New FHA Rules

FHA Unveils Rules on Post Payment Charges, ARM Adjustments

From 8/26/14
The Federal Housing Administration (FHA) announced on Tuesday the passing of two new rules—one that prohibits lenders from charging interest on FHA-insured mortgages after the date they’re paid in full and one that requires lenders to give borrowers earlier access to information regarding FHA-insured adjustable-rate mortgages (ARM).

One of the rules, entitled Handling Prepayments: Eliminating Post-Payment Interest Charges, will prevent borrowers from having to pay post-settlement interest, which is defined by the Consumer Financial Protection Bureau (CFPB) as a “prepayment penalty.” The rule applies to FHA-insured mortgages that will close on or after January 21, 2015.

FHA also announced two new requirements for lenders in a rule known as Adjustable Rate Mortgage Notification Requirements and Look-back Period for FHA-insured Single Family Mortgages that will be applied to FHA-insured ARMs that originate on or after January 10, 2015. Lenders must now notify borrowers on FHA-insured ARMs at least 60 days in advance (but not more than 120 days) of an adjustment on their mortgage payment. The current rule requires lenders to provide a minimum of 25 days’ notice.

The second requirement of the ARM rule involves the “look-back period,” or the number of days a lender “looks back” to the index value in order to determine the new interest rate on a reset loan. Lenders must now base interest rate adjustments for reset mortgage loans on the index value available 45 days before the rate adjustment date. The current look-back period is 25 days.

“Together, these new rules are responsive to the regulations implementing the Truth-in-Lending Act (Regulation Z) as revised last year by the CFPB,” FHA said in a release. “These policies provide consistent protections for borrowers with FHA-insured mortgages, while ensuring borrowers have early access to information when making decisions about their FHA mortgages.”

A one-year plan to buying your first home

Buying your first home is a major move, so why not make a detailed plan of action?
From 8/22/14
How to buy a home in one year

Are you planning on buying your first home but don’t have a plan for doing it? That may be a mistake, because there are a lot of details that go into getting it right.

It’s important not to rush into buying a home, because a mortgage is usually the largest debt that people will get into in their lives, says Jim Duffy, a senior loan officer with Primary Residential Mortgage, Inc. “So it’s much better to ask all the right questions, plan accordingly, and plan early,” he explains.

And when he says early, he means it. “It’s worth a year of planning in my opinion, because there are so many decisions you could regret later if they are made in haste,” Duffy says.

With that in mind, here’s a one-year plan to buying your first home.

One Year Out: Start Saving for a Down Payment
Cars breaking down, unexpected medical expenses, that new big screen TV you absolutely couldn’t live without… saving money is tough. But if you want to own a home within a year, you’re probably going to need to save up for a down payment.

How much will you need to save? Well, it depends. First you need to figure out how much you can afford to spend on a home. To get an idea, you can use a home affordability calculator online that takes into account factors such as your salary, investments, and debt.

Next you’ll have to figure out how much you are able to put down on a home.

It’s possible to put less than 20 percent down, but just keep in mind that you’ll have to pay private mortgage insurance (PMI), which protects your lender in case of default.

If you’re a first-time buyer, you can also opt to put 10 percent down and get what is called lender-paid insurance, says Duffy. In this scenario, he says the lender charges an eighth to a quarter percent higher interest rate and in turn, they pay off the entire policy. Essentially, you’re mortgaging the insurance just like the home.

Because you’re spreading the payment over 30 years, the payment is only about $20 to $30 a month, rather than a few hundred a month with PMI, says Duffy.

Once you’ve established approximately how much you can spend on a home, and therefore how big of a down payment you’ll need, it’s time to start saving. Duffy suggests you then divide the projected down payment amount by the number of paychecks you get in a year, and then set aside that amount per paycheck.

Another good reason to start saving now? If you’re renting you may not realize that owning a home comes with a lot of upkeep and surprise expenses, says Duffy.

“So if you’re in the habit of saving and budgeting for that down payment, you’ll be successful as a homeowner, because you’ll keep that habit after buying a home.”

Nine Months Out: Check Your Credit
Your credit is the first thing potential lenders will check, says Duffy, so you want to make sure it’s the best it can be. And that might mean improving it or correcting errors in it. And both of those can take time.

