Yesterday at The Mortgage Porter, I wrote about changes that HUD had confirmed via a press release for FHA insured loans. Seasoned mortgage professionals know that the HUD lady hasn’t sang until a Mortgagee Letter is issued and this morning, HUD did just that with ML 2010-02.
Effective on FHA insured loans with case numbers assigned April 5, 2010 or later, the upfront mortgage insurance premium will increase. Typically the FHA upfront mortgage insurance premium is financed, however it can be paid as a closing cost (which is how the 2010 GFE discloses the premium).
FHA insured mortgages for purchases and non-streamline refinances will increase from 1.75% of the base loan amount to 2.25% and streamlined FHA refinances (refinancing an FHA underlying mortgage) will increase from 1.5% to 2.25%.
According this Mortgagee Letter, HUD states that the “annual premiums will not change at this time“. The annual premiums are what consumers pay in the monthly mortgage payment…and I do believe we will see risk based pricing utilizing credit scores impact FHA’s monthly (annual) mortgage insurance premiums in just a matter of time.
According to HUD’s Press Release yesterday, the following changes should take place with FHA insured loans in early summer:
- Seller contributions towards allowable closing costs reduced from 6% to 3%.
- Increasing the down payment requirements for lower credit scores (risk based underwriting). The Press Release states that those with a 580 score would need a minimum of 10% down payment. Lenders all ready have underwriting “overlays” which will not permit this scenario so this “toughening” of the guidelines is a bit lost…unless things are loosey goosey again this summer (I’ll eat two shoes).
HUD’s press release also stated they will “implement a series of significant measures aimed at increasing lender enforcement”.
The upfront mortgage insurance premium increase will go into effect just 25 days before a home buyer needs to be “in contract” to qualify for the home buyer tax credit.
1.5% to 2.25% a big increase, but my guess is since it is financed, it will not create much of a reaction in the market. The 3% limitation will not likely be a problem either. Most requests for monies toward closing costs do not exceed 3% of the sale price.
Most people will view both of those as a change for the good. A little more money coming in to the FHA coffers to insure against defaults, and less fluff in the loan amount for dollars not associated with true net purchase price.
All things considered for the Country at Large…good changes, both.
A bit off topic Rhonda, I am concerned with the new Finance Contingency requirement that loan application must be made within 5 days (same) and application must be to the entity that is going to actually FUND at closing. Isn’t that not the case for most Brokers vs. Direct Lenders?
not with a broker, with a direct (and correspondent) lender, we fund the loan from our credit lines so that would be the same entity where the application was taken. I haven’t seen this addendum would you mind emailing it to me?
If you knew your clients had selected a mortgage broker, could you modify the addendum?
Sure. It was revised in December 09.
In a Wall Street Journal report on Sept. 29, 2009 about FHA:
-Bear Stearns leverage ratio when it went belly up: 33-1
-FHA leverage ratio in 2006: 14-1
-FHA leverage ratio in 2009: 55-1 (unbelievable)
Thus, why the term “FHA is the new subprime” is used tongue-in-cheek. That FHA would even consider sub 580 FICO borrowers for financing a home is beyond me. It almost seems like this tightening is asking today’s borrowers to subsidize the garbage FHA loans recently written.
Tim, I can’t find any lenders that are doing 580 FHA loans even w/10% down right now (let alone after HUD’s tightening). 620 appears to be the minimum mid-score right now (and many lenders won’t go that low) for FHA.
I think we dodged a bullet.
The floated ideas were much more stringent.
Tim, I have not been able to find a lender that would go below 620 FICO for over a year. I quit looking some time ago. That change was window dressing by the FHA. Zero effect.
The FHA loans that will go under are going to be mostly from folks losing their jobs (17% real unemployment), and being underwater in equity, or both. You can probably throw in divorce in there too.
Of course, there will be other more glamorous reasons that will be widely reported (fraud, reckless lending, rich bankers, rogue brokers etc). It is always popular to fix blame on “the other” in culture: most often it’s poor folks, and minorities.
The late Tanta of Calculated Risk coined the phrase, “We are all sub-prime now”, meaning that we, as taxpayers, own most of the bad debts accumulated during the bubble. Most of us (the whole USA), whether we choose to acknowledge it or not, benefitted at least temporarily from the bubble, so there is probably a rough (unpleasant and unwelcome) justice in there somewhere.
Funny, but some folks in Congress are trying to resurrect the DPA’s (100% financing)…over the FHA’s dead body!
