Major changes go into affect on the FHA loan program on Monday July 14, 2008. These changes are very significant and will impact the affordability of these loans for many borrowers, especially those will less than stellar credit who can’t put 5% down. Basically, almost everybody in todays market.

Essentially, the Upfront Mortgage Insurance Premium (UFMIP)and monthly Mortgage Insurance IMI) will now be risk based. Even though the borrower has the option to pay UFMIP in cash upfront, it is typically financed into the loan. Bear in mind that UFMIP is not part of the regular closing costs. FHA has always charged a flat upfront mortgage insurance premium for every borrower regardless of credit risk. Until last week UFMIP on the 30 year fixed FHA loan was at 1.5%. The monthly mortgage insurance payment has also always been fixed at 0.5% for the 30 Year loan. These percentages will now change effective Monday.

UFMIP will now be charged on a risk basis, i.e., based on your credit score. It will range from 1.25% for lower-risk borrowers to 2.25% for riskier borrowers. In dollar terms this means that on a $200,000 loan UFMIP can range from $2,500 to $4,500. Remember this is on top of the closing costs and down payment already due. Since this can be financed into the loan, your final loan amount will reflect this cost. Having poor credit will now be expensive even on FHA loans.

Monthly mortgage insurance will vary from 0.5% and 0.55% and is determined by the loan to value. If you are putting less than 5% down than its set to 0.55% but if you’re putting more than 5% down it will be 0.5%. Monthly mortgage insurance is calculated by multiplying the percentage to the loan amount and dividing by twelve. So on a $200,000 loan and a MI rate of 0.55% your monthly mortgage insurance payment is $83.34.

First time home buyers who fall in the hefty 2.25% UFMIP bracket do have a way to obtain a slight reduction to UFMIP. If you are borrowing more than 95% of the purchase price (loan to value) and your credit score is below 559 then you may be eligible for a reduction in your UFMIP by 0.25% - so it would be 2.00%. However, you need to complete a HUD-approved pre-purchase counseling session. FHA will only provide the discount after you have successfully completed the course and will ask for a certificate of completion.

Additional Reading on FHA: Is the FHA Loan Program Right For Me?

Relevant FHA Down Payment Assistance related posts on other blogs:

Arizona Republic Article on DPA
Dear HUD, Stop Being a Bully
Real Estate Road Signs - “Buy A House for $500 Down”
Down Payment Assistance Programs

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Tags: FHA, mortgage insurance, upfront mortgage insurance
Categories: Credit Scores, FHA, Mortgage Insurance, Uncategorized
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Shannon Hubbard from BlogArizona.Com left a really great comment on my post “The VA Loan: Perfect 100% Home Financing for Veterans“. I had always intended to follow upon on these points but she covered it for me. So, I’m going to use her comment and elaborate where I may be able to add  some value.

The VA Funding Fee

The only thing I don’t like about VA loans is that you have to pay a funding fee of around 2-3% (it varies depending on your circumstances, and I haven’t kept up with it, so don’t quote me on that number!).

She’s right. The VA does charge a funding fee and it varies depending on how much you put down, if this is the first or second time you’re using the VA loan and whether it’s for a purchase or a refinance. For example, if you are doing a  purchase with no money down then you’re looking at 2.00% fee, and its 2.75% if you’re a Reserve/National Guard vet.

If you are using the VA loan for a second time and are not putting less than 5% down, then your funding fee is 3.00%.  Refinancing an existing VA loan only costs your 0.5%, but if you’re refinancing from a non-VA mortgage then the charges are exactly that of a purchase. There are additional variances as well, so make sure to review them with your lender as you discuss the costs of the loan.

Regarding the funding fee Shannon makes a good point in her comments:

The funding fee can be financed into the loan, so you don’t have to pay it up 
front. But veterans who have a service connected disability do NOT have to pay the  funding fee.

This is an important point. The VA certificate of eligibility will specify the kind of disability you have and consequently you may not be required to pay the funding fee. I recently was able to do this for a borrower. It saved them thousands of dollars.

No Monthly Mortgage Insurance on VA

…with a FHA 3% down loan, I think you still have to pay mortgage insurance, which you don’t with a VA loan…

This is an important distinction for the VA loan. With the FHA loan you have to pay monthly mortgage insurance regardless of how much your are putting down (unless it’s a 15-year loan). With the VA you do not have to pay monthly mortgage insurance. So, I guess the hefty funding fee is used to insurance the loan and relieve the borrower of a monthly obligation. A nice benefit if you’re torn between an FHA and VA loan.