First, the easy one: fixing any potential errors. And odds are decent that there is one. “About 25 percent of credit reports have some sort of meaningful error,” says Ken Lin, CEO of, a site where consumers can access their free credit reports. Worse, he says only about 35 percent of consumers check their credit annually, something you can do once per year for free.

If there is an error on your report, you need to call the creditor that made it to have it reversed, Lin says. But that takes time, says Duffy. “I had something that was wrong and it took five weeks to work it out. And I’m in the business!” he says.

The second issue – improving your credit so you can qualify for a mortgage or a better interest rate on your mortgage – could take more time. Lenders typically use the FICO credit score, which has a scale of 300 to 850, says Lin. The higher your score is the better.

Duffy says that to qualify for a mortgage you’ll likely need at least a 620 credit score. For the best rates, he says you’ll probably want 740 or more. According to FICO itself, the difference in the mortgage interest rate for borrowers with credit scores of 620 and 760 is more than a percent and a half. That can add up to hundreds of dollars a month.

So how do you improve your score? Assuming you are not delinquent or late on payments to creditors, both Lin and Duffy agree that your best shot is to make sure your outstanding balances on credit cards are at or below 30 percent of your available credit limit.

“If you can pay your credit cards down to 30 percent of your available credit, that will usually earn you 10 or 20 points right away,” says Lin. But if you’re also trying to save for a down payment, that might take time, so check your credit well ahead of applying for a mortgage.

Six Months Out: Find Your Future Neighborhood
Now’s the time to casually look into different possible neighborhoods – without a realtor, so you feel no pressure, says Duffy.

Why? Because you may think you know where you want to buy a home or where you can afford a home, but do you? This is a major investment and what you want out of it may change faster than you think.

For instance, says Duffy, a young couple who doesn’t have kids now but wants them in the future might want to check into the schools in different neighborhoods. They likely haven’t even thought about schools until now.

“People often move to neighborhoods just because it has a great public school,” he says. So, even if you’re more into alcoholic bars than monkey bars at the moment, that could change down the line.

Second, you may be surprised at how much prices can change from one neighborhood to another, says Duffy. It can literally be tens to hundreds of thousands of dollars difference within the space of a mile.

He says it also takes time to discover the nuances of a neighborhood – the benefits as well as the disadvantages that you may not see driving by on your rush to work.

Three and a Half Months Out: Find a Mortgage Broker or Lender and Research Mortgage Options
Now that you know the neighborhood in which you want to buy, it’s time to find a mortgage broker or lender rep and look into the various mortgage options. Because, yes, there is more than just the 30-year, fixed-rate loan that everyone’s so familiar with.

For instance, perhaps you want to pay your home off earlier than 30 years so you can retire without the burden of a mortgage payment. In that case, you may want to get a 15-year, fixed-rate mortgage, says Duffy. These come with lower interest rates, and because you are paying them off in half the time, you could save tens or even hundreds of thousands of dollars in interest during the life of the loan, he says.

Or, perhaps you want an adjustable-rate mortgage. “This option won’t fit most people these days, because interest rates on fixed rates are still low, historically speaking,” says Duffy.

But for those who know they will be selling their home before the rate adjusts, typically in five to seven years, it may be a good choice, he says. That’s because the interest rate for that first five- or seven-year period will be lower than a 30-year fixed rate.

Then there are options such as VA loans for military veterans, which come with easier qualifying and lower down payment requirements, he says.

As for finding a good mortgage broker, Duffy says you’ll want someone you trust and who knows the neighborhood or market in which you want to buy a home. The Internet is always an option for researching lenders, of course, but you may also want to ask friends who bought homes. Referrals from people you trust are always helpful.

Three Months Out: Get Pre-Approved
If you think that you should find a house first before starting the mortgage process, you might want to think again. Duffy says that in this seller’s market, with sometimes stiff competition among buyers for homes, pre-approval is often demanded by sellers to weed out buyers who can’t qualify for a mortgage and thus waste everyone’s time.

A simple pre-approval means that your mortgage broker or the lender’s agent has reviewed all your tax documents, bank statements, income and asset documents, credit report, etc., and you’re looking good for a mortgage of a certain amount, says Duffy.

But he suggests having the broker or banker go a step further and getting a full credit approval. “Then, the only thing lacking is the property information. That way the buyer can close faster, which is very important in a seller’s market,” Duffy explains.

