Update on FHA Changes

On Friday, December 14 the senate passed a bill that would loosen underwriting guidelines and increase the loan size of our bright and beautiful FHA loan. It appears that Washington recognizes the woes created by subprime lending and our congressional friends want to offer support. It’s not a question as to whether this help is needed. During the five-year housing boom many consumers turned to Adjustable Rate Mortgages (ARMs) that will soon reset (if they have not already done so). With the new proposal on the table, we might see a lower down payment for FHA (if the Senate gets their way, even lower than today’s 3% required) and, the risk-based MI that I have referred to in a previous blog, will be delayed by twelve months.

Perhaps 1.8 Million Americans can exhale; that is the number of borrowers that will see their mortgage costs skyrocket before the end of 2008. Credit and underwriting guidelines have already tightened and many economists and analysts fear that a recession is heading our way.
But for now, we will keep our eye on the middle of the road and see where the Senate and House will meet. The White House has already said that President Bush will sign off on this bill which is also a relief. More updates to come.

Credit Tips for 2008

I posted the previous blog entry, "Will FHA Require a 620 in '08?" on http://www.activerain.com/ and the first question I was asked by a reader was, "What tips can you give someone to improve your credit?"




Here are a few suggestions for future borrowers:

1. You need to start early, get a copy of your report, make sure all liabilities are reporting correctly. If not, contact your creditor.


2. Check balances against high credit limits. Make sure to obey the 1/3 rule--balances should not be more than 1/3 of the high credit limit. You may need to open up a new card; this is important.


3. Pay off or settle all open collections. After 24 months, they are not impacting your score, however, if the debt is resold, it will open up on your report as a new collection and therefore drop your score.


4. Get to your true score. Remove authorized users if you do not know them well and know their ability to pay on-time. If they are late, so are you. This is scheduled to change soon.


5. Watch student loans carefully. This can wreak havoc on your score if not monitored carefully. I often see errors that damage credit scores.


6. If you do not have credit lines, begin now and open up a new account, even if it's a secure card.


7. Of course it goes without saying be vigilant and pay your bills on-time. Especially automobile loans.



Don't wait until you decide to purchase a home. Act now!

Will FHA Require a 620 Credit Score in 2008?

Will FHA Require a 620 in 2008?

I shall answer this question with deliberate ease, a bit of caution, a tad of apprehension. Over the years, I have stood proudly from my mortgage rooftop and boasted that FHA is a great loan for the credit challenged borrower, the first-timer, the borrower seeking a second chance to start over. “Who do you have for me this time, Juanita?” my underwriter always ask when I plop down in front of her to state my case. She braces herself, for experience has taught her that I attract those that have a “make-me-cry” story, a credit score that could be as low as a 447 (closed 2 weeks ago). And so I dribble on and present my case and 9/10 times, if I believe strongly in a borrower, the final scene of this saga plays out at the closing table. “Call me afterwards and jingle those keys in my ear,” I tell these ecstatic borrowers if I cannot attend their closing. Ahhh, the jingling sound is like music to my ears. No words need be said. They know and I know that we have defeated the odds, that the other lenders were wrong; their family and friends who said, “just wait a while” were wrong. They fought the good fight—and won. The single mom now has a home for her three kids, not a cramped apartment without a backyard. I have tracked many of these borrowers and their payment history and they have proven over the years that they were worth the effort and time to get them closed. Add to that, they are always an excellent source of referrals for me and my agents.

Now times are indeed a-changing. For those who are unaware, FHA has developed a new risk-based structure. Among the many changes that will go into effect in 2008, the standard upfront mortgage insurance (1.5% of the base loan amount) will now range from .75% of the loan amount for lower-risk mortgages up to a maximum of 2.25% for those considered high risk. Credit scores will be used to determine risk; in fact the HUD notice (dated 9/20/07**) that announces this change must be copied and studied so that you fully understand this new change and its impact. The most significant change is this: borrowers who cannot obtain a downpayment from their own funds or a family member must have a 620 credit score in order to qualify.

If you’re like me, you’re asking other questions. Here are some other key points I’d like to bring to light.

Ø When will this change occur? Originally the change was scheduled for January 1, 2008, but according to the Washington Post, “On December 4, 2007, HUD announced it is temporarily delaying the implementation of the risk-based premium rule for up to 60 days.” FHA Commissioner Brian Montgomery said, "It's good to have breathing room to let Congress work something out and let banks adjust their systems to the new rule."

Ø If the borrower has no credit score, they must have a downpayment of at least 5% of their own money to qualify for FHA-insured financing and will pay 2.25% upfront. These borrowers can lower the premium to 2.0% by making a downpayment of 10% of their own money.

