I have heard a lot of buzz already this morning with the recent announcement from FHA about their guideline changes. Many folks have a “the sky is falling” attitude about this, and frankly, I don’t think it’s that big of a deal.

First off, the FHA has been a savior to the mortgage and housing market over the last year or so. In many cases, it has been one of the only viable options to help folks purchase with little or no down payment. And keep in mind, the FHA does not make loans, they only insure loans for lenders, such as WestStar Mortgage, in case of delinquency or default. The are more of a “foreclosure insurance company”.

The FHA has been faced with increased delinquencies and falling reserves, and to ensure their ability to continue to offer a strong and stable mortgage program, they are forced to make some changes.

Here are the changes, what you should know about them, and why we will still be OK:

Increased Mortgage Insurance Premiums
The FHA is increasing their up-front mortgage premium from 1.75% to 2.25% of the loan amount. They need to add additions funds to the pot to help cover defaults. This change will better fund the FHA mortgage program and help it continue to exist.

Why this is OK:
This fee is financed on top of the mortgage, so it does not impact the buyer’s cash out of pocket for closing, and has very little impact on monthly payment. Also, the VA’s funding fee is typically 2.2% to 3.3%, so they are really just coming in line with the current up-front cost of a VA mortgage. So, not that big of a noticeable difference here.

Lower Seller Contributions
The FHA has been concerned about a buyer’s investment into the purchase of a property. The new rules limit the seller contribution to 3% of the purchase price, down from 6% previously. The alternative to this was an increase to the down payment requirement, and that would make it tougher to buy a new home.

Why this is OK:
In many cases, especially as you get to higher purchase prices, 3% is often enough to cover closing costs. If is not, your loan officer has options to still make the deal work. Those can include:
Increasing the interest rate a bit and crediting back funds from the lender for closing costs
Getting a gift from a relative, that can cover down payment, closing costs, and pre-paids
Utilizing the VHDA FHA Plus or Homebuyer Tax Credit Plus to finance up to 5% of the purchase price for down payment, closing costs, and pre-paids
Utilizing the USDA mortgage program with:
No down payment
No limit to seller contributions
No mortgage insurance
Can finance all closing costs and pre-paids up to the appraised value

Increased Down Payment and Credit Score Requirements
The FHA has increased their minimum credit score requirements to 580 or higher. Borrowers with a credit score below 580 now must make a 10% down payment.

Why this is OK:
Most lenders already require a minimum of a 620 credit score to qualify for an FHA mortgage, and some are even higher than that. This rule will have little practical effect since the average FHA credit score has been running at about 693. I see no impact whatsoever on getting buyers qualified due to this change.

So, at the end of the day, these are some changes to help sure-up the FHA insurance program, and help ensure it continues to be available for years to come. With the assistance of a really good mortgage partner, these changes should have little or no impact on your ability to qualify and close buyers.

Have a great week, and make the best of 2010!
Kevin
757-645-8996

PS: Want to qualify more buyers and close more sales? Have your clients give me a call. With almost 16 years of mortgage lending experience and billions of dollars of mortgages originated, there is not much I have not seen.

I close loans…..
I close loans others can’t….

Because of this, monitoring and managing your FICO score is vital, especially if you’re looking to buy or refinance a home anytime in the near future.

The FICO scoring system was created in the 1950s by Fair Isaac Corporation and has been the standard for lenders since the 1980s. FICO credit scores typically range between a low score of 300 and a high score of 850. Under the FICO system, securing credit becomes less expensive for borrowers with higher scores (those who represent the least risk) and more expensive for borrowers with lower scores (those who represent the most risk). In fact, when it comes to a mortgage, a lower credit score could easily cost a consumer hundreds or even thousands of dollars more in interest every month and throughout the life of the loan, compared to the same loan with a higher score.