In a pre-approval with a full credit approval, your mortgage rep will essentially do everything that is needed to get the mortgage, including getting the lender’s underwriter to approve you for a mortgage, says Duffy. Then, the only thing lacking in the mortgage application is the property information.

According to Duffy, presenting a full credit approval letter lets sellers know that you will have no problem getting a mortgage to buy their home.

The other obvious advantage to this is that you know exactly how much house you can afford. And finally, the reason for the three-month window is that credit reports are good for 120 days with most lenders, says Duffy. “So that gives you time to actually find the home and be closed on the home without having to redo credit,” he says.

Two Months Out: Find a Good Realtor and Find Your Dream Home
Okay, time to get really serious. It’s time to find a realtor. This late in the game? You might think that you should look for one earlier but that could be a mistake.

First, Duffy says finding a realtor after you find a mortgage expert, such as your lender, may sound counter-intuitive, but is actually very practical.

“Mortgage professionals tend to do a lot more transactions in a month than a realtor, so we get a good feel for who the good realtors in a particular marketplace are, what their strengths are, and who to steer clear of,” he says.

Second, it may sound crazy, but you don’t want to start looking too early, especially in markets where properties don’t stay on the market for long, says Duffy.

“If you do this too early, you might see properties that will be sold by the time you’re ready to buy,” says Duffy. That just spells a lot of broken hearts and frustration.

But if done right, with a solid plan, buying a home can be a wonderful, well-thought-out experience. After all, the expression is Home Sweet Home, not Home Sweat Home.

Housing Pricing or Mortgae Rates?

What matters more to housing: Price or rates?
From 8/26/14
Mortgage rates are the wild card as the housing recovery enters the fall season, with buyers sensitive to the slightest moves.

There has long been a saying in the real estate market that potential homebuyers don’t buy according to the home price or the mortgage rate. Instead, “they buy the monthly payment.” The monthly payment is, of course, a combination of rate and price, but the weight of each can change dramatically.

For example, home prices were able to soar uncontrollably during the last housing boom only because risky mortgage products at the time made monthly payments minuscule and down payments often nonexistent.

Of course when those monthly payments turned into pumpkins, the housing market came crashing down. A dramatic rise in home prices, like we saw last year, can slow home sales even when mortgage rates are low if mortgage availability is tighter. That’s what we saw in the first half of this year.


Fast forward to today. Mortgage rates are near historic lows and haven’t moved much in the past year, since jumping a full percentage point from their bottom in the late spring of 2013. Home prices, which jumped by double digits in 2013, are only now beginning to ease.
“For the first time since February 2008, all cities showed lower annual rates than the previous month,” noted David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices in a release. “Other housing indicators—starts, existing home sales and builders’ sentiment—are positive. Taken together, these point to a more normal housing sector.”

Read More US home prices show ‘sustained slowdown’ in June: S&P/Case-Shiller
True, for the first time in six years, home prices in all of the nation’s top 20 housing markets saw smaller annual gains in June, according to S&P/Case-Shiller Indices. Make no mistake, the prices are still higher, but the jumps are finally shrinking. As investors move out of the market and mortgage-dependent buyers move in, the double-digit price gains we saw last year have disappeared.


Sellers are, in fact, reducing the list price at a much higher rate than at this time last year, according to Redfin, a real estate brokerage and analytics firm.
“Sellers are finally getting the word that this is a different market than 2013,” said Nela Richardson, Redfin’s chief economist. “We are seeing the gradual end of multiple offers, and escalation clauses are becoming a thing of the past in all but the most desirable markets.”
That leaves mortgage rates as the wild card as the housing recovery enters the fall season, a period historically driven by first-time buyers. Those buyers have been disproportionately hard hit by the recession and slowest to return to the market. Rates are still low, but buyers today are extremely sensitive to the slightest moves.

