Monthly Archives: February 2013

FHA Mortgage Loans are Back and Just in Time

When I first started in the mortgage business, at least one in four of all of my buyers got an FHA loan. The rates were fantastic, the down payment requirements minimal, and the credit requirements were close to meaningless. Most first – time home buyers got an FHA loan. In the last three years, over 600 families have trusted me with their home loan needs. Of those 600, I did a total of two FHA loans over that time. One in 300.

130853990I wasn’t alone. FHA guaranteed less than 5,000 loans in California last year. In 2003, they did over 100,000. A 95% decrease in demand. Nationally, FHA loans are down 50% from a few years ago. FHA loans lost their popularity in the past few years for numerous reasons. Loan limits were too low for the fast-appreciating real estate market, income documentation guidelines were too strict, and appraisal restrictions were very difficult.

Subprime lenders, with looser guidelines, capitalized and met this demand. Home values increased more than FHA lending limits did. The average home in Las Vegas was around $300,000. The FHA loan limit was around $270,000. Subprime lenders would go over $1 million.

FHA requires full documentation of your income and a 3% down payment. Subprime lenders were doing 100% loans with stated income with scores as low as 600. Although sometimes flexible, FHA guidelines limit your debt-to-income ratio to 41%. Many subprime banks were letting borrowers go to 55%.

With rising sale prices, more borrowers went with stated income loans. FHA wouldn’t allow this. Subprime did. The FHA appraisal requirements were much more strict and this also turned off many sellers. Subprime lenders had no additional requirements. The FHA loan was, quite frankly, a last resort. Subprime had taken its place. Today, that has changed. With all of the recent guideline changes, the subprime loan is nearly dead with anything less than 5-20% down. Many subprime banks have gone out of business. Many more will.

FHA is back!! Once again, borrowers are looking at this as a primary option, especially first time homebuyers.

There are two types of mortgage loans; government loans like FHA and VA, and then there are the rest, which are called conventional loans.

100% financing on conventional loans is not as readily available as it was, particularly for those with marginal credit. FHA has not changed. 97% financing was and is available regardless of credit score. In the last three months, I have closed five FHA loans. FHA recognized their business was getting hurt by increasing home values so they dramatically increased their loan limits.

In Las Vegas today, the FHA loan limit is $304,000. This is right in line with our average sales price. The timing could not be better and, as a result, FHA loans are back as a very viable loan option. If you have very little or no money available for a down payment, bad-to-fair credit and feel like you have way too many bills, FHA may be your key to homeownership today.

FHA does not loan money, they insure loans. You don’t go to the FHA to get a loan. You go to a mortgage company that has been approved with the FHA. These companies have special permission to underwrite and close the loan. You can buy a single family home, a duplex, triplex, or 4-plex. FHA will even insure loans on manufactured/mobile homes.

As an approved FHA lender, when we do an FHA loan, it is insured by FHA. If the loan goes into default, they guarantee it. This means the loan has very little risk to the lender. As a result, the rates are nearly equal to that of a conventional loan, even though the credit scores may be way worse.

Rates on conventional loans are usually based on credit score. The better your score, the better your rate. This is not so with FHA. Everyone, regardless of score, gets a great rate. FHA was started in the 1930’s to assist first-time homebuyers. The goal was to help families with lower and moderate income get home financing. The program was geared for minorities as well.

Many lenders in today’s subprime mess are pointing the fingers at each other. They believe that countless numbers of the homes going into default today are because of high subprime rates. They believe these homes would not be in jeopardy with an FHA loan with a much lower rate.

For example, last week I closed a borrower on an FHA loan. His credit score is 611 with limited trade lines and 3% down. His interest rate is 6.250% on a 30 year fixed, which he will never have to refinance if he doesn’t want to.

Last year, because of the loan amount, this loan would have probably gone subprime with an interest rate of closer to 8.000% on a 2 year fixed rate, that would have likely forced a refinance in 24 months. And he doesn’t have a prepayment penalty!! FHA doesn’t have prepayment penalties. As you know, most subprime loans have prepayment penalties and if you want it waived plan on the rate going up by 1-2%. The program works and provides incredible options for borrowers whose only choices in the last few years have mostly been awful.

