The new FHA risk based mortgage insurance guidelines are set to take effect on July 14, 2008. They were originally set to take effect on January 1, but FHA held off due to public comments. The new guidelines appear to answer most of the concerns that I had about the original proposal.
The most notable part of this policy is that, although there is still substantial leniency, this is the first official adoption of minimum credit scores for the FHA program.
This may sound harsh, but divorce is not a good excuse for bad credit.
Considering the number of credit explanation letters I see in FHA loan submissions which prominently promote divorce as the explanation for borrowers’ credit foul-ups, it appears clear to me that many loan officers are not aware of this fact. As a result, many loan submission files end up unnecessarily in the turn-down stack.
For ages, your borrower’s nontraditional credit has been acceptable to use to qualify for FHA loans. In the past, though, HUD wasn’t very specific on exactly what they expected to see when alternative credit was used. Were letters from creditors acceptable proof or did it need to be added to a nontraditional credit report? What types of accounts are acceptable?
The advice I’m about to give goes against the grain in the mortgage business where everyone likes to advertise that they offer 1200 different loan programs for borrowers with all types of credit. I’m going to give it anyway. Loan officers today cannot survive without good FHA training.
The very best way to make your mortgage marketing successful is to concentrate it on a very tightly defined niche and position yourself as the expert in that niche. Borrowers aren’t attracted to those one size fits all ads and you are throwing away your money.
Here are three niches that an FHA mortgage specialist can use to close more loans in less time with more profit and, most importantly, happier customers that are anxious to refer their friends and relatives.
1. First Time Home Buyers.
This is the most obvious FHA niche market. After all, this was the reason the FHA program was created in the first place. In spite of what you hear in the news, a housing downturn presents the best time for smart and well advised first time home buyers to enter the market.
The key to marketing to first time buyers is to understand that they need a lot of information and guidance before they trust. Study their needs in today’s market. Those needs are a little different than they were during the boom times.
Create a free report that shows how FHA mortgages can help meet those needs and put that home buyer in a position to profit when real estate values start rising again – as they always do. Create a series of follow-up letters and reports that you can send out over time. Get their email addresses and set up an automatic series of emails that can be sent out to them over a long period of time. Educate them and they will trust you.
Here are five quick tips loan originators can use to help prevent FHA mortgages from falling through during processing. For some mortgage originators these tips will seem ridiculously basic. Unfortunately, conversations with FHA underwriters show me that many loan officers haven’t caught on to these ideas yet.
1. Make sure the loan you are submitting makes common sense.
Incredibly, this is one of the most common mistakes made by originators who entered the mortgage business within the last 5 to 7 years. Subprime programs generally only required that the loan fit into their matrix and never cared about the reasons the person had credit problems. Make sure that you can verbalize a good case that it makes sense to believe that this borrower can reasonably be expected to make the payments on the loan. Often this requires asking a lot of uncomfortable questions of the borrower to make sure that you truly understand their situation. Even when your submission is approved by the automated underwriting system and theoretically the underwriter needs only to validate the information and not make a credit decision, the underwriter may well find something wrong if the loan does not make common sense. Lenders are held accountable by HUD for loans that default. They can always find a reason to override the automated underwriting findings if they want to.
Is it just me, or is anyone else getting tired of a new bill coming out of one side of Congress or the other every day proposing to change the FHA guidelines?
I just received a great quote in an email from Cato Institute chairman William Niskanen:
“The Senate has again demonstrated that its guiding principle is ‘Don’t just sit there. Do something really dumb in response to the current perceived crisis.’ This week’s example is the Foreclosure Prevention Act, which passed the Senate by a vote of 84 to 12. One provision of this act is a temporary $7,000 tax credit for buyers of foreclosed properties, the primary benefits of which would accrue to those grieving bankers who made bad loans. Another provision is a temporary tax deduction worth up to $1,000 for families who pay property taxes, the primary beneficiaries of which would be high-income home owners. The most expensive provision is a three-year tax break for homebuilders, which would increase the supply of unsold homes and delay the recovery of housing prices.
There was an interesting article in the Wall Street Journal which you can find here – “Uncle Subprime“.
Take a look at the article. It points out how seriously misguided our lawmakers are, and how completely unaware they always seem to be of the unintended consequences of what they do. Whatever proposal comes down the pike, they just can’t resist gutting it and leaving the worst, most pandering, most foolish elements to become law.
One of the primary market benefits of an FHA loan has always been that credit scores were not a factor. A borrower with great credit scores could definitely have their loan approved more easily, but someone with some credit problems could still get approved – provided they had a well documented common sense explanation for their credit problems and could show that the problem had been resolved. In spite of not relying on credit scores, FHA foreclosure rates went down while conventional mortgage foreclosure numbers went up in spite of their almost excessive reliance on credit scores.
