FHA Loans & Mortgages Information

May 29, 2008

The gears of the mortgage market are starting to unlock for borrowers needing big loans. In expensive markets such as Washington, that covers most people looking to refinance or move up from an entry-level home.

Just in the past two weeks, interest rates on the new “conforming jumbo” mortgages — for amounts between $417,000 and $729,750 — have come down enough to make a difference to borrowers. And mortgages allowing down payments of just 3 to 5 percent are coming back to the market for borrowers who have good credit.

“The bottom line is rates are lower than they were,” said Kevin Connelly, a vice president at BB&T.

Last week, for example, BB&T was offering 30-year, fixed-rate mortgages for a conforming loan, which is for $417,000 or less, at 6 percent interest with no points, a type of prepaid interest. A conforming jumbo cost only one-quarter of a percentage point more, 6.25 percent. Loans for amounts beyond $729,750, now called “jumbo jumbo” loans, were at 7.25 percent.

That 1-point difference is enough to matter in anyone’s budget: On a $729,000 mortgage, the lower rate saves $484 per month. Before you jump on one of these loans, though, check out FHA mortgages. Insured by the Federal Housing Administration, these loans are available for as much as $729,750, the same cap as on conforming jumbo loan amounts.

FHA’s loan-amount cap has been raised through the end of the year so that the program can be more widely used in expensive areas, including ours. Yes, the frumpy, old FHA program is now an attractive tool for most Washington area home buyers and refinancers. The beauty of the FHA program is that borrowers can still make a down payment of as little as 3 percent. Last week the interest rate on an FHA conforming jumbo was an attractive 6.38 percent.

“FHA has really, really been taking off,” said Jim Foley, senior vice president of George Mason Mortgage’s Bethesda branch. “You can have a lower FICO [credit] score; 620 and above is what they’re looking for “Major housing legislation that’s being debated in Congress would make permanent the higher loan limits for both the conforming jumbos and the FHA program, with annual revisions as home prices change. But it’s by no means a sure thing that the legislation will pass, and President Bush has threatened a veto.

As the law stands now, the higher limits will vanish as of Jan. 1, so don’t dawdle. Other good news for borrowers: Fannie Mae is removing its demand for higher down payments in areas it considers “declining markets,” which includes most of the Washington area. Beginning June 1, Fannie will again accept mortgages with as little as 3 percent down.

In December, Fannie and Freddie started to require an extra 5 percent down in areas where it had determined that home prices were falling. The policy applied even to neighborhoods where prices have been stable or increasing slightly.

Officials at Freddie Mac announced that loans with 5 percent down or less can still be made in declining markets if the loan is for a single-family home that is the borrower’s main residence, and the borrower has good credit. It must not be a cash-out refinance.

Fannie and Freddie, government-chartered corporations that purchase mortgages and repackages them for sale to bond investors, cover a huge portion of the mortgage market, and so their standards influence the whole industry.

You’re in good company if you find the talk about jumbo-this and jumbo-that a bit, let’s say, jumbled. Even those in the mortgage business are searching for appropriate names.

The new category of loan amounts, with the clumsy and contradictory name conforming jumbos, is a creature of the economic stimulus package that Bush signed into law in February.

The credit crunch that’s been going on since last August had been making loans especially difficult to get for what used to be considered jumbo amounts, more than $417,000. They were too big to be bought by Fannie and Freddie, and few other investors were interested in buying mortgage-backed securities at any price. That made jumbos particularly difficult for borrowers to obtain, even if they had good credit scores.

What’s a “conforming loan,” anyway? It’s one that conforms to the standards of Fannie and Freddie. Until the passage of the economic stimulus legislation early this year, only a loan amount below $417,000 qualified.

That changed a few weeks ago when Freddie Mac, under pressure to do more to help stabilize the mortgage and housing markets, announced it would buy between $10 billion and $15 billion of the new conforming jumbo mortgages from major lenders such as Wells Fargo Home Mortgage, Chase, CitiMortgage and WaMu. That was enough to break the logjam and make the loans affordable, attractive options for buyers and people looking to refinance.

“Everything started popping about two weeks ago,” Foley said. “These higher loan amounts are definitely helping.”

Date Line (May 23rd 2008) -If you’re a first-time homebuyer, you’ll find it a little harder to qualify for a mortgage than the first-time buyer who walked in your shoes two years ago.

The credit crunch on Wall Street and record foreclosure rates have made investors nervous about homebuyers who have small down payments and lower credit scores.

While the number of first-time buyers is down, there are plenty of folks who are tempted by falling home prices and low interest rates. What kinds of loans are out there for them?

The kind of loan you’re offered starts with your credit score. According to Fred Glick, a mortgage lender and real estate broker based in Philadelphia, Fannie Mae and Freddie Mac are looking for credit scores of at least 660.

“We’re absolutely accepting loans where borrowers have credit scores in the 600s,” said Craig Nickerson, Freddie Mac’s vice president of expanding markets. “There’s no question that the stronger the credit of the borrower, the better product they can obtain.”

“But there is a matrix based on the credit score and the down payment” that can change that number, Glick explained. “If you put down 5 percent, you’ll need a credit score of at least 660. But if you go with an FHA loan, you can put down [as little as] 2.25 percent and allegedly they’ll take a 580 credit score.”

“With a credit score over 700, you can still get 100 percent financing,” Nickerson noted.

FHA loans are making a strong comeback, according to Allen Jones, a spokesman for Bank of America.

