DID YOU KNOW?

If a borrower will use the loan to complete payment on a land contract, contract for deed, or other similar type financing arrangement in which the borrower does not have title to the property, the new mortgage may be processed as either a purchase or a refinance transaction with maximum FHA-insured financing if the borrower receives no cash at closing. If all loan proceeds are used to pay the outstanding balance on the land contract and eligible repairs, renovations, etc., the appropriate LTV ratio is applied to the lesser of:

1. The appraised value; or

2. The total cost to acquire the property (the original purchase price, plus any documented costs the purchaser incurs for rehabilitation, repairs, renovation, or weatherization), plus allowable closing costs and, if treated as an FHA refinance, reasonable discount points.

Equity in the property (original sales price minus the amount owed) may be used for the borrower’s entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85 percent of the sum of the appraised value and allowable closing costs. Replenishment of the borrower’s own cash expended for repairs, improvements, renovation, etc., is not considered as “cash back,” provided the borrower can substantiate with canceled checks and paid receipts all out-of-pocket funds spent for those purposes.

NOTE: TO BE TREATED AS A REFINANCE, THE CONTRACT FOR DEED MUST BE SEASONED AT LEAST ONE YEAR.

IF OWNED LESS THAN A FULL 12 MONTHS, THE LOAN MUST BE TREATED AS A PURCHASE.  THE SALES PRICE WILL BE THE AMOUNT LISTED ON THE LAND CONTRACT.  MUST VERIFY BORROWER’S 3.5% OF OWN FUNDS INTO THE TRANSACTION.  EQUITY, IF ANY, CAN BE USED TOWARDS THE REQUIRED DOWN PAYMENT.  EQUITY DETERMINED BY DIFFERENCE IN SALES PRICE AND OUTSTANDING BALANCE.

The agency said borrowers with payment- and debt-to-income ratios over a certain threshold must complete a three-month trial period in a new loan before the Federal Housing Administration would insure it. Some analysts said that stipulation could cause problems.

“Some folks thought the credit ratios would have been a little more liberal, particularly in light of the Federal Deposit Insurance Corp.’s experience with the IndyMac portfolio,” said Brian Chappelle, a partner at Potomac Partners LLC and former HUD official.

The Hope for Homeowners program allows borrowers to take out FHA-insured mortgages, relieving the owners of the old mortgage of a delinquent loan in exchange for writing its value down to 90% of the current home value and waiving any prepayment or late payment fees. The FHA in turn will pay off the old loan and give second lien holders a share in the possible future appreciation of the home’s value.
Though the program was created by a bill passed in July, it left most of the details to HUD and an oversight board of federal regulators.

Under those details, which were released Wednesday, the borrower’s payment-to-income ratio cannot exceed 31%, and the debt-to income ratio cannot exceed 43%, for the FHA to insure a new mortgage immediately. Borrowers with higher ratios — up to 38% for payments and 50% for debt — may still participate, but the FHA would require the three-month trial.

Rod Dubitsky, the head of Credit Suisse Group’s asset-backed securities research division, said the requirement that servicers try a payment plan before turning the borrower over to an FHA-insured loan left room for the original servicer and the new lender to clash over decision-making authority.

“There’s a ‘he said, she said’ potential from the borrower’s standpoint,” he said. The setup “requires the servicer and the FHA lender to work hand in glove.”

Observers said the FHA’s underwriting procedures for the program are also strict. New lenders must obtain two year’s worth of tax returns on the borrower from the Internal Revenue Service, among other things.
The eligibility requirements released Wednesday also dictated that loans be originated before this year. Borrowers must have made at least six payments and must not be able to make more. Borrowers are banned from participation if the mortgage is not on their primary residence or if they own a second home. The new loans cannot exceed $550,440.

At a press conference announcing the details, HUD Secretary Steve Preston said it was open to improvments. “We will continue to listen to the industry as they adopt the program and experience homeowner needs.”
HUD officials and observers said they were hoping that the passage of a bailout bill for the financial industry would make the program more efficient.

Under the existing program, lenders considering making new loans to struggling borrowers would not have any up-front financial incentive. They would only be able to share in the possible future appreciation of the borrower’s home. The bailout bill, which the Senate was expected to pass Wednesday, would authorize the FHA to pay the new lender up front instead. The bill also would encourage servicers to use the program for eligible loans purchased by Treasury as part of its proposed facility to buy $700 billion of troubled mortgage assets.

FHA Commissioner Brian Montgomery would not comment specifically on the fate of the two changes to the plan that are in the bailout bill, but he said HUD was still making improvements to the plan.

“We’re kind of flying the plane and fixing it at the same time,” he said. “Our work doesn’t end today. A good bit of it does, but this product is out there for the next three years, so as we go forward we’ll adjust as we need to.”

By Emily Flitter

Brian Montgomery, Assistant Secretary for Housing, has testified before the House Financial Services Committee that modernizing the Federal Housing Administration is of paramount importance for America’s “troubled subprime borrowers.” The FHA has been insuring mortgage loans for low and moderate income families since the depths of the Great Depression, but these loans became unpopular with the advent of the subprime market.

However, subprime mortgage loans have proven to be extremely risky for borrowers with bad credit or low income, a problem which has resulted in a recent surge of foreclosures. Home foreclosures not only force borrowers out of their place of residence, but also cost the lender an average of $40,000 and can wreck havoc on real estate investors, lenders, and communities at large.

By approving of the modernization reforms, Montgomery claimed that the “FHA could potentially assist tens of thousands more borrowers who need an exit strategy from their subprime mortgages.” Some of the proposed changes include:

- Removal of the mandatory 3% down payment, which many low income borrowers cannot afford. The FHA plans to switch to a more flexible down payment option.

- Increasing the limits of FHA mortgage loans. Traditionally, FHA had standard loan limits which were often lower than those of subprime mortgage loans. In areas of the country where housing costs are relatively high, many individuals looking to purchase a home could not, as the old FHA loan limits were below the median house prices. With these changes, people in states like New York and California will be able to obtain an FHA loan that will have a loan limit high enough for homes in those areas.

- Creating a new risk-based structure. Currently, all borrowers who apply for an FHA loan are subject to a standard premium. In the new structure, the premium would be based on the credit profile of the borrower and would shift up or down based on that borrower’s level of risk to the lender.

All of these modifications are part of the Expanding American Homeownership Act which passed the House last year by an overwhelming majority. With this new structure, the FHA would not only be able to reach thousands more borrowers, but it would present “a safer, more affordable financing option than many subprime loans,” according to Montgomery. By modernizing its practices and requirements, the Federal Housing Administration will be able to continue increasing homeownership among low-income Americans, minorities, the homeless and the elderly.

Though these sweeping changes to FHA policy will give the most aid to first-time home buyers and families without previous mortgages, the FHA will also continue to offer refinancing options for those who are still working on another loan. As previously noted, many low and moderate income families have found themselves unable to make monthly mortgage payments, mainly due to risky and financially unsound loans. As more and more individuals wish to refinance to a safer, more stable loan, the FHA is there to assist. The number of conventional to FHA refinances has almost doubled in the last year, and as long as borrowers meet a few simple requirements, they will qualify for a more reliable FHA refinance.

- MortgageLoanPlace.com