There are many advantages to an FHA loan.

You are only required to put down a 3% down payment and the lender can help you get it. It can also be gifted from a close friend, a relative or a non-profit organization that provides financial assistance. There are many private down payment assistance companies (DAPs) that can help you with the 3% down payment. The FHA allows this and works with these companies. You have likely heard of a Nehemiah. Nehemiah is a DAP. If you do a conventional loan, this is not allowed.

You can have less than perfect credit. In fact, your credit can be pretty bad. FHA is far less concerned about your credit score than they are your history over the last two years in paying your bills on time. They will often ignore previous financial troubles and other blemishes on your credit report.

There are no “set” guidelines about credit. There is much more flexibility at the underwriting level. For example, I recently had an FHA loan where the borrower was putting down his own 3% and not using a DAP, he was employed for over two years, and he has no late payments for the past two years. He also had four months reserves. His credit score was under 550, his debt to income ratio was 47%, and he only had one current trade line. The loan was approved. The FHA rate at the time was 6.125%.

As opposed to most conventional lenders, which have strict guidelines, FHA underwriters have some discretion to look at the overall strength of the file and make a decision. For example, even though it is commonly thought your debt to income ratio must be 41% or less to qualify; I have seen FHA loans approved with debt to income ratios over 50%.

Some of the FHA guidelines are more strict.

You do have to be two years out of bankruptcy from the date of discharge and you must have some good re-established credit to get an FHA loan. If you had a foreclosure you likely need to wait at least three years for an FHA loan and your credit should be pretty clean after that date. If you can prove the foreclosure occurred because of extenuating circumstances like the death of a spouse or a serious illness that prevented you from working, they will sometimes make an exception to this as well.

The FHA has many different choices of loan programs like 30-year fixed, 15-year fixed, 1, 3, 5, 7, and 10 year ARM’s too. Interest only is not available. The rates are excellent as I discussed above. The fees are controlled by FHA so you usually pay less for the mortgage too. In today’s market, there is a lot of bank-owned on the properties that are in need of pretty substantial repair. The FHA has a program that allows owner-occupied borrowers to finance up to $35,000 in the mortgage to make these repairs.

In a conventional loan, these repairs need to be made before the close of escrow. In many cases, the seller doesn’t want to make these repairs and offers the property “as is.” The buyer can’t afford to make the repairs and certainly doesn’t want to make them before they own the house. This usually kills the deal after the home inspection or appraisal.

The FHA has a plan for this. The program is called a 203(K) and it allows for the appraiser to consider the value of the home after all of the repairs and renovation is made. You get to buy the home, fix it up to be livable, and then you get to include all these costs in one easy loan. And you still only have to put 3% down. No other loan program allows for this.

When the loan is closed, the repair/renovation money is withheld in escrow, as well as additional reserve funds of 10-20%, to pay for these improvements and any overages that may occur that weren’t factored at the time. The contractors go in, fix the house, and then they get paid through the withhold account and reserves. The biggest catch here is, once again, the home has to be owner-occupied. This program is not available for investors or second home buyers.

In today’s market, the only negatives to an FHA are loan are loan limits, which are $304,000 and that unless you put down 20%, which most people don’t, your FHA loan will require mortgage insurance. Mortgage insurance (MI) is handled a little differently than you are used to with a conventional loan. For one, it’s usually a bit cheaper. FHA mortgage insurance is not based on credit score like conventional loan MI is. It runs 0.5% of the loan amount and is broken down over your monthly payments.

FHA also has an upfront insurance premium that is 1.5% of the loan amount. That premium is due at the close of escrow and can either be paid in full at close or added to the loan amount. As most FHA borrowers have very little money to put down, this premium is usually financed into the loan. The good news here is that mortgage insurance, as of January 1, 2007, was made tax-deductible, so that helps as well.

And how about this? FHA loans are assumable!! If you want to sell your home, you can simply transfer it over to your buyer and he doesn’t have to go out and get a new loan. The buyer does have to meet the FHA credit standards, but as I have already touched on, those are very reasonable.