FICO Scores APR Monthly Payment Total Interest Paid
720-850 5.038% $1,617 $282,278
700-719 5.163% $1,640 $290,574
675-699 5.700% $1,741 $326,832
620-674 6.850% $1.966 $407,680
Below 620 — Typically does not qualify in today’s lending market

The above chart clearly reveals the relationship between higher FICO scores and lower interest rates and monthly mortgage payments. Of course, interest rates are determined by many factors but the bottom line is that individuals with low credit scores will pay nearly three times more in interest than those with strong credit scores.

Now, in todays mortgage market, you mill also be subject to “Loan Level Price Adjustment Fees” (LLPA’s) when applying for a conventional mortgage. In addition to higher interest rates, having less than a 720 in today’s credit environment can also cost you up to 3% in points or an increase in your interest rate! Here’s the chart based on an 80% LTV:
FICO Score Approximate LLPA You Will Pay
Below 640 3.000%
640-659 2.750%
660-679 2.250%
680-699 1.000%
700-719 0.500%

LLPAs are mandatory surcharges based strictly on credit scores. They are additional fees paid to Fannie Mae or Freddie Mac, not your mortgage professional. Analysts suggest that imposing these “penalties” is a blatant effort to recoup – and to help lessen further losses – on foreclosures. The surcharge could mean thousands of dollars for borrowers who do not monitor and maintain a good credit rating. Keep in mind, these LLPA’s only impact conventional mortgage programs. Traditional FHA, VA, and USDA mortgages do not have such significant additional costs/fees.

For people experiencing the worst-case scenario, carrying a middle credit score of less than 620 could cost you an extra $9,000 upfront on a $300,000 loan amount.

If you’re thinking about buying, selling, or refinancing a home, you have to be credit ready. Give us a call today for a free credit consultation. We’ll pull your credit and see where you stand. Remember, effective credit repair, if necessary, could take up to 3-6 months, so act now and be credit ready in no time.

Stay tuned for more great credit tips!

What if I don’t have the money to buy a home right now?
There are many loan programs available that offer low and no down payment options. Some programs permit gift money as a down payment, and often sellers are willing to make a contribution to your purchase if they want to sell the home quickly.

There are many benefits of home ownership to consider, most of all, tax deductions.
Let’s take a look at how advantageous this can be as a homeowner:
How much is tax deductible?
Tax deductions vary, but the IRS has laid out solid rules. They also have several tax publications full of helpful information worth taking the time to read. Publication 530, Tax Information for First-Time Homeowners, is very thorough, as is Publication 936, Home Mortgage Interest Deduction. For quick reference, you can refer to Tax Topics 505, Interest Expense, and 504, Home Mortgage Points.

These publications often refer to local and state guidelines, so you may want to consult a CPA to answer all the questions that arise from reading these materials.

Here are a few tips you should know up front:

Real Estate taxes are deductible on a primary residence. Real Estate taxes are paid at settlement or closing, or through an escrow account.

Mortgage interest is deductible on a loan to purchase, build or improve your home. Your lender will provide you with a Mortgage Interest Statement (Form 1098) to list the total interest paid during the year. This should include any deductible points paid for that year.

Pre-paid interest is deductible in the year it is paid. At the close of a real estate transaction, borrowers usually pay for the interest on their loan that falls between the closing period and the first of the next month. Mortgage payments are made “in arrears” so when a loan is closed mid-month, there is interest due to the new lender which must be paid in advance.

If you are building a home, the interest on the construction loan is deductible. The construction period cannot exceed 24 months prior to the date that you move in if you claim this as your primary residence.

Your Social Security number
Current pay stubs or, if self employed, your tax returns for the past two years
Bank statements for the past two months
Investment account statements for the past two months
Life insurance policy
Retirement account statements for the past two months
Make and model of vehicles you own and their resale value
Credit card account information
Auto loan account information
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If you currently own Real Estate:
Mortgage account information
Home insurance policy information
Home equity account information (if applicable)