FHA Loans and FHA Mortgages

Today, the Federal Reserve and other central banks globally cut their funds rate a 1/2 percent.  The decision today reduced the Fed’s benchmark to 1.5 percent and lowered its discount rate by the same amount to 1.75 percent. This was in fear of global market turmoil and trying to stimulate the U.S. economy.  Because of this move, the stock market moved in a positive manner, up slightly this morning. It gained 100 points early this morning, but not has lost 196 points as of 12:20 pm EST.

The Fed’s Open Market Committee voted unanimously for today’s move, said in a statement, “incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial-market turmoil is likely to exert additional restraint on spending.”

 WARNING…. WARNING…… WARNING…..

This is not to say that mortgage interest rates have dropped. Sometimes in the past, mortgage interest rates did become lower in weeks after the Fed drop. There have been times when rates went up. There are many variables for these two factors to take place. Sometimes rates were lowered previously to the Fed lowering the discount rate.  The issue here is that its extremely hard now to predict where rates would go. Even by those that call themselves experts, it’s a flip of a coin. If correct, they are geniuses, if not, they are failures. Keep in mind, they have a 50% chance to be a genius.

The discount rate is for short term lending. The mortgage interest rates are when it comes to financing your property are considered long term rates. 

Overall, there is no true indicator to how rates will rise or fall anymore. It was a safe rule of thumb to say when the stock prices fell, the bond market became better in which mortgage rates became better. The indicator to watch for this is the 10 year bond.  At close of business yesterday, the 10 yr bond closed at a yield of 3.59. At 12;28 pm EST today, the 10 yr yield is now 3.67. This increase usually means that mortgage interest rates will go up.

A few topics of conversation and key points……

  – It’s been said that the short term rate reduction is a good thing, but for long term, it probably won’t have a giant effect.

  – This will not help the real estate market out of its troubles, but it should help the financial sector.

  – What the authorities are trying to do is to stabilize the current situation in the credit and money markets.

  – A reason for the Fed Rate cuts is seen as inflationary and inflation is not good for mortgage rates.

  – The bottom line, this news from our government is just trying to instill consumer confidence.

There is a lot more detail that I could give you, but you need to have a simple understanding to when you hear that the Feds lowered interest rates or that the Feds cut rates, it doesn’t mean that mortgage interest rates went down also.  I just wanted to make this simple to understand.

The definitions below are from Bloomberg News. 

Federal Open Market Comiittee - 
The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System.

The Feds Fund Rate -
The interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. The Fed funds rate, as it is called, often points to the direction of US interest rates. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate.

The Discount Rate - 
The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings. In context of NPV or PV calculations, the discount rate is the annual percentage applied. In the context of project financing, the discount rate is often the all-in interest rate or the interest rate plus margin. 

Mortgage Back Securities (MBA’s) 
Securities backed by a pool of mortgageloans.

WARNING…. WARNING…. WARNING……  As I have been writing this, it’s now 1:30 pm EST, and the stock market has only lost 80 pts now, yet the 10 yr yield as now risen to 3.82. That is an increase of .23 since the close of business yesterday. For mortgage rates, that is not a good sign. And as this went on, we just received a interest rate freeze from our investors, which means that mortgage interest rates will become higher later today. As you can see, it will be a yo-yo for the next few months, just as it has been for the last several months. One other key factor to the rise and fall of mortgage interest rates are the MBA’s. Mortgage Backed Securities. Again, this could get confusing, so I will leave this alone for now.

****Don’t play with the float / lock game unless you are speaking to a true mortgage professional.

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Experience & Knowledge at its BEST !!!

In obtaining a FHA loan might be a tad more challenging now, more than ever. Now with a slightly larger downpayment and the possibility of downpayment assistance programs being delayed or not coming back, the average consumer will just need to be a little more patient. Hence the reason why they will need the services of a mortgage professional more than ever, and just not an order taker.

So, what has changed and will take place next year? FHA Mortgagee Letter 2008-23 - The fact that you will need 3.5% of your own money as a downpayment. 100% of this can still be from a gift, which can still come from several different sources. But none of that 3.5% will be applied to your closing costs as if did in the past.

