If you were reading our blog about two months ago, you may remember an article about Upcoming FHA Changes. Well, these changes are going into effect on Monday, October 4^th.  Here’s what you need to know.

Will these changes affect me? Why are they changing the FHA program?

First of all, it’s important to note that these changes are not retroactive. If you have an existing FHA loan, or your FHA case number was requested before October 4th, your mortgage insurance will be calculated using the current rules, with a larger up-front premium and a smaller monthly premium. If you apply for a mortgage through the FHA program on or after October 4th, 2010, these changes apply to you.

These changes were implemented to increase HUD’s Capitalization ratio, or the amount of funds that it has in reserve to cover the number of mortgages that it takes on. This is a good thing, because if HUD were to stay undercapitalized, FHA loans could be harder to come by.

FHA Insurance Changes – Effective Oct. 4th, 2010

Currently, FHA Mortgages require an up-front mortgage premium of 2.25%, or $4,500 for a $200,000 house. This is a cost that you pay (usually financed into the loan) “up-front” in order to get the FHA mortgage. You then pay an ongoing annual mortgage premium of somewhere between 0.5% and 0.55%, depending on your down payment and loan to value ratio. You pay this premium monthly, so we figure out the annual premium and divide by 12. On a $200,000 mortgage, your monthly mortgage insurance would be between $83 and $92. If you apply for a 15 year FHA mortgage, these premiums will actually be lower.

These changes, effective on Monday, will decrease the up-front mortgage premium to 1% (or $2,000 on a $200k home) while increasing the annual premium to 0.85% to 0.9%. Again, your annual premium rate depends on the size of your down payment and loan to value ratio. On a $200,000 mortgage, this increases your monthly mortgage insurance to between $142 and $150, an increase of about $58 monthly.  Again, a 15 year FHA mortgage will have reduced mortgage insurance costs.

The FHA Reform Bill that passed two months ago allows FHA to increase its annual premium to a new cap of 1.55%, so a year from now we may only have fond memories of 0.9% annual premiums.

Seller Concession changes?

A “Seller Concession” takes place when a seller pays (through their proceeds of sale) some or all of the closing costs & prepaid expenses for the buyer of their property. In the current market, it has become common for a seller to pay some or all of the third party fees for a buyer, to help them reduce the total cost of purchasing.

Using a $200,000 purchase on a 30 year fixed FHA loan, the minimum downpayment is 3.5%, or $7000.  Closing costs & prepaids could easily amount to another $6000-8000 depending on the taxes, insurance costs, time of year, etc.  Being able to cover these additional cost for a buyer can help the seller find more qualified borrowers or lower the total purchasing costs for a buyer of their home. Currently seller concessions are capped at 6% (of the sale price of the home) for FHA Mortgages.

There has been speculation, but no official statement, that this percentage could be lowered. This could make things much tougher for consumers, because in smaller markets where real estate is much cheaper, the 6% concession is needed cover all of the buyer’s costs.

If HUD decides to lower the amount that a seller is allowed to contribute towards a buyer’s closing costs & prepaids, it could slow down some already-troubled markets.

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Geoff Boyd – PrimeLending – Clackamas, OR

Highlighted for Emphasis

Original Chart from Calculated Risk

This is a quick one guys – just wanted to dispel some of the noise about the housing numbers that came in today. Very simply, in March and April, the housing numbers were artificially inflated by the new home-buyer tax credit. You can see that numbers rose precipitously during this period – the biggest jumps by percentage that we have seen in a while.

Now, if you look at the chart above, you can see that the May numbers are almost level with February, and a bit higher than January. A lot of people are pointing to this data as a double-dip indicator; I say that we are still reaching the bottom of our current dip. The government intervention of a home-buyer tax credit has proven itself ineffective at building or sustaining long-term growth. I tend to agree with the experts who have been saying, from the beginning, that this tax credit would attract mostly new buyers who were already planning on buying in the near future. I think the numbers that we are seeing prove this in retrospect. Instead of slow, sustained growth, we are now seeing an artificially depressed housing market; this is because many buyers who would have raised May’s number bought in March or April, and no new buyers were created.

So, yes, I will go on record and say that it is silly to get worked up over numbers that reflect very basic economic principles.