To go further off subject (at the moderator’s presumed consent):
I am helping a client that saw her lender’s escrow account jump by $400/mo. Apparently a hazard insurance policy has been imposed upon her by the lender, without her consent. She is in a condo, and the HOA pays for hazard insurance, so I am assuming it is related to the newer “walls in” policy implemented by Fannie Mae:
http://www.berginsurance.com/DisplayPage.aspx?pageid=40
I recently completed a condo refi, and proved to the lender’s satisfaction that the HOA policy covered the “walls-in” requirement.
I do know that the borrower signs papers stating that the lender can place a hazard insurance policy on the property if the existing policy lapses or is cancelled, but this is the first time I have seen it enforced in this manner.
Are any of you professionals or readers encountering the issue of a lender imposing an individual insurance policy upon a condo unit owner (at the condo owner’s expense)?
Thanks in advance for your advice.
If there is an interest, I will be happy to report back what I find out.
Hi All,
In regards to Ardell’s question about the financing contingency:
1.b.
“For purpose of this addendum, “lender” means the party funding the loan.”
The author of this form is taking the definition of the word “lender” directly from HUD as well as from WA State DFI and the laws/rules governing mortgage lending in WA State.
Lender is defined as the entity with the ability to fund the loan.
A broker is a middleman; the person who finds the mortgage money, for a fee. By definition, a broker is not a lender.
So for the purpose of the financing contingency, the buyer must make application with an entity with the ability to fund the loan; a lender.
Homebuyers who choose to work with a loan originator who is licensed under a mortgage broker: Your broker/LO must take your application and turn it in to a lender within the number of days stated in the financing addendum in order for the buyer to be in compliance with their purchase and sales agreement.
One of the important cases we can reference in the classroom is David and Amy Johnson v. Hal and Barbara Maloney Kittitas County, WA 99-2-06954968
From my own experience, the majority of mortgage broker/LOs in this state that I have met are NOT aware of this distinction.
Perhaps that’s because many LOs have been solely or almost entirely focused on the refi market over the last 7 to 10 years.
Please note: I am not an attorney and the above cannot be construed as legal advice. For legal advice, please consult with your favorite attorney.
Rhonda, this is an excellent article. A great resource, no doubt. The time to qualify for the home buyer tax credit is narrowing. There’s no time to waste. Keep on sharing the word.
Rhonda,
Thanks for sharing the info. I agree with Roger that some of this was just window dressing as most lenders were already stricter than what was allowed.
Good article, we appreciate it.
Thanks Ben and Jeff!
Rhonda:
Looks like Ardell took part of the tangential issue of condo insurance and ran with it. I’ll pick up the thread over there.
Side note… I’m not getting email notification of most responses to comments, is something broken?
Roger I forwarded that info to Dustin to give him a heads up regarding the RCG site.
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hi rhonda. that’s so true. i supposed to purchase a house few days ago but had to back out because i do not want that upront MIP of 2.25%. But my question is, is it true with FHA loan that you could JUST request to remove your MI when your Loan to value is only 78% and it’s more than 5 years?
The loan officer I spoke said that with FHA , you will have to switch it to conventional loan in 5 years if you want it to be removed (provided equity is >22%) and it will apply whatever existing interest rate it has on that time . Meaning, if I have 4.5% in my FHA; it might go higher depending on that time? Thanks! I really appreciate the response..
Sheba, the upfront mortgage insurance premium is finaced (typically) over 30 years and doesn’t make near the significance in your monthly mortgage payment as the increased annual (paid monthly) mortgage insurance premium. FHA has upfront (paid once–via financed) and annual (paid monthly).
With FHA, your annual mortgage insurance is removed (not the upfront you’re referring to) after 60 payments and your mortgage balance is paid down to 78% of the value of the home from when you took out the FHA loan.
You DO NOT have to switch the loan to conventional to have the annual (monthly) mortgage insurance removed — it should drop automatically without an additonal refinance. If you have a 4.5% FHA loan now–you will then. (If your LO is giving you this advice–make sure they’re actually able to provide FHA financing–it sounds like they’re not and they’re just trying to force you to go conventional).
Something else to consider with FHA refinance now is that it’s about to get more expensive. Congress is passing new regulations which will drop the upfront mortgage insurance that you’re concerned about–but gives HUD the authority to dramatically increase the annual mortgage insurance (monthly) which has a much bigger impact on your mortgage payment.
One more plus about FHA is that your FHA mortgage may be assumable so in the future, if you have a 4.5% rate now and you decide to sell the home down the road…you will be able to offer your assumable mortgage to a qualified buyer. This could be a huge advantage for you over other listings at that time.
Ask your LO directly if they are able to provide FHA loans.