Home Financing Changes - What It Means to You!
We don't normally like to turn our blog posts into long diatribes, but at the same time, there have been so many changes this past year in lender financing, as well as multiple changes at Fannie Mae/Freddie Mac and most recently with FHA, we felt it necessary to give a better breakdown of these changes and more specifically -
WHAT IT MEANS TO YOU in your ability to obtain a home loan (or refinance) in the coming months. As much as we would love to say that things are "looking up"...all signs are pointing to increased tightening in lending by the fall and by the end of the year it's strongly suggested that interest rates will rise. How much is anyone's guess - hopefully not too much!
We realize there's a lot here to take in (and probably not first on your list of "great late night reading"), but our goal is to keep everyone up-to-date on the current housing situation.
We hope you'll find this helpful and will keep it close in hand over the coming weeks and months as you consider the purchase or sale of your first or next home.
Current Changes in Lending Standards:
1. On January 1, 2008, Fannie Mae and Freddie Mac implemented their new Risk-Based Pricing. Fannie Mae and Freddie Mac announced that in order to compensate for the high delinquency credit losses on FNMA and Freddie MAC loans, certain loans that closed after December 31, 2007, would be re-priced to reflect the new risk-based pricing. The loans effected all have loan to values (LTVs) that are greater than 70%. Here's how it breaks down: Credit Score Approximate Rate Increase
Below 620 or Non--Traditional Credit .625%
620-639 .500%
640-659 .375%
660-679 .250%
WHAT IT MEANS TO YOU: This one affects non-FHA loans (conforming loans backed by Freddie and Fannie). The better your credit score, the less likely you are to be hit with additional fees. While they don't look big here, they do add up and quick. A credit score of at least 720 is now the preferred score. They will look at 680, but it is now considered "borderline" to most lenders (at least for conforming loans).
2. Shortly after that, we had the Mortgage Forgiveness Debt Relief Act of 2007. At the end of January, President Bush signed into law a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under the previous law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.
This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 Million for refinances).
For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to http://www.govtrack.us/congress/bill.xpd?bill=h110-3648
WHAT IT MEANS TO YOU: If you have/had to do a short sale on a home between January 1, 2007 and December 31, 2009, the amount that the bank wrote off (in most cases) is no longer taxable income...so essentially you are now getting that money for free.
3. Then in March came FHA's Higher Home Limits, which offered the following New Mortgage Loan Limits by County (in Arizona):
Maricopa $346,250
Pinal $346,250
Pima $316,250
Coconino $450,000
Gila $325,000
Yavapai $390,000
Cochise $271,050
WHAT IT MEANS TO YOU: Under the new FHA guidelines, if you are purchasing a home in Maricopa County, you can purchase this home for up to $346,250. FHA is a great program because you are only required to put down 3% (well it was 3% - more on that in a moment) versus the normal 20% on a conforming loan.
4. Then, just when we thought all was well, on July 14, 2008 FHA announces their own Risk-Based Pricing guidelines (just as Fannie and Freddie did in December). Here's their breakdown:
Effective with new FHA loans on or after July 14, 2008, FHA will implement risk-based premiums according to the following guidelines:
FHA Single Family Mortgage Insurance Upfront and Annual Mortgage Insurance Premiums (Loan Terms Greater than 15 years) Effective as of July 14, 2008 |
All premiums are specified in basis points (0.01%)
|
FICO Score
|
LTV |
850-680 |
679-640 |
639-600 |
599-560 |
559-500 |
499-300 | NON-TRADITIONAL |
≤ 90.00 |
125/50
|
125/50 |
125/50 |
150/50 |
175/50 |
175/50 |
150/50 |
90.01-95.00 |
125/50
|
125/50 |
150/50 |
175/50 |
200/50 |
n/a |
175/50 |
> 95 |
125/55
|
150/55 |
175/55 |
200/55 |
225a/55 |
n/a |
200/55 |
- A first-time homebuyer, with HUD-approved counseling, will pay only 200 basis points for the upfront mortgage insurance premiums.
|
First-Time Homebuyer with HUD-Approved Pre-Purchase Counseling
The counseling may be completed up to one year before the homebuyer signs a purchase agreement (executes a sales contract) for the subject property. It must be one-on-one, face-to-face counseling unless a hardship can be demonstrated, and then the counseling may be conducted one-on-one over the telephone. The counseling must consist of, but is not limited to:
· Budgeting and credit, including an analysis of the household’s unique financial/credit situation;
· Assessing homeownership readiness, including an evaluation of home and monthly payment affordability;
· Development of a written action plan outlining the steps the household and the counselor will take to help the household meet their goals;
· Financing a home, including a discussion of alternative types of mortgage loans/features and special financing products, common lending documents, and steps in the loan application, approval, and closing processes;
· Shopping for a home, including understanding the professionals involved in the process; and
· Maintaining a home, including preventive maintenance, taxes, and insurance
WHAT IT MEANS TO YOU: Well, considering the fact that there is a huge increase in FHA loans now, due to the tightening of credit under other loan programs, this one really hits hard for those borrowers who have marginal credit. Previously, there was really no "minimum credit score" under FHA, but now if your score is under 500 and you're asking for more than 90% financing, you will not qualify for a loan.