Ø If there are two borrowers, don’t think of the “decision score” as you would a conventional loan (i.e. the lower of the 2 scores). FHA will average the two decision scores with hopes that a higher percentage of borrowers will receive a reduced premium.

Ø If a borrower is a first-time homebuyer who has received pre-purchase homeownership counseling, the maximum upfront premium is 2%, even if their credit score would fall into the 2.5% category. Agents, make sure your borrowers receive this counseling prior to execution of the sales contract.

It's time for first-timers to attend credit workships and homebuyer seminars BEFORE you sign a contract.

Starting Over - After a Divorce

Among other things, a divorce can devastate a person financially. In my occupation, I hear of this all too often. A boatload of credit card debt. A car loan with late payments. Open collections. These are only a few of the credit vexations that may occur when someone has gone through a divorce.

Let's assign these problems to Jane Doe. Now years past; she attempts to recover from her divorce but her credit is ruined. 480 FICO. She wants a house but she has not yet rebuilt her credit. Can we help her? Here's more:

Rent: $800 and paid on-time
Utilities, car insurance: paid on-time
Collections: Less than $5000
Employment/Income: Stable and enough to afford a $1000 mortgage payment.
Assets: $4500 and thank goodness she still has her 401k with $10,000

Can we help her?

She's afraid to call because of her score, her collections. But she shouldn't be. Excellent rent history and her alternative credit will bode well for her. She has also saved up for a home and can prove > 3 months of reserves. She can explain and document her past credit challenges (previously she had good credit, her dates of late payments coincide with her divorce.

Is it possible for her to get a loan?

She won't know until she calls. Never be afraid to call. You never know.

Times are A-Changing for Other Loan Programs

Today I got word from my company that we will no longer offer the NINA loan. For those unfamiliar, NINA stands for No Income No Asset. At one time, we needed nothing more than signatures on a loan application, no matter if the property was $1M. It was crazy and quite frankly, never made sense to me. I guess at the end of the day, Wall Street investors would purchase such nonsense so everyone was OK. Other changes were noted in the unwelcome memo of new loan program changes.

Does anyone need to ask why I believe in the constancy and reliability of the FHA loan? It's the only loan program over the years whose name has not appeared in email alerts, followed by "Urgent - Please see changes." Yes, it's true that we only have Nehemiah until March 2008 but FHA Optimist like myself have a strange feeling that even without Down Payment Assistance programs, everything will be alright.

One Question - One Answer - Re: Bankruptcy

This weekend someone called and asked me if they were still eligible for a FHA loan though they were less than 2 years out of a bankruptcy. Though you would think that the answer would be No, since the guidelines state very clearly that you must have the 2 year seasoning, I surprised the caller by saying, "This is possible, provided you have extenuating circumstances."

I have closed a loan for a borrower that was only twelve months out of a Chapter 7, however hers was a story that would leave you in tears. She had done a good deed for a relative and by doing so she was left financially strapped. She had the court papers to prove it. I submitted her loan application, credit and supplemental documentation to my underwriter and she granted us permission to proceed. We closed her loan two months ago.

Every case is different but one thing is for sure--you will never know until you ask.

The Teacher Next Door

Today an agent/friend called and asked me to put together some marketing collateral for teachers. I immediately began my research, thinking of a Department of Community Affairs program that loves teachers. Then I remembered The Teacher Next Door, a program established by HUD to offer single-family houses, condominiums, and townhouses to teachers at a 50 percent discount. If the “HUD acquired home” cost $150,000, the borrower pays only $75,000. How’s that for a bargain? It gets even sweeter.

The teacher may also apply for a FHA-insured mortgage with a down payment of only $100 and he/she may finance all closing costs. Are you loving this yet?

Well, there’s more to the story.

The goal of this program is to encourage teachers to buy homes in revitalization areas across the nation. As per the guidelines, you must be "employed full-time by a public school, private school, or federal, state, county, or municipal educational agency as a state-certified classroom teacher or administrator in grades K-12."

However, there are property type restrictions (ex. No duplexes, no triplexes). Also, the homes cannot be other real estate for sale in the area (i.e. forget the 3-bedroom dream home in the new subdivision down the street—no new construction). HUD sells all qualifying homes as-is and it does not provide any warranties.

The good news—there are tons of revitalization areas across the country listed and sold exclusively over the Internet. Every week a bid is awarded. And the bid must be the amount of the list price. The computer randomly selects each bid and it is posted each week on the web. I advise clients to enlist the services of a professional real estate agent even though they think they understand the program requirements and bidding process.

It’s important to note that a borrower will be required to sign a silent second mortgage and note for the discount amount. No interest or payments are required as long as they fulfill the three-year occupancy requirement. For this point alone, I recommend that a borrower read the fine print carefully. It turns out there are no free rides, even on a good neighbor program. Here are a few URLs that will provide more information on this program.