Regarding Appraisals

Also, as you mentioned, the appraisal standard is a bit tighter with VA loans. VA appraisals look more closely at certain aspects of the property’s condition. The main things I see VA appraisers call out are broken windows and peeling exterior paint.

When it comes to the Appraisal the VA works a bit differently. Once we have the loan application complete we notify the VA office for an appraisal. They will then assign their own appraiser. The lender has no ability to influence the selection. Additionally, the VA frowns upon lenders or real estate agents contacting the appraiser once the appraisal has been completed. Consequently the appraisal is also tighter with more annotations, notes and observations. The VA is very careful about this and likes to make sure the collateral is in great shape.

I want to thank Shannon for taking the time to comment and also for spurring this conversation. For those who dont’t know, Shannon and her husband Scott are great home inspectors. You should head on over to their blog to learn more.

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Tags: FHA, MI, Mortgages, VA Loan
Categories: FHA, Mortgage Insurance, Mortgages
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Borrowers with a subprime mortgage who are refinancing to a FHA mortgage are often not aware of the upfront mortgage insurance premium (MIP). As the name implies, this is paid upfront at the time of close. During the subprime heyday MIP was one of the reasons not to do a FHA mortgage. How the tables have turned.

FHA under the 203b, 234(c), & 203k programs charges an upfront MIP equal to 1.5% of the loan amount. If you end up selling the home or refinancing the loan within the first 84 months (7 years) you are entitled to a refund of the balance. MIP can be wrapped into your loan, but you have the option to make a cash payment at close as well.

If you are putting less than 10% down then FHA also charges a monthly mortgage insurance equal to 0.5% of the loan amount. You must pay this even if your home appreciates to the point where your loan balance is less than 80% of the value of the home. FHA will not allow you to cancel.

So, on a $200,000 mortgage here is what your fees look like:

• Upfront Mortgage Insurance Premium (MIP) = $3,000
• Monthly Mortgage Insurance = $83.33

Subprime lenders used these two FHA features as a major selling point for their loans and so a lot of folks in the industry have forgotten how it works. As a borrower these are things you need to be aware of as you consider refinancing your subprime mortgage into a FHA mortgage.

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Tags: FHA, Mortgages, refinance, subprime
Categories: Mortgage Insurance, Real Estate, Subprime Mortgages
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Here is an important update on the Mortgage Forgiveness Debt Relief Act of 2007 (H.R.‚3648) from the Daily Herald:

the House Ways and Means Committee voted to permanently remove the so-called “phantom income” tax penalty that haunts financially distressed homeowners whose debt is partially forgiven by a lender after a foreclosure or a “short sale” to avoid foreclosure.

Also, they also passed a provision to extend the deductibility of mortgage insurance premiums through 2014. This is also very important. Currently the deduction applies only to loans originated in 2007. So, if this becomes law we can pretty much kiss the need for a second mortgage good bye. We can go back to doing one loan (much simpler).

Both of these provisions still need to make it through the full House and Senate. However, I would think it will pass and become law before the end of the year.

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Tags: debt relief, mi tax deduction, mortgage insurance
Categories: Congress and Government, Mortgage Insurance
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Back in August I had suggested that borrowers re-think the use of Private Mortgage Insurance (PMI) as they consider different home financing options. I pointed out that since PMI is tax-deductible for all purchases made in 2007 it is worth the consideration. Also with the demise of the 2nd lien market those fancy 80/20 and 80/15 loans aren’t as readily available anymore, so PMI could be the only option in many cases.

Looks like lots and lots of consumers read my post from August because the number of borrowers using PMI jumped 15.2%. According to PrivateMI.com:

Mortgage Insurance Companies of America (MICA) reports that 197,169 borrowers used private mortgage insurance (PrivateMI) to buy or refinance a home in August. The number of borrowers using PrivateMI in August was 15.2% higher than the July total of 171,186.

For all the years the mortgage insurance industry took a beating it’s making a strong comeback. At least for today PMI wins its battle with 2nd lien’s.

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Tags: private mortage insurance, second mortgages
Categories: Mortgage Insurance, Mortgages, Real Estate
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Over the past several years Private Mortgage Insurance (PMI) has gotten a bad name. There is a now a whole group of first time home buyers who think PMI is evil. That is because we mortgage pros have been placing everyone on these 80/20 deals. Don’t get me wrong, it makes a lot of sense to do an 80/20 loan instead of paying PMI. However, with the liquidity crisis spreading to second lien holders, obtaining a second loan instead of paying for PMI is no longer a slam dunk.