Read More High-end house flipping is soaring
“It never ceases to amaze me how hung up mortgage borrowers can be on rate,” said Matthew Graham of Mortgage News Daily. “In fact, a lot of times we have to remind them that the .125 percent difference in rate only amounts to X dollars and they’re surprised.”
The average contract rate on the 30-year fixed mortgage has moved slightly lower in recent weeks, as the yield on the 10-year Treasury shrinks. It hovers just above 4 percent, but can’t seem to break lower, through to that psychologically significant 3 percent range. Rates loosely follow that yield but are also influenced by changing mortgage finance policy and a smorgasbord of fees inflicted on lenders by Fannie Mae and Freddie Mac, which largely fuel the mortgage market today.
There is also uncertainty surrounding Fannie and Freddie’s future and the future of their mortgage-backed securities.
“As a rule, uncertainty hurts value,” added Graham.
Read More Where you give up the most to afford a house
Rates are not at rock bottom, so there is no great incentive for a buyer to jump now to take advantage of the lowest rate. They are also not rising, so there is no incentive to buy based on fear that rates will go higher. The argument could also be made that rising rates would be the outcome of an improving economy, and that improvement would be a stronger driver for homebuyers … stronger than the extra cost of rising rates in a monthly payment.
All of this is why there seems to be equal gangs of bulls and bears in the housing market today. Some claim affordability is still good enough to drive demand through the fall and into 2015. Others claim rising rates, weak income growth and a conservative lending environment will stall the market in its tracks. And that’s just the demand side. The supply side is another story.

Fix Your Credit

How to fix your credit score when buying a home
From 8/25/14
If you have been turned down for a mortgage or quoted rates and fees that seem too high, you may have some homework ahead. The minimum credit score to land a mortgage is 620. If you have the capacity, and are in the position to do so, there are some things you can do to help save your credit and your mortgage.


Contrary to popular belief, credit scores do change, and can even change more than once within a 30-day period. If you have either applied for a mortgage and learned your credit score has dropped, or your loan is in process and there is a change to your credit score, taking the appropriate action can still keep your loan together. One way of the ways a quality lender can help is offering a rapid re-score service. A rapid re-score service allows you to make a change to a credit obligation, by providing to the lender supporting documentation of whatever action you took, which they in turn use to work with your creditor to raise your score. You can expect results within 48 hours.

1. Fix Maxed-Out Credit Cards

Carrying credit cards with maxed-out or near maxed-out balances can be catastrophic to a credit score. You could have no delinquencies, no derogatory credit of any kind, but carry high balances on your credit accounts your credit score could be lower. If you’re looking to increase your credit score, you should pay down your credit cards to at least 30% of the total credit limit. If your credit card has a limit of $1,000, you never want to have a balance above $300, for example. Your total allowable credit line multiplied by .3, tells you the balance you never want to exceed.

2. Don’t Close Credit Cards

Don’t close credit cards, even if you are not using them. This can be hugely detrimental to your credit score because it reduces your available credit – and it can raise your debt utilization ratio if you’re carrying debt on other cards. If your debt utilization ratio goes above 30% after you close your cards, your credit score could drop. After applying for credit, if you feel you’re not going to use a particular credit card, simply stop using it, but do not voluntarily close the credit card with the creditor. The creditor may eventually close the account due to activity anyway, but this usually occurs long after the card is opened. Moreover, during that time, you get the benefit of having an open credit line reporting favorably to the credit bureaus.

3. Reverse Late Payments

Late payments on a mortgage are by far the worst possible derogatory credit item — beyond a bankruptcy, short sale or foreclosure — that substantially reduces credit scores. This is also true with other credit accounts like car loans and credit cards. If you have a legitimate reason why you were late and you can provide supporting documentation to your creditor – a billing mishap, for example (after all, mistakes do happen), then pursuing a late payment reversal can help raise your credit score.

4. Stop Credit-Shopping

Make all your payments on time, keep your balances in check or ideally pay them off in full each month and do not apply for multiple types of credit within a 30-day period of time. In other words, applying for a mortgage, car loan and credit card all within a one-month timeframe does reduce your credit score because it represents a credit risk to the credit bureaus. Consumers can get into trouble especially when they are applying for different types of credit and hoping their credit score will not adversely be affected.

5. Consolidate Debt

If you don’t have the financial means to pay down your credit balances to 30% of your credit limits, you might want to consider consolidating your debt. For example, if you carry a balance of $2,000 against a credit card with a $3,000 credit limit, you might want to consider getting a new card with a $10,000 limit. This will boost your total available revolving credit to $13,000. Transferring that debt to the higher-limit card will put you at 20% debt usage for that card, and about 15% for your overall credit limits. This can raise your credit score. Also, consolidating debt, say with a low-interest card or using a personal loan with a low interest rate, also reduces your minimum payment liabilities. This increases your borrowing power. Increased borrowing power with a higher credit score increases your odds of getting a mortgage.