For Frequently Asked Questions, go to http://www.hud.gov/offices/hsg/sfh/reo/goodn/gnndfaq.cfm

To find out where these properties are located, visit: http://www.hud.gov/offices/hsg/sfh/revite/abtrevt.cfm

For a Teacher Pre-qual Questionnaire:
http://www.hmbireo.com/forms/9549-b.pdf
A great niche in a down market. Many teachers have never heard of this program and the targeted areas may be right in your backyard. And a similar program exists for firefighters.




Juanita McDowell
The FHA Originator

One Question - One Answer

Today I received a call regarding student loans. "If my student loans are in deferment until 2009, do I need to worry about them? I know my debt is already high."

No, is the answer. If you are doing a FHA loan, and your student loans are in deferment for the next 12 months (from the closing date), your lender does not need to count them in your Debt-to-Income ratio. Period.

Conventional loans are a different story.

Early Preparation is the Key

It's the end of the month, the most exhausting time of the month for a Loan Consultant. Most people choose to close at this time to avoid prepaid interest, which reduces the total amount owed at closing. Some months are better than others, meaning, we have our approvals done and our closing packages are sitting happily on an attorney's desk, ready to transform into an accurate HUD Settlement Statement. However, there are other months that stand alone, that no one can explain. Loans are approved with conditions but the borrower simply can't find...whatever. Appraisals may come in short and the seller refuses to adjust the price, even slightly. Or the seller has tax liens and we cannot prove clear title. Or student loan creditors refuse to give that all-too-important deferment letter. And the list goes on.

But here's a tip. Gather everything upfront so that conditions are few. Here's a good generic list to get you started if you are doing FHA or any fully documented loan.

Remember the number 2.

1. 2 years of W-2s (most recent 2 years)
2. 2 paystubs (if you get paid once a month, 1 is sufficient) for all jobs
3. Most recent bank statements for the last 2 months
4. If you are self-employed, tax returns for the last 2 years
5. Landlord name and # for the last 2 years (or residential history for the last 2 years)
6. Employer name and number for the last 2 years
7. Go to http://www.getdownpayment.com/ and take the homebuyer's course if your organization uses Nehemiah. If not, this is still a great online class for the first-timer. Should not take more than 20 minutes.
8. IF you have student loans, make sure they are in deferment or you know the monthly payment amount. Sometimes credit reports are not accurate.
9. IF you have paid collections or judgments, also submit any payoff letters that you have
10. IF you have experienced a divorce, provide the decree. IF you pay or receive child support, provide the documentation that supports this.


This list will get you started. Ask your lender for a "checklist" of items that apply to your situation. This upfront preparation will make a world of difference in you loan experience.

Can an Investor Obtain a FHA Loan?

Today an investor called and asked me if he would be eligible for a FHA loan. My first thought was No, as I have never originated a FHA loan for a non-occupant borrower; my rates sheets over the years have never allowed me to price out a rate for an investment FHA loan. And I suppose some companies do not allow such a thing regardless. However, the 4155, that golden light that guides us to FHA guidelines, does have specific stipulations for investment properties. Let me quote directly from the light: "With permission from the appropriate Home Ownership Center (HOC), private investors, including non-profit organizations ... may obtain FHA-insured mortgages for the following reasons:

Purchasing HUD Real Estate Owned (REO) properties. Owner occupancy is not required when the jurisdictional HOC sells the property and permits the purchaser to obtain FHA-insured financing on the investment property."

There's always more to the story and heaven knows there are plenty of HUD REOs right now on the market. If you are an investor interested in purchasing a HUD property, ask your Loan Consultant to check their program guidelines before answering "No" to this question too quickly.

Overtime and Bonus Income and FHA

Per the 4155, the FHA bible for those of us in the business, "Both overtime and bonus income may be used to qualify if the borrower has received such income for the past two years and it is likely to continue. The lender must develop an average of bonus or overtime income for the past two years and the employment verification must not state that such income is unlikely to continue."

Most people stop reading there. I have taken over many "declined" loans from other lenders because they don't read or know to read the sentence that follows: "Periods of less than 2 years may be acceptable provided the lender justifies and documents in writing the reason for using the income for qualifying purposes."

This line is golden for those who have been turned down because the principals involved in helping them get a loan did not know this. And so, another reason I love the FHA loan. The flexibility in structuring this loan is nothing short of incredible.

Who Can Get a FHA Loan?

Who Can Get a FHA loan?

