For the next 30 days, HUD is seeking public comment on the following policy changes, each of which are designed to mitigate risk to the Mutual Mortgage Insurance Fund while promoting sustainable homeownership for FHA borrowers:
1) Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.
2) Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.
3) Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.
All of the above is a quote from the HUD.Gov site linked in the first sentence. Anyone who understands what these new measures will or will not do for the public at large should take a few moments to respond to the Government’s request for “public comment”. I know I will. This is a topic that not many fully understand, so it is very important for those who do to respond from the standpoint of “public good” vs self-interest.
What is hilarious is that most lenders already have these overlays in place and HUD is just now getting around to this? Day late and a dollar short…
No respectable lender has funded FHA loans with less than a 620 FICO score in like a year or more. Most are at 640 now and some even want 660 REGARDLESS of down payment.
Manual underwrite? What’s that? Good luck finding a lender who still will do a manual underwrite… that would mean an underwriter would actually have to use two brain cells and then the bank to be accountable for their decision.
Ardell,
I’ve been trying to find where I can comment on these changes… have you had any luck on where we can make our comments on this?
Russ,
I was a bit surprised when I saw “manual” underwrite as well. I did a double take thinking they must mean the automated system, which was way out of whack, and not the current manual underwriting standards.
Maybe it’s a typo 🙂
Even Fannie & Freddie have a manual underwriting option if the AUS won’t take the file for whatever reason. The problem is most lenders won’t manual underwrite anymore from what I have seen. I think the reason is risk management. If the AUS approves a loan and it goes bad, then no one can come back on the lender and say they shouldn’t have approved the loan. However, if they manually underwrite, it means the bank has to justify their decision if the loan goes bad and then can’t hide behind the AUS findings.
1 & 3 won’t be an issue because banks already basically do this. Only #2 could cause problems much like the 3% cap on YSP/SRP. It would hurt small loans because the closing costs are fixed. 3% is more than enough to cover closing costs on most $300k loans, but on a $100k loan it could be a problem.
Of course, one could argue that in many cases if you can swing a few grand for closing costs, you probably shouldn’t be buying a home, but that is another topic for another day!
Russ,
If the house needs a new heater or a new roof, and the seller is doing a credit for those repairs, is that counted as part of the 3%? If it is, then we are going to have to find a lot of vendors willing to get paid at closing so those items are included in the total price without being a seller credit.
I think that is a good thing for the lender if that is the case, and part of my public comment.
As to your comment, they aren’t saying costs have to be 3% or less. They are simply saying the buyer may have to contribute something toward their own closing costs as they will only finance 3%. So it shouldn’t change how you do things…just how it is paid. i.e. 3% financed plus $1,200 cash at closing. I don’t see it as a cap on costs.
Yeah, I know it is isn’t a cap on the costs. Three percent may not be enough on some smaller loans if the buyer can’t cough up the difference though because there are times when closing costs could exceed 3% on smaller loans. This could be problematic if the buyer can’t make up the difference.
Nick,
Full instructions on the two methods for commenting and the particulars are in the pdf advisory:
http://edocket.access.gpo.gov/2010/pdf/2010-17326.pdf on the page noticed as “41217” at the bottom of the 2nd column and beginning of the third column.
These are the instructions for the second, electronic, preferred method. If done electronically you can see other people’s comments and they can see yours. There is also a “mail” option.
2. Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal eRulemaking Portal at http://www.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the http://www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically.
I believe this is the “docket # and title” they refer to:
[Docket No. FR–5404–N–01]
Federal Housing Administration Risk Management Initiatives: Reduction of Seller Concessions and New Loan-to-Value and Credit Score Requirements
Russ,
That is where in all of the threads you seem to lean towards the “free” no out of pocket options, and “the new way” wants to move in the other direction. If out of pocket is present, even if it is a small amount, it removes the ability of a lender to say “free” or “no cost”…and that is a good thing.
If what you are saying is someone wouldn’t do a refinance or buy a house if they had to pay $1,000 out of pocket, then they likely shouldn’t be doing it at all. Maybe not the case on a refi…but clearly the case on a purchase loan.
Does the 3% include repair costs on a purchase loan? I think that is the bigger issue, as some houses can eat up 3% toward repairs pretty quickly, leaving nothing to allow for closing costs. Would appreciate an answer to that question.
Are seller credits for repairs part of the 3%? I think that answer is yes but would like a lender to answer that.
@ Ardell:
Two different issues. The FHA closing cost credit being limited to 3% is slightly different from the financial reform limiting YSP to 3%, but the effect is the same as it makes it harder to structure deals on smaller loans.
I agree with you this will be an issue especially when it comes to repair credits on small purchases because typically a repair credit is just a credit given to the buyer in the form of a closing cost credit. 3% doesn’t leave a lot to work with on small deals and some buyers may not be in a position to make up the difference.
That is true, unfortunately there will always be a number of people who simply cannot do what they want to do – it’s most unfortunate when that includes owning a home.
I just figured out why we are going in circles on this, Russ. Because lenders generally don’t want to see the word “repair” on a seller credit. So that pretty much answers my question.
Not following you on the “small deal” issue, as agents cannot charge a higher % on a small deal…so not sure why lenders think the can/could.
Seeing the word “repair” is fine on a purchase and sales agreement–as long as everyone is prepared for the documentation that will follow…often times, it’s all ready there. If a credit is for a roof repair, the underwriter is going to want to know just how bad that roof is…it’s quite possible that the “repair” may have to be taken care of prior to closing.
Agents may not charge a higher amount on a lower deal, but they may charge a lower % on a higher transaction…also keep in mind that most agents are paid based on the sales price and the LO *has* typically been paid on the loan amount.
Rhonda said: “… keep in mind that most agents are paid based on the sales price and the LO *has* typically been paid on the loan amount.”
In the grand scheme of FHA mortgages…there is very little difference between the sale price and the loan amount…about $262 as to commission difference.
Ardell, it’s true that many opt to put the minimum down with an FHA loan (currently 3.5%)…some do more down and decided to go FHA because of the assumibility factor or because of credit scores…but the commission is still far different than the $262 figure. I’d say most LO’s don’t make 3% on a loan (I never have) and most traditional agents charge 3% for their side.
Rhonda,
The difference on the issue of based on loan amount vs based on mortgage amount for the agent is $262 on a $300,000 purchase at 3%. Not the difference between what the lender makes and what the agent makes. When I started in the business the ratio was that an agent made 4X what a loan officer made. Not sure what it is today. A mortgage rep had to do 4 times the volume of an agent to equal the same annual income.