5% down payment. Most lenders prefer a 640+ credit score though a few will still do as low as 600. The monthly PMI payments are significantly higher each month for FHA loans.
Did you notice the credit score requirements listed above? From news reports, it sounds as if you must use an FHA loan if you have an average or below average credit score. That’s not true. Lenders will now approve a 5% down conventional loan with a lower credit score than what most lenders will allow for FHA loans.
In short – don’t believe everything you see on TV or read on the internet. Contact a mortgage professional to get accurate information for the home loan process.
I’m sure no one saw this one coming (lots of sarcasm here).
For the past several years, FHA has annually increased their monthly mortgage insurance. Toward the end of 2012, as posted here on this blog, FHA was given the approval to dramatically increase their monthly mortgage insurance. It seems the probable increase isn’t going to be that bad.
The actual proposed changes include increasing the monthly mortgage insurance from 1.25% of the loan amount annually to 1.35%. That isn’t a huge change. The BIG change is this…
Currently FHA mortgage insurance falls off once a borrower has paid at least 60 mortgage insurance payments AND has 22% equity in the home. Moving forward FHA loans could require mortgage insurance for the life of the loan. If approved, it doesn’t matter how much equity you have in your home, you’ll be paying mortgage insurance as long as you have the mortgage.
That is a dramatic change. Why would FHA be considering a change this dramatic? As with most things in life, it all has to do with money.
Also discussed on this blog, FHA exhausted its reserves toward the end of 2012. This doesn’t mean FHA can’t function. What it means is they don’t have the reserves the government say they “should” have based on the amount of FHA loans they have financed. FHA is still funding loans and running its day-to-day operation. They are just lacking reserves.
Well, one way to get rid of this problem is making mortgage insurance payments never go away. That would certainly help. It isn’t official yet, but once FHA officially announces their changes, I’ll be here to update you.
In the meantime, if you are thinking of buying a home and needing to use an FHA loan to do it, now is the time to get going. We don’t know the exact changes, but we know the terms will be worse than they are today. If you are buying a home in Georgia, contact me to get the prequalification process underway.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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