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.