“In the calendar year 2006, Bank of America originated $1.5 billion of FHA loans. In April 2007, we originated $1.1 billion in FHA loans,” he explained. This year, Bank of America expects to fund $5 billion in FHA loans. “With the changes FHA has made over the past year, it has become a sweet spot for us.”

Who is a good FHA candidate? “Someone in a first or second job out of high school or college, who is working and can afford the property but might need help with the down payment. With FHA, a parent can provide the down payment assistance as long as the borrower can afford the payment,” Jones said.

Jones said that the average credit score of an FHA borrower is about 620, although “there are plenty of 500s and plenty of 700s” as well.

In San Francisco, RPM Mortgage’s Dick Lepre said that his company no longer accepts applications from borrowers who have a credit score of less than 680. “Everything is being ratcheted up. It’s as if somebody took every credit guideline and raised it 20 points,” he said.

When it comes to down payments, lenders want to see at least 5 percent down for a normal conforming loan of up to $417,000, according to Victor Benoun, owner of the Mortgage Source, a mortgage brokerage based in Studio City, Calif. “If you’re borrowing more than $417,000, lenders want to see at least 15 percent equity in the property, although they’re cutting that back to 10 percent to make up for a declining market,” Benoun said.

Which makes FHA’s 3 percent down payment requirement seem doable. In addition to having the cash for a down payment, Benoun said many first-time buyers are having trouble coming up with enough income to support their mortgage.

“Lenders would normally say they’d like to see 25 to 28 percent of your gross income going against your housing expense, and now that has been relaxed a bit more to include ratios of up to 40 percent of your gross income. Once you get past the ratio of 42 or 45 percent of your gross income, you may not be able to do a conforming loan,” Benoun explained. “I have clients now who are self-employed and they’re not showing enough income to qualify.”

We recommend that you speak with a licensed mortgage banker who can help determine what is best for you.

The FHA plans to shift to a ‘risk-based’ system tied to credit data to price its mortgage insurance similar to traditional lending.

May 19, 2008

DALLAS — Who has a better credit score on average — a home buyer with higher or lower income?

Inside the country’s fastest-growing mortgage program, the surprise answer is: People with lower incomes have slightly higher FICO scores. That finding, which emerged from a statistical analysis of all approved mortgages insured by the Federal Housing Administration during fiscal 2007, is now buttressing a policy switch that could affect thousands of buyers and refinancers.

The FHA, which for decades has used a one-size-fits-all approach to pricing its insurance on home loans, plans to shift to a “risk-based” system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down-payment amounts since the mid-1990s.

The agency’s move, which will cover new applications including “jumbo” loans up to $729,750 in high-cost markets through December, will bring the FHA in line with the private sector’s main approach.

Brian D. Montgomery, the FHA’s top official, outlined the impending change in a speech here May 8 at the annual conference of the National Assn. of Real Estate Editors.

Under the old approach, he noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That amounted to a pricing inequity for applicants who presented a low risk of default on loans and an inappropriate subsidy of applicants who were likely to default.

A study of an entire year’s applications turned up the additional fact that the FHA’s lower-income borrowers typically had higher FICO scores than those with larger incomes.

“Is it counterintuitive? Yes,” Montgomery said.

According to the study, applicants with FICO scores of 680 to 850 had a median income of $48,756 last year, while those with low scores of 500 to 559 had a median income of $53,388. Fair Isaac Corp.’s FICO scores range from about 300 to 850 — the higher, the better — and are predictive of future defaults and foreclosures. Even at rock-bottom down payments of 3%, applicants with lower incomes had higher credit scores than applicants with bigger incomes making similar-size down payments.

All of which underlines the key reason for making the switch to risk-based pricing: Why should people who have demonstrated superior credit — irrespective of their income levels — pay the same mortgage insurance premiums as loan applicants who have seriously flawed credit histories?

Under the new system, according to the FHA’s outline of its plan, “a larger number of low-income borrowers [will] benefit from premium reductions than . . . moderate-, middle- and upper-income borrowers combined.”

On 30-year mortgages with down payments of 10% or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25% of the loan amount upfront and annual renewal premium payments of 0.5%. Borrowers with down payments of less than 5% and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25% up front and 0.55% annually. All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5% premiums upfront and 0.5% annually.

To set premium rates by credit standing, the FHA plans to use the middle score of an applicant’s three FICOs generated by the national credit bureaus — Equifax, Experian and TransUnion. If only two are available, it will use the lower.

For applicants with thin or “nontraditional” credit histories on file at the bureaus, the FHA will underwrite and price the loans without reference to FICOs, with heavier emphasis on rent and utility payments among other measures of creditworthiness.

Although FHA mortgage volume has more than doubled in the last year, the move to risk-based pricing is expected to make it more attractive to buyers and refinancers.

During the housing boom years, the FHA lost much of its business to subprime lenders and insurers who offered zero-down, low- or no-documentation loans at high interest rates and fees, including prepayment penalties.

The FHA, by contrast, always has required at least a 3% down payment and full documentation of income and assets but has never permitted prepayment penalties.

Since taking over as FHA commissioner in 2005, Montgomery has emphasized “modernizing” the agency and winning back market share. That has included pushing for higher loan limits to serve greater numbers of borrowers in high-cost areas such as California and the East Coast.

The FHA also is now the government’s key vehicle for refinancing borrowers stuck with unaffordable — and often toxic — subprime mortgages and looks to play a key role in the government foreclosure bail out initiative.