Keep in mind that lenders typically don’t like to see new credit accounts when you apply for or are in the process of getting a mortgage — if you decide to do it on your own. However, it’s a different story if you do this under the tutelage of your loan officer, so everybody can work cohesively together and make the appropriate adjustments during the process. These actions can also be taken in the infancy stage to get officially pre-approved.

6. Opening New Credit

Here’s another move you should do in consultation with your lender. Sometimes the best way to come back from a tarnished credit history is to open up new credit and start with a clean slate. Start small and work up — opening up a secured credit card with a local bank or credit union or even an online financial services provider can be a wonderful first step in starting over. After six months of ‘paid as agreed’ history, you will be on the right track to building enough credit to obtain more credit. Next, apply for a new credit card. Once this card is in good standing for the next six months, you can plan on having a higher score, which can get you better terms on other credit obligations, such as loans, consumer credit products and certainly mortgages. Keep in mind that applying for new credit will result in a small, temporary drop in your credit scores.

Staying on top of your credit is ultimately a good thing — whether you’re applying for a mortgage or not. Keeping your credit standing in good shape at all times, if you can manage to, will come in handy because sometimes you need good credit when you least expect it.  And when you do need it — like if you’re planning to buy a home — your job in building or maintaining your standing will be that much easier. At the very least, it’s important to know what’s on your credit reports — to be aware of errors or signs of fraud, or to keep an eye on negative items — and it’s good to take advantage of your free credit reports, which you can get once a year. Monitoring your credit scores (which you can do for free on can also give you a good idea of where you stand, and if you see any big, unexpected changes, that’s a sign to check your credit reports for any problems that you should address.

New FICO Rules, Game Changer

Why New FICO Score Rules Could Be a ‘Game-Changer’ In Helping You Obtain a Loan
From Motley Fool 8/23/14

Some 64.3 million U.S. consumers who have at least one medical debt on their credit report woke up to a healthy dose of good news on Friday that the Fair Isaac Corp. (FICO) — which lenders use in 90 percent of their consumer and mortgage lending decisions — will penalize them less for their unpaid medical bills.
FICO further announced that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency.

Why this is good news
The new FICO score rules will likely boost the credit scores for millions of Americans, giving them greater access to a wider range of loans, at a reduced interest rate.

“It’s been a long time coming,” said Ted Rood, a national mortgage lender based out of St. Louis, Mo. “This is going to be a game changer!”

“It’s wonderful, wonderful news,” said Gina Dale, a loan officer with Centrue Bank in Plano, Il. “So many more people will now be able to qualify for loans.”

The new scoring model will likely be implemented by credit card and auto lenders first. Mortgages typically lag in adopting new scoring models.

Nevertheless, the new FICO score rules are set to ease access to borrowing for millions of consumers. Currently, collections can impact credit scores as much as foreclosures or bankruptcies do and stay on credit reports for seven years, even if a borrower has paid off that balance and remained current on other debts.

Why the change?
The relaxing of standards has been driven by multiple studies, including FICO’s own, showing that an unresolved medical debtcaused by a medical emergency, was not as serious or negative as a regular unpaid collection.

In another study based on 5 million anonymous credit records, the Consumer Finance Protection Bureau in May criticized credit-scoring models for applying too much weight to unpaid medical debt.

Action was further prompted by the sharp increase in the number of Americans struggling with medical debt, which rose from 58 million in 2005 to 75 million people in 2012, or 41 percent of U.S. adults, the Commonwealth Fund stated in a report last year.

In announcing a loosening of its standards, FICO made it clear it was not overstating the creditworthiness of borrowers. Rather, it believes the new standards will more accurately reflect a borrower’s true credit risk and provide lenders with greater precision in their loan-making decisions. According to FICO, the median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.

Who else will benefit?
Consumers won’t be the only winners under the new model. FICO’s changes should also boost the sagging loan portfolios of lenders. With the new scoring changes, more Americans will be using mortgage calculators to calculate their mortgage payments.

FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently,” said Jim Wehmann, a FICO executive vice president.

FICO’s new more lenient model should also benefit collection agencies. Consumers with unpaid medical debts now have an incentive to settle, knowing that FICO will stop including in its calculations any record of a consumer failing to pay a bill, if the bill has been paid or settled with a collection agency.

