One of the big selling points for subprime mortgages has been that they allow the ratio of your debt to your income to go up to 50%. For borrowers with a spouse who has a deal killing credit problem but will nevertheless still be helping with the mortgage payments, this has seemed very attractive. They could officially qualify for the home they wanted without having to use the spouse’s income. What many of them didn’t realize is that should have at least tried to use an FHA mortgage.
The National Housing Act provides that the mortgage limit for any given area shall be set at 95 percent of the median house price in that area, as determined by the Department of Housing and Urban Development, except that the FHA mortgage limit in any given area cannot exceed 87 percent of the Freddie Mac loan limit ($417,000) for a one unit, ($533,850) for a two unit, ($645,300) for a three unit, or ($801,950) for a four unit, nor be lower than 48 percent of the Freddie Mac loan limit for a residence of applicable size.
Sounds complicated, but it boils down to the FHA limits being between $200,160 and $362,790 depending upon the area you live in. Except in Alaska, Guam, Hawaii and the Virgin Islands where the limits care based on 150% of the median price.
One of the most frequent complaints from borrowers and lenders is that the FHA programs, including the new FHASecure initiative, are useless in areas such as California and New York where home prices and mortgage balances are significantly higher.
From the HUD Mortgagee Letter (with some extra highlighting):
FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard to obtain risk classifications on each mortgage originated under the FHASecure initiative. If TOTAL renders an “accept/approve,” the mortgagee’s underwriter need not perform a personal review of the borrower’s credit history and capacity to repay. However, in the more likely event that the risk class is a “refer,” the underwriter must:
Total Mortgage Scorecard is FHA’s automated underwriting system. It analyzes all the factors of the loan and either approves it or refers it to an underwriter for manual analysis. Borrowers with upcoming rate adjustments should move heaven and earth to keep their credit clean during the time before their ARM adjusts. Total Mortgage Scorecard has been known to approve mortgages with debt ratios that substantially exceed the standard guidelines when the credit is clean for the past 12 months.
1. Determine that the homeowner has the capacity to make future mortgage payments as well as pay all other obligations. 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.
If borrowers do not take the time to clean up their credit ahead of time, the underwriter will be very reluctant to allow those debt ratios to be exceeded.
Here is a little known aspect of FHA mortgages that can be a life saver in times like today:
On a refinance, subordinate financing (i.e. 2nd mortgages and home equity lines) may remain in place, but must remain subordinate to the new FHA first lien currently being financed. The combined-loan–to–value (CLTV) is not restricted, provided the borrower qualifies to make all scheduled payments on all liens.
On September 5, 2007, HUD released Mortgagee Letter 2007-11 giving guidance for lenders to implement the FHASecure initiative.
Here are the highlights of the eligibility requirements:
The mortgage being refinanced must be a non-FHA ARM that has reset.
The mortgagor’s payment history on the non-FHA ARM must show that, prior to the reset of the mortgage, the mortgagor was current in making the monthly mortgage payments, i.e., the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due.
If there is sufficient equity in the home, under additional eligibility instructions provided, FHA will insure mortgages that include missed mortgage payments.
Under certain conditions, FHA will insure first mortgages where (1) the existing note holder writes off the amount of indebtedness that cannot be refinanced into the FHA insured mortgage; or (2) either the FHA-approved lender making the new mortgage or the existing note holder may take back a second lien that includes closing costs, arrearages or previous secondary financing if the indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits.
Mortgagees must determine, as part of the underwriting process, that the reset of the non-FHA ARM monthly payments caused the mortgagor’s inability to make the monthly payments and that the mortgagor has sufficient income and resources to make the monthly payments under the new FHA-insured refinancing mortgage.
Maximum FHA loan to value ratios
The maximum loan to value limits are shown below and are applied to the appraisers estimate of value, exclusive of any upfront mortgage insurance premium.
For States with Average Closings Costs At or Below 2.1 Percent of Sales Price:
98.75 percent: For properties with appraised values equal to or less than $50,000.
97.65 percent: For properties with appraised values in excess of $50,000 up to $125,000.
97.15 percent: For properties with appraised values in excess of $125,000.
For states with Average Closings Costs Above 2.1 Percent of Sales Price
98.75 percent: For properties with appraised values equal to or less than $50,000
97.75 percent: For properties with appraised values in excess of $50,000
The initials ”FHA” stand for Federal Housing Administration. The FHA is a part of the Department of Housing and Urban Development (HUD). When you see HUD homes for sale, they are foreclosed homes that were financed with mortgages guaranteed by FHA.
The FHA program was established in 1934 as part of the National Housing Act with the mission to expand credit and home ownership opportunities for borrowers who may have had credit problems, have a limited credit history, or whose bills take up a higher percentage of their total income than typically allowed on conventional loans. The FHA program accomplishes this goal by providing insurance which will pay off the loan if the borrower defaults. Because of the guarantee of FHA mortgage insurance, the lender can take more risk approving mortgages for borrowers who would not fit into conventional loan programs. The FHA loan guidelines were designed around the needs of the first time homebuyer, but the program can also be used for a purchase or refinance by any borrower who does not already have an outstanding FHA. The standard FHA loans are only allowed for owner occupied homes and are not for purchasing investment property.
Every day there is a constant barrage of headlines trumpeting the meltdown of the mortgage industry. Obtaining a conventional mortgage is becoming more difficult by the minute. Qualification guidelines are tighter than they have been in years.
This meltdown is occurring at the same time a record number of adjustable rate mortgages are set to begin their rate adjustments. Because these ARMs usually had initial teaser rates that were artificially low, if you have an adjustable rate mortgage there is a near 100% chance that your rate will be going up. Most of the time, this first rate adjustment will be several percentage points. It is not uncommon right now for a mortgage that has had an interest rate in the low 5’s to be adjusting up to the 8 or 8.5 percent range! If you have a subprime loan, this increase may be from 6.5 percent to 9.5 percent or more! Borrowers who are unprepared for this will have their mortgage end up as part of the delinquency rate statistics talked about on the evening news.
George W. Bush today announced that HUD’s Federal Housing Administration (FHA) will help an estimated 240,000 families avoid foreclosure by enhancing its refinancing program effective immediately. Under the new FHASecure plan, FHA will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing.”
The remainder of the press release on this subject can be found on HUD’s website here.
Since most people are unaware of the FHA insurance program and what it does, now would be a good time to take a look at the history of FHA.
On September 5, 2007, HUD released Mortgagee Letter 2007-11 giving guidance for lenders to implement the FHASecure initiative.
George W. Bush today announced that HUD’s Federal Housing Administration (FHA) will help an estimated 240,000 families avoid foreclosure by enhancing its refinancing program effective immediately. Under the new FHASecure plan, FHA will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing.”