FOMC will issue its report in about 30 minutes. Stay tuned and we will offer up our analysis of this potentially major event.

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Have a question or something to add? Leave a comment or send us an email

Geoff Boyd – PrimeLending – Clackamas, OR

Here’s the biggest problem with VA Loans: most Active Military Personnel and Veterans are not aware that they have access to this EXCELLENT program.  The military does not do a great job of educating them about their benefits, so they just don’t know about them. One of the best programs available for Veterans (besides 10% off everything at Home Depot) is the VA Mortgage Loan program, which provides low-cost Home loans for Active Military Personnel and Veterans. So, it often falls to loan officers and agents (REALTORS too!) to educate the consumer. If you haven’t done so yet; check out Part 1 of this series: 10 Common Myths about VA Loans, for a quick list of the 10 most common misconceptions that people have about their VA benefits.

The main purpose of the VA home loan program is to help veterans finance the purchase of homes with favorable loan terms and at a rate of interest which is usually lower than the rate charged on other types of mortgage loans. For VA housing loan purposes, the term “veteran” includes certain members of the Selected Reserve, active duty service personnel and certain categories of spouses.
- Veterans Affairs Pamphlet on VA Home Loans¹

Phew! In plain English, here are the selling points of the VA Loan program.

Cheat Sheet
Top 5 Selling Points for VA Loans

- 0% Down-payment
- Market-Competitive Rates
- No Income Restrictions
- More Flexibility on Credit and DTI
- Home Energy Efficiency Upgrades in the Loan

The Veterans Administration (VA) Mortgage can be accessed by all veterans and active military (including military reservists), and never expires. It is not the same as other government sponsored programs, which can take a long time to close or require Mortgage insurance. This benefit is reusable, and can be used to purchase or refinance a home. In fact, this benefit can be used to purchase up at a 4-unit dwelling, as long as the borrower will make their primary residence in one of the units.

The application process is not more difficult than a normal mortgage application, as long as the lender is well-acquainted with arranging VA Mortgages. Your lender makes a difference; lenders who are VA Approved are the only ones allowed to directly access the VA Loan Program. Once you apply, you need to have an appraisal. These appraisals are not substantially different than a conventional or FHA appraisal, except that they are performed by a VA assigned appraiser. In fact, if the appraiser decides that the property qualifies for energy efficiency upgrade, these upgrades can be financed as part of the loan. VA Loans have no downpayment, no mortgage insurance, and reduced closing costs; rates are comparable to similar conventional or FHA rates. VA Loans are more flexible on credit and DTI and there are no income restrictions on this program.

If you have any other questions or want to get yourself or someone else prequalified, Send us an Email, Leave a Comment, Tweet us or Call Us – no sales pitches, we want you to still like us at the end of the day!

1. http://www.homeloans.va.gov/pdf/vap_26-4_online_version.pdf [↩]

… and how can you avoid them altogether?

Personal Bankruptcy in America is a major issue and a concern for many.  Recent numbers show that close to 14% of homes are past due on their mortgage, with almost 2% of those homes currently in some level of foreclosure. How do you know when your debt is so toxic and overwhelming that bankruptcy is the right answer?   What alternatives do you have for avoiding foreclosure?

Capitalism without bankruptcy is like Christianity without hell.
- Frank Borman

If we don’t change, millions of American families are just one medical emergency, or one layoff, away from financial disaster and bankruptcy.
- Jim Cooper

Personal Bankruptcy

The number of personal bankruptcies peaked in 2005, when over 2 Million families filed for bankruptcy.  The law changed after that to require debt counseling prior to declaring bankruptcy, but the number is climbing once again, now back nearly to 2001-2004 levels.  There are two main types of personal bankruptcy, Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is the most common choice, at 65% of bankruptcies.  In Chapter 7 bankruptcy, most debts are discharged (except some debts like student loans, spousal/child support) but much of the debtor’s property is forfeited to a trustee, who then sells the property to pay down the debts.  In Chapter 13 bankruptcy, less common at 35% of personal bankruptcies, the debtor keeps all of their property, but they are required to make payments over 3-5 years to a trustee in order to pay down a portion of their debt.  You can file for Chapter 7 every 8 years, and there is no set limit on frequency for Chapter 13 Bankruptcy.

