Recent FHA changes: What you need to knowJeff MifsudFHA loans, updates, FHA risk-based pricing plan, FHASecure As of the writing of this article, the Federal Housing Administration has been working very hard to make FHA a better loan product. In this months article, I'll start by summarizing the updates, and continue with some answers to the most frequently asked questions I've received this month. Here's the update ... the FHA has: *Passed their Reform Bill (HR 1852) in the House and having it reviewed by the Senate; *Published their risk-based pricing, which will require minimum scores (this is not yet law, but will be after some modification); and *Published their final rule to disallow seller financed down payment assistance, i.e., all seller financed downpayment assistance programs. In response to the current crisis in our industry, FHA has implemented a program called the FHASecure plan that can help borrowers currently in adjustable-rate mortgages (ARMs). Now, on to the Q&As. Q: What is the FHA Reform Bill? A: This bill is designed to adapt the FHA loan to current market conditions, allow insurance premiums for higher risk loans and to increase FHA loan amounts. Some of the major changes we can expect to see include: *Increase in loan amounts, determined by the lesser of 125 percent of median sales price in your area or 175 percent of the agency limit; *Extension of mortgage term to 40 years; *Lower to zero downpayments for first-time homebuyers; *For FHA broker and lender approval: allowance of surety bonds instead of audited financials; *Automated underwriting technology for borrowers with alternative credit; and *Risk-based mortgage insurance premiums. Q: What is FHAs risk-based pricing plan? A: There are two main features of the risk based pricing model: 1. Establishment of minimum credit scores; and 2. Increase of up-front and monthly mortgage insurance premiums. If, for example, funds for closing come from the borrower or a relative (or a close friend with no interest in the transaction), a lower score will be allowed. If, however, funds come from any other source, a higher score will be required. I have seen hundreds of borrowers with scores in the low- to mid-500s due to old, lingering collection accounts with small balances (i.e., medical bills), but who have an excellent 24-month alternative credit history. These people are very credit-worthy individuals and will be penalized with this risk-based model. Since the credit scoring will negatively affect these types of borrowers, I believe (and hope!) that FHA will modify their guidelines to allow these borrowers access to financing. Q: What is the recent change regarding downpayment assistance programs? A: FHA has long had the practice of allowing a borrower's investment to be derived from gifts by family members and from certain organizations. On Oct.1 of this year, the U.S. Department of Housing and Urban Development published its final rule regarding a borrowers investment in the transaction. This rule establishes that a borrower is prohibited from using downpayment funds from the following sources: the seller or any other person or entity that financially benefits from the transaction, any third party or entity that is reimbursed directly or indirectly by the seller, or any other person or entity that financially benefits from the transaction. Please note that this rule is in regard to the downpayment itself and that sellers and lenders will still be able to cover up to six percent of the borrowers closing costs and prepaid expenses. In addition, borrowers will still be able to receive downpayment funds from acceptable government programs and non-profit agencies that provide funds for homebuyers. Q: What is the FHASecure plan? A: The plan allows borrowers with strong credit histories to qualify for a refinance when they would otherwise be unable to qualify. For example, homeowners who had been making timely mortgage payments prior to their loans adjusting, but are having difficulty making the current, inflated payments. Only loan applications dated prior to Dec. 31, 2008 will qualify. In addition, FHA will implement risk-based premiums that match the borrower's credit profile with the insurance premium they pay; i.e., riskier borrowers pay more. Q: What does FHASecure mean to loan officers, their clients and their real estate agent partners? A: What it means for loan officers is that they now have an opportunity to increase their income dramatically by filling their pipelines with refinance loans of borrowers with ARMs. FHA originators out there are equipped to respond to this segment of the market, make a lot of money and make their clients happy by delivering a good loan. For their clients who are in ARMs but hopefully not up in arms (sorry, I couldnt resist), it means an opportunity to get out of their time-bomb loans and into a stable mortgage. Keep in mind, FHA can now go up to a 95 percent loan-to-value (LTV) on a cash-out refinance and up to 97.75 percent, in most cases, on a rate and term refinance. For real estate agents, it represents a chance to team up with loan officers to market FHA to their databases in order to save their clients with ARMs from potential foreclosure. Q: What are the most important points loan originators need to know regarding FHASecure? A: Here are the six most important things you need to know about FHASecure: 1. The payment-to-income ratio and debt-to-income ratios remain 31 percent and 43 percent, respectively. Compensating factors are to be provided by the underwriter when the ratios are exceeded. 2. The homeowner's mortgage payment history during the six months prior to the reset should reflect no instances of making mortgage payments outside the month due and that other recurring obligations were paid on time. 3. Because property values have declined in many areas, FHA warns lenders and appraisers not to inflate value. FHA holds the lender and appraiser equally responsible for the appraisal and will take action against both parties if necessary! 4. The plan represents the creation of what Im calling the "short refinance." This is similar to bank-owned "short sale," when a lender will accept a payoff less than what is owed them. FHA will allow the current lender to write off the amount of indebtedness that cannot be refinanced into the loan because of insufficient equity in the home. 5. If the total amount of the settlement charges exceeds the maximum LTV, FHA will allow the current lender to hold a second mortgage to cover the difference (including closing cost, arrearages, taxes, etc.). The combined LTV may exceed the maximum LTV and the FHA mortgage limit for the area. 6. Borrowers who became delinquent after the reset are eligible for this program. What you need to know is that although this is now an official temporary FHA program to assist borrowers in ARMs, many lenders are not offering this loan. Based on my sources, the lenders currently offering the program are Chase, GMAC, Fidelity Home Mortgage Corporation, First Horizon Wholesale and WestAmerica. This product opens up a great marketing opportunity. Fellow loan officers, I urge you to team up with your real estate agents and circulate a joint letter explaining the FHASecure loan. If a borrower doesnt qualify for the FHASecure, they may qualify for the standard FHA refinance. With the trillion dollars of ARMs coming up for adjustment, you have an opportunity to refinance these loans into FHA, save your clients from financial disaster (thereby assisting the overall economy!) and make terrific income at the same time. Jeff Mifsud founded Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a faculty member of LoanToolBox.com and is a former FHA underwriter. He may be reached at (877) 342-9100 or e-mail [email protected]. For upcoming FHA Webinars, visit www.mseminars.com.