“This is great news for collection agencies,” Rood said. “It provides laggards with an incentive to pay up. Before these changes, you were incentivized not to pay off your debt. The last thing you wanted to do was trigger a new ‘date of last activity’ report for an old debt, say, a debt from 2008. Again, you were just better off not paying it because older debts weighed less heavily against you on your credit report than new debt.”

Amir Erez with Cedar Financial, a Calabasas, Calif., collection agency, doubts, however, that FICO’s new calculations will motivate deadbeats to pay up.

“I haven’t had enough time to really digest the news,” Erez said, “so at this point I remain very cautious. The reality is if you have a big debt to pay, you’re probably still not going to pay it unless you’re forced into litigation.”

FICO’s announcement also piggybacks on news out of the Federal Reserve earlier in the week that one in four U.S. banks had eased mortgage standards for borrowers with strong credit during the second quarter of 2014, the largest positive swing since 2006.

In late July, Wells Fargo & Co., the nation’s largest mortgage lender, also began lowering the minimum credit scores on its fixed rate jumbo mortgages to 700 from 720, another sign of credit loosening.

Millions of Americans will still find themselves ailing from unpaid or unresolved medical debts, but in the wake of the new FICO score rules and credit belt-loosening by some of the nation’s leading lenders, the pain may have subsided slightly while renewing the hope and possibility of credit access for millions of others.

The Truth About Mortgage Underwriting Pt.3

From Housing Wire 8/15/14

When Lobbying Hurts the Industry More than It Helps


This analysis would not be complete without addressing the many frustrations we heard from people wishing the good old days would come back. We believe those who share these complaints are hurting the mortgage recovery because they provide ammunition for the interest groups that do not want to see large levels of default ever again. Here are a few common complaints that we believe need to stop, at least until we fix the major problems. In reality, most regulators and decision makers do not agree that federally insured institutions should:


  1. Help tax cheats. Affluent people who report low incomes to the IRS are not going to get a lot of sympathy in today’s regulatory or political environment. They will need to make large down payments.


  1. Lower FHA limits. FHA dramatically increased their loan limits in 2008 to help stem the housing crisis and then dropped them to more normal limits this year. While that has hit a few home builders in a few markets particularly hard (and it has slowed economic growth in those markets), FHA is now back to historical normal limits. Given all the assistance FHA is already providing and the housing recovery that is taking place, it is unlikely Congress will decide to revert to another loan limit increase.


  1. Stop or reverse FHA fee increases. FHA has increased their insurance costs, particularly on high LTV / low FICO loans. All in, a borrower with poor credit and low savings is still paying the equivalent of less than a 5.5% interest rate, so there is little sympathy here as well. If fees were 75 basis points lower, and rates were 75 basis points higher, the borrower would be in the same place. While underwriters may not like it, many folks in DC believe that now is the time in the recovery for the FHA to shore up their reserves.


  1. Bring back seller-funded down payment assistance and closing costs. The government determined these programs resulted in risky loans that may have even been above 100% LTV on day one. Now is not the time to lobby for these programs.


  1. Loosen documentation. Several industry veterans said that today’s documentation is not too much more difficult than it was in the 1980s before automated underwriting took place. While costly and perhaps a bit overboard for many, less than full documentation is not going to garner a lot of sympathy today either.


  1. Have sympathy for those who sold short. Short sellers include very honorable people who did everything they could to help the bank recover as much as possible, as well as less honorable people who strategically forced the banks to take huge losses even though they could have kept their mortgage current. At this point in the recovery, asking short sellers to wait four years to get a federally insured or guaranteed mortgage is not viewed as unreasonable.


  1. Offer FHA terms on homes above the FHA limit. There are borrowers who cannot qualify for a FHA loan but want to buy a home above the FHA limit and do not qualify for a conforming loan. They are not going to get a lot of sympathy right now either, as homes above the FHA limit are more expensive than half of the homes being sold in the market.


To the extent that any of these scenarios above can produce good loans, banks or non-banks will start making them and charging the appropriate risk-based return.


We could go on and on with respect to loans that industry executives think banks should be making, but instead we hope to focus people’s attention on the paradox in today’s lending environment and the current reality that could help buoy sales.


In conclusion, let’s:


  1. Get the word out that loans below the FHA limit are readily accessible, with monthly payments that are a great historical value in comparison to gross incomes.


  1. Let the bankers use manual underwriting in instances where they can document that the loan has a very low likelihood of losses.