The effective date for all FHA mortgages on the new downpayment will be January 1, 2009. Now, this is for purchases only. We will still be using the old method for all refinances in regards to FHA loans. The one difference being that you could not exceed the appraised value when for all loans when adding the UFMIP.(upfront mortgage insurance premium)

Some extra changes or non-changes :

  –  Sellers assistance is still permitted up to 6% seller concessions. This 6% is calculated off of the sales price.

  –  As mentioned, closing costs may not be used to help meet the minimum 3.5% downpayment requirement.

  –  On all FHA loans, no matter if it’s a purchase or refinance, the total first mortgage with UFMIP can’t exceed the appraised value.

  –  In regards to the combined loan-to-value (CLTV). If government subordinate liens are involved, the combination of the 1st mortgage and any other lien can exceed 100%. This has always been the same, previous to this new mortgagee letter.

  –  The effective date for the 3.5% change is for all FHA loans with FHA case numbers that are assigned on or after January 1, 2009.

FYI Section - For any of you reading this that have been talking to another loan officer and it takes more than a day to get an answer about anything?  I would start to seek a true mortgage professional. Especially one that understands most guidelines when it comes to FHA mortgages. I am seeing more and more bad advice or misleading information being passed out by loan officers. This could cost you money down the road, no matter how you look at it.

For your FHA mortgage needs, please don’t hesitate to contact me.

FHA Loan changes for 2008 - 2009

   Part 1 - Down Payment Assistance Programs

   Part 2 - Upfront Mortgage Insurance Premiums

   Part 3 - Down payment and Maximum Mortgage Requirements

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Experience & Knowledge at its BEST !!!

FHA loans will no longer have mortgage insurance premiums based on a combination of loan-to-value ratios and credit scores. This actually starts today, October 1, 2008, and rescinds Mortgagee Letter 2008-16. This is for all FHA mortgages that have FHA case number assignments as of today.

So, what does this mean?  Well, we won’t have a chart of like 18 different options, which was tedious at times, depending on the borrowers credit scores. It’s now pretty simple and basic.

Overall, this is in effect through September 30th, 2009. It will be revisted prior to that to decide whether changes should be made, depending on the mortgage insurance pool & if it lost monies.Changes will be effective at the beginning of the fiscal year. FHA’s fiscal year begins 10/1 and ends 9/30.

Upfront Mortgage Premiums :  FHA loans will have an upfront premium in an amount equal to the following percentages of the mortgage as listed below :  (these are all applied to the base loan amount)

  –  Purchase money mortgages & Full-credit qualifying refinances = 1.75 percent

  –  Streamline refinances (all types)  =  1.50 percent

  –  FHA Secure (not sure about the new FHA Hope Program)  = 3.00 percent

Annual Premiums : (these are monthly mortgage insurance - MMI)  Below is a chart to show the difference between the LTV (loan to value) and the term of the mortgage.

Highlights regarding FHA’s Mortgage Insurance Premiums :

  –  All FHA loans to borrowers with a credit score must be risk-classified by FHA’s Total Mortgage Scorecard.

  –  Those borrowers with credit scores below 500 and with a LTV ratio equal to or above 90 percent are not eligible for FHA-insured mortgage financing.

  –  Borrowers without credit scores will need to be manually underwritten based on the credit criteria described in Mortgagee Letter 2008-11.

  –  Eligibility for delinquent mortgagors under the FHA Secure initiative is described in full in Mortgagee Letter 2008-13.

** FYI – In the previous Upfront Mortgage Insurance Premiums that were determined in Mortgagee Letter 2008-16, first-time homebuyers were allowed to take a HUD approved counseling course to reduce their upfront mortgage insurance. Since the new premiums are in effect now with 1 kind of percentage, this does not apply now. **

Overall, it is extremely important for all loan officers and lenders to read Mortgagee Letter 2008-22, because there are 5 pages of new rules and guidelines. What I listed here were the basics of the new changes. The mortgagee letter also talks about the defining of the “decision credit score", if you have multiple borrowers, about non-traditional credit, and the underwriting rules when using FHA’s total mortgage scorecard. That last section is very detailed and very important.

For your FHA mortgage needs, please don’t hesitate to contact me.

FHA Loan changes for 2008 - 2009

Part 1 - Down Payment Assistance Programs

Part 2 - Upfront Mortgage Insurance Premiums

Part 3 - Down payment and Maximum Mortgage Requirements

- FHA Loans - FHA Mortgages - Conventional Loans - VA Loans -

Experience & Knowledge at its BEST !!!