The bottom line is if you are a first-time homebuyer or you are a bit more credit-challenged and your lender suggests a subprime loan you should ask for FHA as an option. In addition, if you are being quoted more than the “going rate” for a loan, you believe you can support your income with paycheck stubs and W-2’s, and the loan amount is $304,000 or under in Las Vegas, you will also want to ask about an FHA option.

If your preferred lender says FHA is not for you for any other reason other than loan amount or income documentation, and suggests a subprime loan, you may want to get information from a different lender. Not all lenders are permitted to do FHA loans. You want to make sure the reason why you are being steered away is not simply because they can’t do the loan.

Conventional Home Loan As Opposed to an FHA Loan – 5 Significant Features

You might be in the situation where its time to purchase a new home. One of the first things you do is to look for a conventional home loan. But when researching for home financing, borrowers are met with making a choice between the normal type of house mortgage or a Federal housing administration loan, which is a government underpinned loan.

130852495Each kind of mortgage loan possesses some quite distinctive characteristics which will interest particular individuals, while for others the identical characteristics can have them turning away from the idea.

The main feature that distinguishes the two of these loan products is the fact that a Federal housing administration house loan carries a pre-determined upper limit on the amount one can borrow while the conventional home loan has no limit on the amount that can be borrowed.

Below are 5 significant features of a conventional home loan:

1. There are variations within the conventional home loan group. One can apply for loans with adjustable rates of interest, a fixed rate of interest, bridging finance, a balloon housing loan and amalgam mortgages. All of these feature varied rates of interest components together with differing repayment terms.

2. The conventional home loan typically demands a greater overall credit rating as compared to Federal housing administration funds. The reason for this is that conventional types of financing won’t be endorsed by the governmental authorities. This means that lenders will be looking for more security and less risk when lending for conventional mortgages.

3. These kinds of mortgages have a reduced permitted debt to revenue ratio, typically somewhere between 33% – 36%, whilst a Federal housing administration product permits as much as 41% debt to revenue ratio.

4. When it comes to making an initial deposit the conventional home loan might demand a payment in advance somewhere in the vicinity of 20% of the value of the property being purchased. For some borrowers, this percentage could possibly be bigger dependent upon their consumer credit rating.

5. It is worth noting that the history of the normal mortgage loan shows it to possess an increased property foreclosure level as compared to Federal housing administration mortgages.

The main reason for this is that the Federal housing administration provides a form of mortgage insurance coverage while conventional home loans do not.

If the borrower wants mortgage insurance they will need to set something up as an added extra with the financial institution they are dealing with or seek out coverage themselves.

FHA Mortgage Home Loan Credit Requirements

Credit requirements for FHA Loan are comparatively less stringent as compared to

  • Conventional Mortgage Loan
  • VA Mortgage Loan
  • USDA Home Loan 

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The first thing to understand is that there is no specific score requirement specified by FHA. The loans are underwritten based on overall credit profile of a borrower. Most lenders use automated systems like Desktop Underwriter by Fannie Mae or Loan Prospector by Freddie Mac, along with investor specified credit score requirements, to determine eligibility. If the loan is auto approved by DU or LP and score requirements are met then other factors like lates (Not Mortgage Lates), collections, charge offs are accepted, relatively easily, by underwriters. Generally a prospective Buyer may not like to pay charge offs or old collections and this may be possible on an auto approval.

Judgments and Tax Liens

Judgments and Tax Liens are a different ball game since these affect title. A 12 month history from IRS may be accepted by certain lenders and prospective Buyers may not be asked to clear the entire outstanding tax Lien in one go. Judgments normally need to be paid.

Credit Scores 640 + or 620 +

Credit requirements required by majority FHA Home Loan Lenders has already been increased to 640 for the past few months now. The earlier score requirements were 620. There are some lenders who will finance borrowers with 620 + fico. There are no additional pricing hits for FICOs being below 640 and above 620.

Credit Scores Below 620

Few FHA Home Loan lenders will accept such borrowers, if they have NO NEW lates in the last 12 months. Any new collections or charge offs opened as a result of lates before the last 12 months are considered OK.