The Truth About Mortgage Underwriting Pt.2

From Housing Wire 8/15/14

Easy Money through FHA


FHA federally insures 95%+ loan-to-value (LTV) mortgage loans made to people with poor credit and low incomes.


FHA market share


Here are three recently approved loans, all through FHA or VA:


  1. Recent foreclosure. 96.5% loan on a $170,000 house, coupled with $36,000 in income, a foreclosure three years ago contributing to their 620 FICO score, and debt service equal to 55% of their gross income


  1. 57% of income needed to pay debts. 96.5% loan on a $165,000 home, coupled with $38,000 in income, a 642 FICO score, and debt service equal to 57% of their gross income


  1. Fixed income and disabled. 100% loan on a $160,000 home to someone permanently disabled with a 601 FICO score and a $34,000 fixed income


Tight Money above FHA Limits


Affluent commissioned salespeople, self-employed, newly employed, and retirees who don’t have steady paychecks have tremendous difficulty getting a mortgage because they either:


  1. Report inconsistent income to the IRS


  1. Cannot provide extended income history from a new employer, or


  1. Do not have sufficient current income to qualify but are trying to keep some cash in the bank or delay paying taxes on an IRA distribution.


Here are six borrowers who were denied a mortgage:


  1. 27% LTV. A couple with a 780 FICO score who wanted a $300K loan on a $1.1 million house and would have $300K in reserves after closing, but whose verifiable income was only 30% above the proposed mortgage payment.


  1. 801 credit score. Newly retired couple with fantastic 801 credit score, $1 million in retirement accounts, and $400,000 in savings after they were going to put down $350,000 on a $550,000 home purchase, but whose Social Security income was less than double the proposed mortgage payment.


  1. Affluent business owner. Owners of a small retail business who were turning the business over to their children to manage, with the intent of collecting dividend income; who had $500K in cash savings and wanted a 50% LTV.


  1. Relocating borrower. A US citizen who has been working overseas takes a job in the US, has a 700 FICO, 20% down payment, and plenty of reserves, but cannot produce a W-2 because he do not exist in the country in which he was working and hasn’t started his new job yet.


  1. New employee. A prospective borrower qualified in every way except she had only been in her current job for five months and had worked in the family business previously where she did not get a W-2.


  1. Loan = 15% of applicant’s assets. A retiree who wanted a 50% LTV and had assets six times the proposed loan amount was turned down and eventually paid cash.


Mortgage Industry Vets Tell It Like It Is


We expect the borrowers and outcomes profiled above will be surprising to many. We also want to share the following sound bites from mortgage industry veterans to offer surprising clarity on other areas of debate:


  1. Loans today are easier than the 1990s. “For the average borrower, I believe it was more difficult to qualify for a mortgage in the 1990s.”


  1. Huge improvements are being made in conforming loans. “For a while, if you didn’t have a credit score over 720 and you wanted a loan with less than 20% down, you were pretty much looking at an FHA loan. During this period, it’s fair to say that sales were being seriously impacted by 20%+. Slowly at first, and now more rapidly, things are changing. Credit requirements for 95% conventional financing are as low as 620, and MI companies have lowered premiums and relaxed guidelines. Banks have been peeling back overlays. You aren’t likely to get a conventional loan with a ratio above 45% anymore, but nor could you really get that back in the 90s either.”


  1. Disposable income is more important than gross income. “Our industry needs to focus more on disposable income versus debt-to-income ratios, meaning a borrower who makes $2,200 a month with a 40% debt-to-income ratio is more risky than someone who makes $12,000 a month with a 50% debt to income ratio. The first borrower has very little cushion after income taxes, utilities, car insurance, food, etc. for emergencies. But the person making $12,000 a month would have much more left over after all of these other debts.”


  1. Stated income should have its place. “There is a time and a place for Stated Income, not “No Doc” loans, but Stated Income loans. They were a great tool back in the 2000s that rarely went bad if they were used properly because the borrower had a lot of their own capital invested in the home.”


  1. Income is the problem. “The challenge is not credit based, it’s income based. Home valuations have increased at a steeper trajectory than income. Also, the new buyer pool is saddled with student loans and other debt, which has really created the (disposable) income issue. I believe credit is much more accessible than the media/public portrays (in terms of credit scores, LTV’s, etc.) My opinion will remain our immediate challenge is income/debt/DTI.”