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Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending

• • The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
  • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
  • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
  • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.

Update the combination of FICO scores and down payments for new borrowers.

• • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
  • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
  • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.

Reduce allowable seller concessions from 6% to 3%

• The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
• This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

Increase enforcement on FHA lenders

• Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
  • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
• Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
  • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
  • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
• Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
  • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
• HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
  • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders.This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
  • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

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HUD is the nation’s housing agency committed to sustaining homeownership; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development and enforces the nation’s fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.

You can find this press release by clicking here: HUD

I talk to clients all of the time who would like to “move up” and take advantage of lower home prices and interest rates but they can’t sell their current home so they decide to rent it.

I decided to post the FHA guidelines for just this scenario so I hope this helps.

This is straight from FHA’s guidelines

September 19, 2008

MORTGAGEE LETTER 2008-25

TO:                 ALL APPROVED MORTGAGEES

SUBJECT:    Converting Existing Homes to Rentals—Underwriting Instructions

Through this Mortgagee Letter, the Federal Housing Administration (FHA) takes steps to immediately respond to an unscrupulous practice arising in the housing mortgage market that poses a risk to FHA, FHA-approved lenders, and consequently to FHA’s ability to help new homeowners.

Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence.  This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace.

Due to FHA’s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages.  Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter.   The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken.  This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated.  In either case, this guidance is directed to preventing the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage.  Although the property being vacated will not have a mortgage insured by FHA, surrounding properties may and, thus, FHA may be indirectly negatively affected should that property result in a foreclosure.

Exceptions:

Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see http://www.hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm) may be considered in the underwriting analysis under the following circumstances:

• Relocations: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.  A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year’s duration after the loan is closed is required.  FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month’s rent was paid to the homeowner.

• Sufficient Equity in Vacated Property:  The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property.  The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.

The guidance in this Mortgagee Letter applies solely to a principal residence being vacated in favor of another principal residence.  This Mortgagee Letter is not applicable to existing rental properties disclosed on the loan application and confirmed by tax returns (Schedule E of form IRS 1040).

It is important to note that if the property being vacated had a mortgage insured by FHA, eligibility for a second FHA insured mortgage can only occur under the exemptions described in handbook HUD-4155.1 REV-5, paragraph 1-2.

RESPA Reform Coming Soon

The Department of Housing and Urban Development (HUD) has passed new regulations amending Regulation X, the regulations that

implement the Real Estate Settlement Procedures Act (RESPA).

On January 1, 2010, HUD will require that lenders and mortgage brokers provide borrowers with a new standard Good Faith

Estimate (GFE) that clearly discloses key loan terms and closing costs. Closing agents will also be required to provide

borrowers a new HUD-1 Settlement Statement that clearly compares the borrower’s final and estimated costs.

Main Components of RESPA Reform:

> Re-defines an “Application” for 3-day disclosure purposes

• Must contain at least the following 8 items, and borrower must indicate intent to apply:

- Name

- Gross Monthly income (if applicable)

- Social Security Number

- Property Address

- Estimate of property value

- Loan amount being sought

- Interest Rate

- Product Type

> Prohibits collection of fees (except for credit report) prior to borrower’s receipt of GFE

• GFE must be issued within 3-business days of an application as defined above

> New standardized Good Faith Estimate (GFE) form

• Allows borrower to easily compare GFEs from various lenders when shopping for a loan

• Will be three (3) pages and include rate/lock information in addition to fees

> HUD Mandated Tolerance Limitations on Fees/Charges (varies according to three classes of fees/charges)

• Unless there is a valid “Changed Circumstance” (list to be published at a later date), lenders/brokers are prohibited

from exceeding certain fee tolerances from most recent GFE to settlement

• Zero Tolerance—certain charges cannot increase at settlement

• 10% Tolerance—the total of charges in this class can increase up to 10% at settlement

• No Tolerance Limitation—certain charges can increase at settlement

> Amends yield spread premium disclosure requirements

• The new GFE section, “Your Adjusted Origination Charges”, must disclose all lender and broker fees/credits,

including yield spread premium (YSP)

> New HUD-1 Settlement Statement

• Revised to be comparable with the new GFE

• Added page that compares HUD-1 to the GFE

• Highlights key loan terms

Watch the video for some of the changes coming to FHA streamline refinances and why FHA is tightening up on their requirements.

Summary of FHA  Streamline Refinance changes

Effective date is for case numbers issued on or after 11/18/2009

Old: Could do an FHA Streamline Refinance loan with no waiting period from current loan

New: Borrower must have made 6 full payments on loan before being allowed to streamline.

Old: FHA Mortgage Loan being refinanced must be current.  No other requirement

New: No more than one 30 day late in previous twelve months.  Previous three months must have no lates.  If mortgage is less than twelve months old, all payments must have been made in month due.

Old: No real determination as to tangible benefit to borrower.

New: must have reduction of total payment (PITI) of a minimum of 5% or

Must be refinancing from ARM to fixed rate or

Must be reducing the term of the mortgage

Old: No income or asset requirement regardless of funds to close

New: Underwriter must certify that borrower is employed and has income

All assets needed to close must be verified

Old: No CLTV

New: Maximum CLTV is 125% based on original appraised value unless new appraisal is used then based on new appraisal

*Old: Could run FHA Streamline Refinance through AU (FHA Total Scorecard)*

*New: If run through AU regardless if mistake, streamline is not available.  Rate and term full doc is only option available*

Old: Abbreviated application was allowed without all information completed

New: Full application must be completed with all income, assets, and liabilities

FHA Streamline Refinance  without appraisal:

Old: New base mortgage amount could include old principal balance plus closing costs, prepaids, and discount points less UFMIP refund not to exceed old total mortgage amount

New: New base mortgage amount cannot exceed old principal balance minus UFMIP refund

FHA Streamline Refinance  with appraisal:

Old: New base mortgage amount could include old principal balance plus closing costs, prepaids, and discount points less UFMIP refund not to exceed statutory LTV limits

New: New base mortgage amount is lower of old principal balance minus UFMIP refund, plus closing costs, prepaids to establish escrow account or

97.75% of appraised value of property.  No discount points may be included

* This is very important for you the consumer. If your mortgage professional is not on top of these new FHA Streamline Refinance guidelines, it could very well cost you your chance to refinance.

As losses continue to mount for lenders and GSEs, several lenders have increased the minimum credit score required on FHA and VA loans from a 620 mid score to 640. We do still have lenders that will go as low as a 580 mid score.

Stay tuned for more updates.