No Active TradeLines or No Scores

The same principle applies. Some FHA Home Loan lenders will accept such borrowers if they have NO NEW lates in the last 12 months. Any new collections or charge-offs opened as a result of lates before the last 12 months are considered OK only if Non Traditional credit can be established. Non Traditional Credit for 12 months can be documented in the form of Rent payments, Telephone/ Cell phone payments, Electricity, Water, Garbage, Cable, Storage or any other payments made consistently for the last 12 months. Generally a combination of 4 Traditional or Non traditional lines are required.

Prospective Home Buyers should read comprehensive Lending information on FHA Loans, VA Mortgage Loans, USDA Loans, Conventional Loans.

Shop Around For Your FHA Loan

Because many people don’t understand where the FHA loan comes from they assume that they are all created equal, but nothing can be further from the truth. What you need to understand when you are applying for this type of loan is that while they are all insured by the Federal Housing Administration they are not all funded by the same lender, which means that the specifics, and therefore the affordability of the loan can vary wildly.

128930089Every lender and every mortgage broker has their own fees and their own ways of doing things and because of this you need to shop around a bit and make sure that you are getting the best deal for you. Don’t rush into getting your loan; instead take some time to consider which offer would be best for you, now and in the future.

Shopping Around Will Help You Save

When you know that the Federal Housing Administration does not actually provide the loans you will then have the information that you need to realize that you can save by shopping around for your FHA loan. It is a good idea to work with two to three different companies when you are trying to get a home loan because this will give you a good look at what is out there and how good of a deal you can get. Many people decide to apply with more than two to three different mortgage brokers, but generally this will give you a good sampling of what is out there.

When you have been approved for an FHA loan you will be given the loan offer that you will need to sign. You should request the loan document from all of those that approve you for it and look at them line by line. Look at the costs associated with the loan, the costs that the lender is charging you, the costs that the broker is charging you. You may be surprised to see how fast these seemingly small fees add up, and you are paying them! When you look at them you may find that while the actual loan is the same, the closing costs are much different.

The closing costs are often where you will see the biggest difference because this is where you will pay all of the administrative costs of the loan. Each lender or broker has their own fees and when you look at this you might see that the difference between the loans that appeared to be the same are thousands of dollars different in their final cost because of what one lender or broker charges compared to what the others charge. If everything else is equal, why would you want to pay one lender or broker more than you would pay the others? You want to choose the most affordable option for you and if the actual terms of the loans are the same, then the cheapest option is the best option.

It’s important when you look at the loan document to look at the specifics of it. Are you getting a fixed rate, an adjustable rate, what is your interest rate? These are important differences that often exist that can make a big difference in the affordability or appealing nature of the loan. You will also want to look at the amount of the down payment, as this can also affect how affordable one loan is for you. As you can see, shopping around can save you a lot of money not only on the closing costs associated with the loan, but also on the costs associated with the loan for the entire duration, which can be as long as 30 years!

Obama FHA Loans – Tips to Modify Your FHA Mortgage Loan

In the times of financial crisis the US citizens are turning up to FHA loans. FHA stands for Federation Housing Administration. It is a part of the HUD (US Federal Housing & Urban Development Department). These are secured loans that help you save your home from the foreclosure.

Here are some tips that would help you modify your FHA mortgage loan effectively:

  • 128019470Do not approach the FHA through any agents or some third party. They would charge you a lot, plus they would lay a bad example in front of the bank.
  • In case you want guidance & help from some professional, approach the counselor appointed by the HUD. They would guide you on tips to manage the finances, how to present your case in the best possible manner and would negotiate on your behalf if need be.
  • You must have all the documents along with valid proofs & papers in place in order to make the process faster.
  • Be very prompt when the bank or the FHA officials contact you. It is ultimately your need to get the loan modified.
  • You must know the amount you can afford to pay as the mortgage monthly payments in the long run. For that evaluate the debt income ratio correctly.
  • Your credit score matters a lot in this case. It is not that the sub prime loan holders have nothing to look up to. You must be very honest & frank in furnishing the financial details. Further, try to your best to convince the bank that you actually are wiling to pay up the loan amount in full. The things that help in proving your desperation include taking up a part time job along with the full time one, taking up job works in the week ends, the non working people in the house may take up a part time job, etc.

President Obama has offered $1000 incentive for home owners that opt for Loan Modification instead of Short Sale Or Foreclosure.