One of the main arguments for not using PMI was that it wasn’t tax deductible. This has now changed. At least for loans obtained in 2007 mortgage insurance will be tax deductible. Almost every company in the business I talk to says this deduction will almost certainly be extended. That I can’t say; but the argument for secondary financing is somewhat muted.

Also, many lenders offer lender paid mortgage insurance (LMPI) in exchange for a slightly higher interest rate. For a high loan to value (LTV) loan this can oftentimes make sense. The reason being that if you’re at 95% today it will be many years before you hit 80% and in that time you may move or re-finance the loan anyway. It then follows that paying a higher rate for LPMI makes sense. However, LPMI is not available to everyone, you must have good credit.

The mortgage market is in flux. The old rules of home financing are no long applicable. What made sense two months ago may no longer make sense. We are in a time where all options need to be on the table.

Hat/Tip to David Porter for his thoughtful comment on a recent post, which prompted me to write this.

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Categories: Mortgage Insurance, Mortgages
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This last month has been a great month for me and my business. The reason being is that I have had multiple opportunities to engineer custom financing packages based on specific borrower needs. To me this is the hallmark of providing great service if you’re in the mortgage business.

What do I mean by this? Not all 30 year loans are the same. Not all loan features mean the same to every borrower. For example, a pre-payment penalty may be undesirable for a borrower flipping a condo, but ideal for reducing monthly payment for someone who intends to be in the home for 5 years. There are many considerations in the analysis and I’m not going to get into details. The bottom line is many people in our industry have preconceived impressions and do not think outside the box. In the long term both the originator and borrower lose!

It is amazing what you can do if you spend the proper time and put in the required effort. Recently I’ve been able to show a young couple the value of the 2-1 buy down and another one of the reasons why lender paid mortgage insurance makes sense in their situation. In the former, he would have lost out on a superb opportunity to own a home. In the latter case, she would have ended up overpaying by several hundred dollars in the coming years. Do you think these borrowers will ever regret doing business with me?

I go the extra mile while structuring the financing because first and foremost borrowers deserve it. They deserve to receive the best possible analysis on the market. The other reason I do this is because I enjoy thinking outside the box. After all, most Nepalese immigrants in the US are engineers or doctors, I’m in the mortgage business. I’ve always known that I’m a different breed.

Every originator I meet talks about how they provide service. Let’s face it, that has become the standard line in the industry. What is service? What color is your service? Mine is dark blue - the color of my financial calculator!

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Categories: Banker, Broker, Business Success, Mortgage Insurance, Mortgages
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I attended a presentation today on Mortgage Insurance. The presenter was pretty excited since she believed MI would be making a strong comeback this year. She gave several reasons for this, one of them being the fact that MI is now tax deductible.

I challenged her on the tax deductibility part since the provision only allows tax deductibility for 2007 and for individuals with less than $100,000 annual income. While the income part may cover most people, the fact that it is only available for loans taken in 2007 is cause for worry. However, the presenter strongly felt that this would be renewed for 2008 and beyond.

The second point made by the presenter had to do with the subprime crash and the subsequent effect it has had on seconds liens. For borrowers in the lower credit score range second liens have become very expensive. We are talking about a one to two percentage points increase in the rate. This can make the second mortgage substantially more expensive. MI can certainly look very attractive in this situation.

There are two methods of using MI in todays market. The first is borrower paid monthly MI. This is a monthly amount paid into an escrow account with monthly taxes and insurance. After the close, the borrower has the option to call the loan servicer to cancel this payment if the borrower has either paid down the principle quickly or, the loan to value has fallen to 80% of the house value by sheer home appreciation. A new appraisal is usually required, paid for by the borrower of course, and many servicer will not address the issue until at least two years after the transaction has closed. Different loan service companies have different rules on this so, check with your particular loan servicer for exact requirements.

The second method is the Lender Paid MI (LPMI) where the lender increases the rate by a certain percentage to cover the MI. The main argument against the LPMI is that the loan payment can never be reduced. However you have to remember that in a high loan to value situation it will be a long time before you reach less than 80% LTV anyways. So, if you are planning on being in the house for only a few years this can make good sense.

After the presentation I had a discussion with a Senior Loan Office at CTX Mortgage. (He has been a mentor figure in my career.) He has determined that Lender Paid MI (LPMI) is usually the better solution where the LTV is high and the borrower has a lower credit score. In the situation of lower LTV and higher credit score then monthly borrower paid MI may make sense but you have to make sure you find a competitive MI provider.

Every situation is different and there are many MI companies out there. To determine what is best for you, I suggest working with a good mortgage professional who understands the nuances of the different MI scenarios.

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Categories: Impound Escrow, Mortgage Insurance
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