California and Florida have the most Bankruptcies by sheer numbers, but Nevada beats both by a high margin in per-capita bankruptcies.  Entire city and state governments are considering bankruptcy as a solution to the mounting debt.

Foreclosure

If you stop paying on your mortgage, the bank will eventually kick you out of the house and take possession of it.  You will forfeit any equity that you have built up, and this foreclosure will show up on your credit report and public record for at least 7 years.  The number of people who are seriously delinquent on their mortgages has climbed drastically over the last few years.  Many factors play into this steadily climbing rate, but the main culprits are the recession and pre-recession loan practices, which often leave families with payments that they could not afford even if their incomes were at a normal or stable level.

What can you do?

The first thing to think about is prevention.  Many bankruptcies and foreclosures are the result of some lack of foresight.  What can you do to make sure that, barring a catastrophic financial event, you will be able to avoid foreclosure and/or bankruptcy?

1) Get educated

Consumer education on credit, home ownership and financial responsibility is the #1 way to avoid dealing with a bankruptcy or foreclosure in the future.  If you don’t know where to start, we recommend checking out http://www.mymoney.gov/, where you can find basic worksheets, calculators and advice.  Don’t assume that you are making the best financial decisions just because you are following the examples of others; as Dave Ramsey likes to say… “Normal is BROKE, I want to be WEIRD”.  Don’t take anyone’s word for it, find out what your options are, what you can actually afford, and plan for your long-term goals.

2) Get Insured

Health Insurance, Life Insurance, Auto Insurance – make sure that you have the right coverage and the right plans.  Your insurance should cover you for major events that you cannot afford; like replacing your or someone else’s car, paying for surgery or losing a parent or spouse.  These policies are not investments, they are costs; avoid policies with investments built into them, like whole-life or universal life insurance.  Proper insurance coverage can help you altogether avoid bankruptcy or foreclosure due to a major medical event or another large out-of-pocket expense that will “never happen to you”.

3) Start Saving

Without this component, the other two are almost worthless.  If you are spending every penny that you bring in, you need to change something.  Career, spending habits, or housing situation – whatever it is, it is going to leave you in a position with no room for anything to go wrong.  Ideally; you will be in a position where you can live off of 75% of your Net Income, putting at least 10% in savings and throwing 15% into paying off debt.  This is a big step to take, and a budget will be helpful to accomplish this goal.

What if it’s too late?

If you have a recent bankruptcy, or you are currently behind on your Mortgage payment, there is hope.  First of all, Bankruptcy or Foreclosure is not a death sentence for your credit.  You will not qualify for very good rates, and you will definitely need to make changes to work around the negative impact of Bankruptcy or Foreclosure, but with diligence and planning, you can bounce back.  With Chapter 13 bankruptcy, you can be considered for a Home Loan after only 12 months of good payment to the trustee, and their permission.  With Chapter 7, you can typically be considered for a new Mortgage after 2 years, or less if you can prove that the bankruptcy was medically-related.

For some Americans, Foreclosure seems to be the only option; they are miles upside down on their mortgage and/or they cannot afford the payments.  Many Americans are in this same position – and banks are having a difficult time keeping up.  At this point, the average time it takes a bank to foreclose on a property is 14 months of delinquent payments.

What are my options?

For Bankruptcy, you are now required to complete debt counseling before you file; this is really the worst of both worlds because this debt counseling will usually trash your credit further by making underpayments on all of your already delinquent accounts (these payments are usually not reported to the credit bureau because the company you are paying is not getting the total payment due to them).  One better option?  Negotiation.  In many cases, companies are willing to work with you to avoid the paperwork and lower payoff of a bankruptcy situation or a collections agency.  If you are faced with an aggressive or abusive lender, you may try to contact the company through a different department to find someone who is willing to negotiate your debt.  If push comes to shove though, remember that in bankruptcy you are not allowed to discharge certain debts like taxes, student loans and support payments; prioritize those debts so that you are not left with large bills after a Bankruptcy.

In Foreclosure, there are new government mandated programs where banks are incentivized and in some cases required to restructure your loan, or forgive it altogether.  Many banks are resistant to this process though, so it helps to have an expert on your side to guide you through the process.  Many lawyers have made a LOT of money by being that expert, but there are many non-profit organizations that have entire departments dedicated to helping people navigate the Loan Modification, Restructuring or Loan Forgiveness options available.  Many of these non-profits are also able to help you clean up your credit after a foreclosure or a bankruptcy.

