New Fha Mortgage Loan Guidelines May Make It More Difficult And Costly To Finance Your Home
Homeowners and homebuyers looking to finance or refinance their home with a FHA loan may be negatively impacted by two recently announced changes to the Federal Housing Administration (FHA) mortgage guidelines. The first change is concerned with the loan amounts homeowners have secured on their home in comparison to the home’s appraised value. The second change involves mortgage insurance. While the upfront mortgage insurance charge will initially decrease under the proposed guidelines, annual mortgage insurance, which is broken down into monthly payments, will increase substantially and could almost triple. Both of these changes will make it more difficult and expensive to finance a new home or refinance a new mortgage with a FHA loan.
FHA Guidelines Decrease Allowable Combined-Loan-to-Value (CLTV). For the many homeowners owing more than a home’s value, upcoming changes decreasing the FHA allowed Combined-Loan-to-Value (CLTV) will fabricate FHA refinancing difficult or impossible without the borrower paying down the existing mortgage liens.
What is Combined-Loan-to-Value (CLTV)? Combined-loan-to-value-ratio or CLTV is the sum of all liens on a property divided by the home’s actual appraised value. For example, if the unpaid primary balance of a first mortgage equals $100,000 and the unpaid principal balance of a second mortgage equals $50,000 on a home valued at $125,000 then the CLTV = 120% or the amount of loans is 120% of the value of the home. Currently the FHA guidelines allow an unlimited CLTV. It allows homeowners to finance up to 97.75% of their home’s value in most areas for rate and term refinancing. Existing junior liens, such as second or third mortgages, are allowed to be subordinated with an unlimited CLTV. Junior liens are liens taken out after you have an existing lien on the property. Second and Third mortgages were common for home owners prior to the 2007 liquidity crunch. Lien position is generally determined by the date they are recorded.
Effective September 7, 2010, the FHA will lop the CLTV to a maximum of 97.75% for rate and term refinances, 85% CLTV for cash out refinances, and 125% for FHA streamline refinances. For homeowners who owe more than the value of their home and have more than one mortgage, FHA financing may no longer be a viable option without bringing money to the closing table to pay down the existing liens.
FHA Mortgage Insurance Rates Set to Change. The U.S. Department of Housing and Urban Development (HUD) is concerned about mortgage default risks and is seeking to increase mortgage insurance reserves for the FHA Mutual Mortgage Insurance Fund. These changes attend lower their risk and raise more money on a monthly basis. While this change will certainly raise money for HUD, it will reduce the buying power for many potential homeowners and make refinancing more difficult for those consumers with already high debt to income ratios.
How will changes in Mortgage Insurance Rate affect borrowers? H.R. 5981 allows the Secretary of HUD, currently Shaun Donovan, to increase the premium charged for mortgage insurance on FHA loans. Currently the FHA charges a monthly charge of .5% for loan to values (LTV) up to 95% and .55% for LTVs over 95% on 30 year mortgage loans. H.R. 5981 allows the premiums to be increased up to 1.5% on LTV’s up to 95% and up to 1.55% on LTVs over 95%. Currently the charge for Upfront Mortgage Insurance Premium (UFMIP) is 2.25% of the loan amount. The UFMIP limit is not scheduled to increase under this regulation.
In a memo released by David H Stevens, Assistant Secretary of Housing/Federal Housing Commissioner, the novel UFMIP “will be adjusted down to 100 basis points on all amortizations terms and the annual mortgage insurance premium will increase to 85-90 basis points on amortization terms greater than 15 years.” This increase is projected to increase FHA premium receipts by $300 million per month according to Stevens. However, for homebuyers and people looking to refinance with an FHA mortgage it will lead to higher mortgage payments.
Initially the increase in mortgage insurance rates was place to take place on September 7th, 2010, but has been pushed back to October 4th , 2010, to give lenders time to update required disclosures and loan documentation. The mortgage insurance premium is a required cost added into the loan payment—when the mortgage insurance rate increases, the over all loan payment increases as well. Remember that these higher payment amounts will affect the mortgage qualification process in regards to debt to income ratio calculations. Borrowers with a borderline to high debt to income ratio may find that the increased loan payment suddenly deems them ineligible for a loan. Borrowers will qualify for lessened loan amounts, reducing homebuyer buying power and the homeowner’s maximum loan amounts as a result of the mortgage insurance increase impact on monthly mortgage payments. Simply put, a unusual 30 year FHA loan with the same rate and loan amount originated after October 4th will cost homeowners more.
Sources:
HUD Mortgagee Letter August 6, 2010
Notification from the Desk of David H. Stevens
Statement by Deputy Assistant Secretary Vicki Bott
Related Posts
Filed under Fha Loans by on Dec 18th, 2011. 
Leave a Comment