I will provide 3 answers to this question:

1. Individuals with no credit or newly established credit.

Occasionally a potential borrower will call, boasting of the fact that they have no credit cards, they pay everything in cash. This type of borrower falls into a small elite group which I admire but have never been eligible for membership. I believe in credit cards, if for no other reason, to establish a credit history with the bureaus (Experian, Transunion, and Equifax). No credit cards ever means no credit scores, and this limits you to the FHA loan. FHA accepts such a situation, provided you have “alternative credit,” which includes (but is not limited to) car insurance, cell phone, a utility bill such as gas, electric, or water. It goes without saying that a stellar rent history is always a plus. A lender verifying this type of credit history prefers at least 3 types of alternative credit that has an on-time, twelve month history.

2. Families with previous credit challenges but are now credit-worthy.

I have always believed in second chances and perhaps that is why I love the FHA loan; it is the “second chance” loan. Life happens to all of us, and behind this fact is a host of potential tragedies, including divorce, sickness, the death of a loved one. Such circumstances may drive several late payments or a bankruptcy that drastically lowers one’s credit score to less than 620, the magic number that enables Conventional financing. FHA is not a credit score driven loan and FHA underwriters allow written explanations for past credit problems. Sometimes these explanations will require supplemental paperwork to support them. An example includes a borrower who has written that she was hospitalized for several months during a particular year. An underwriter may ask for a doctor’s note or proof of hospitalization. A word of caution: Do not write anything that you cannot back up!

3. First-time home buyers.

HUD was created to help low-to-moderate income families. Many first-time buyers are fresh out of college, starting a new job and therefore lack an established work history of 2 years. This is only one example of the first-time buyer for there are a host of other examples which we will cover in this blog over time.

FHA also allows a borrower more acceptable sources of down payment as well as higher qualifying ratios. For these reasons, as well as others listed above, you can rely on the FHA loan. However, there are loan limits. Visit www.fha.gov to research your area.

If you look in webopedia for a definition of HUD it will feed you the following definition:

“Short for Heads Up Display in video and computer games. HUD is the display area where gamers can see their character's vital statistics such as current health, bonus attributes, armor level, ammunition count, and more.”

Wrong HUD. For purposes of home buying, HUD refers to The U.S. Department of Housing and Urban Development. It is a government agency established to help Americans in home ownership. Their mission statement reads like this: "HUD's mission is to increase homeownership, support community development and increase access to affordable housing free from discrimination. To fulfill this mission, HUD will embrace high standards of ethics, management and accountability and forge new partnerships--particularly with faith-based and community organizations--that leverage resources and improve HUD's ability to be effective on the community level."

Like many people I was surprised to learn that, through the Federal Housing Administration (aka FHA), HUD is the largest mortgage issuer in the world. FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the United States.

For more information, you can visite www.fha.gov.

The Self-Employed Borrower and FHA

Now here's a challenge. You work for yourself, maybe you sell Mary Kay, or, maybe you're an independent landscape artist. In either case, your tax returns are done in your favor--you don't owe Uncle Sam anything, and life is good until...you decide to purchase a home.

Everyday I attempt to pre-qualify this type of borrower. They want and oftentimes need 100% financing. In today's mortgage market, that means you must do a fully documented loan. In most cases, lender require tax returns for the last 2 years. The net earnings reported must be enough to qualify for a home; in most cases, it is not. So what do you do?

This dilemna probably inspired the "Stated" loan. Some lenders use other names like "Reduced Documentation." If you meet the credit score requirement and you have money for a down payment (~5% or more, depending on your score), then you are still in the game. At one time we used a "Bank Statement Loan" for these type of borrowers. I have not closed this type of loan in a while.

If you need a FHA loan and there is not enough income on your tax returns, you may want to consider adding a blood related, non-occupant co-borrower to the loan. Or, you may want to have your tax returns amended. Better yet, if you are newly self-employed and not yet a homeowner, I hope you are reading this post now so that you will take this into consideration before you buy.

As always, I can be reached on 404-401-6209 if you have additional questions about this.

A True and Trusted Friend

I have reserved this blog for one type of loan--The FHA Loan. It's a trustworthy friend that has been around the potential homebuyer since the 1930s. It was formed to encourage wider home ownership. Nowadays, with tighter underwriting guidelines and what I'll loosely call the dying off of Subprime loans (this is not entirely true but who wants to pay a few extra hundred on a mortgage payment due to higher mortgage insurance premiums--more on that in another blog), we need to resurrect and promote FHA.

Why FHA? As a Mortgage Consultant who has always closed credit challenged borrowers, this has always been my mainstay. It’s like the Many of my clients were fresh out of college or divorce or simply had credit challenges caused by some circumstance out of their control. Life had dealt them an interesting hand but they deserved a second chance. FHA is more lenient and forgiving when a client (s) has been down a rough road where credit or limited cash on hand is concerned. FHA also allows the borrower to use gift funds for the down payment.

Look to this blog to give you more information about the aspects of this loan, the requirements, as well as its benefits.