Whether you are just starting to feel the recession, looking at Bankruptcy or Foreclosure as an option, or trying to recover from one or both; there are options and alternatives for you to consider so that you can make the best of a bad situation. Get educated about your options, get insured so that you don’t lose everything overnight and start saving for a rainy day, even if it’s already pouring.

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As always, you can leave a comment or question below, or send us an email at blogger@mortgageproblog.com

- Mortgage Pro Blog; Geoffrey Boyd; PrimeLending, Clackamas OR

Gold hit a new high this morning at $1254.50, a result of what I can only describe as intense risk-aversion.  In this economy, stability is a rare and precious commodity; people are looking at stocks, bonds, commodities, etc and seeing a lot of fluctuation in price that they cannot predict, control or reliably take advantage of.  Gold price fluctuations make for an excellent index of market fear.  People at this point are looking for talismans to protect themselves from the “evil spirits” in the market; I believe that Gold is one of those talismans.  If you are looking for something that will make you feel secure, then Gold might be your answer – after all, $1254.50 is a good-looking number.  The fact remains that Gold has never been a great investment, nor is it the answer for this recession.  The primary reason is that gold, in and of itself, does not create or build any value.  It is simply a commodity and should be treated as such, despite what the cheesy radio & TV advertisements will tell you.

First of all, before you start sending me nasty emails, I know that the economy is in bad shape; it seems like every time we look for some good news, we get the exact opposite; things are tough for a lot of people and others WISH that things were just “tough”.  I am not trying to say that the recession is any better than it is.  But I do believe that a lot of people, most of them in front of cameras, can and do profit from telling you that this recession is worse than it is.

One thing that has gone relatively unnoticed in recent weeks is the future of the Euro. Many economists believe that the Euro will be “retired” within 5 years.  Why, because the strong nations in the EU are having fundamental ideological problems with paying for their weaker brethren.  Germany truly didn’t want to participate in the Greek bailout because the Germans felt that they should not pay for Greek irresponsibility.  Can’t say that I blame them. This sentiment is fairly common among those nations that have handled their finances in a responsible manner and this is why many economists believe that the Euro will go away within a few years.  The expectation is that European nations will revert back to their own sovereign currencies.  So, why do I mention this? Because it is significant.  Why aren’t we hearing about this on the nightly “news”?  Because it’s not “sensational”.

So, you may have heard of the most recent boogeyman, the “double-dip” recession.  Ben Bernanke said today that he thinks that we have enough momentum to avoid it; he also projects long-term economic recovery, but that it won’t happen as quickly as we want it to.  Every news outlet talks about the double-dip recession in hushed tones; reminiscent of a certain “bad guy” from a popular book/movie series about young wizards.

I’m probably not the first person to say it, but I will go ahead and be one of the few: If we keep doing the things that we are doing, it doesn’t matter if the recession triple-dips or recovers tomorrow.  Why? Because the awful state of our economy is a direct consequence of the way that our financial system has functioned for years.  We reward the people who are able to game the system for personal gain, and ignore the flagrant abuses of power that have happened at all levels of our financial system.

Here’s the problem in a nutshell – we have a financial system that creates problems for itself to solve.  Instead of making real changes that deal with the underlying problems of predatory lending, poor oversight, over-consolidated power structures and bubble economics, we look at each financial boogeyman and design a nightlight that will last until we forget that he’s there.  The Auto industry was in trouble, so we do Cash for Clunkers – problem solved!  Failing Banks? Bailout and Sweetheart Fed Rates. The Housing market is down?  Tax credits!  Unemployment is high? Census Workers!  These temporary solutions did not fix the underlying problem.

If the recession double-dips, the government will simply issue another stimulus package; if we recover tomorrow, they will probably raise taxes to cover the first stimulus check and the subsequent government spending programs.  What I hope you are seeing is that our society has become largely reactionary as opposed to proactive.  How to fix the underlying problems in our system?  That’s way above my pay grade.  But the people who have a good chance of figuring it out are instead spending time creating temporary solutions like a game of financial whack-a-mole.

When it comes to our financial boogeyman problem, I propose that it’s time to lock the closet.