If you do qualify, and your credit is "so-so", you'll pay more for the up front fee and your monthly MIP fee based on your credit. The good news is that if your credit is really good, than you actually will pay"less" than what it was in the past (1.25% versus 1.5%)...although your monthly MIP will remain the same at .5%. Also...first time homebuyers with credit scores under 560 will have to go through "Pre-Purchase Counseling" (see above).
Now...the new housing stimulus bill that came out has thrown a wrench in things for FHA, as they have placed a one year moratorium on these new guidelines (October 1, 2008 - September 30, 2009). So instead of this being allowed for "the rest of time"...they only get to implement these new fees for just over a year! We're sure they'll come up with something by then to "continue" their new program, but nonetheless, it's what was passed in this latest bill.
5. Now we have just had the incredible bailout for Fannie Mae and Freddie Mac...under the new housing stimulus bill, formally called the "Housing and Economic Recovery Act of 2008". In a nutshell, here's what's in the nearly 700 page document:
GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or $625,500 (depending on where you live and average home prices). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
· FHA Reform – including permanent FHA loan limits at the greater of $271,050 or $625,500 (again...depends on where you live...Arizona remains at $346,250); streamlined processing for FHA condos. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
· Homebuyer Tax Credit - a $7,500 tax credit that would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan). Please note...you MUST pay this one back!!!! (We'll discuss this more in a moment).
· FHA Foreclosure Rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.
· Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008. (We'll get to this one next).
· VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.
· Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision will be effective from October 1, 2008 through September 30, 2009.
· GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.
· Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.
· National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.
· CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.
· LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.
· Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.
WHAT IT MEANS TO YOU: Obviously all of these things will effect all of us in one way or another, but let's discuss the main highlights.
First there is the FHA Foreclosure Rescue...basically just be prepared to pay several different fees (including a 3% refinance fee and a 1.5% annual surcharge). And note that it did say that when you sell this home, if there is ANY equity, you will have to give 50% of it back to FHA for letting you refinance. So say your home is worth $300,000 and then when you go to sell it goes to $400,000....well you'll be giving $50,000 of that back to FHA. (Now personally we don't feel that's really unfair...they helped you out of your mess and they should be compensated to some degree for their losses).
Also of note is the fact that the the FHA Foreclosure Rescue will not go into effect until October 1, 2008. To be eligible for the Foreclosure Rescue, homeowners must live in the home they are mortgaging, must have been paying at least 31 percent of their income toward their mortgage as of March 1, and must have their income verified by the bank. Stickier still is the fact that participation in the program is voluntary for lenders, and that could prove to be a real problem. It's up to the banks and financial institutions to agree to let the borrowers refinance, and some may still feel that they will end up losing less if they let borrowers go into foreclosure. So is it really a "win-win" for all...that remains to be seen.
Second is the $7,500 Homebuyer Tax Credit...which is really a loan you pay back over 15 years. From our friends at the Wall Street Journal...here's a breakdown of how it works: - The credit is $3,750 for married couples filing separately. Unmarried people who jointly purchase a home will be able to divide the $7,500 credit.
- This program is actually a loan, which home buyers must repay over 15 years at zero percent interest beginning in the second year after they purchase the home. A home buyer who qualified for the whole credit would pay $500 for 15 years or about $41.67 per month.
- The credit applies only to homes purchased on or after April 9, 2008, and before July 1, 2009. (Not a very wide timeframe here).
- High-income home buyers don’t qualify: Eligibility begins phasing out for single filers with adjusted income of more than $75,000 and $150,000 for joint filers. It completely phases out at $95,000 for singles and $170,000 for married couples filing jointly.
6. Another side note that they haven't been mentioning much is the fact that the FHA minimum down payment will now go from 3% to 3.5%. While this may not sound huge, if you buy a home at that same $346,250 maximum, a 3% down payment would have been $10,387.50. Now at 3.5% it goes to $12,118.75. That's a difference of $1,731.25. We don't know about you, but that would certainly buy some nice draperies for sure!!! 7. Now for the one that is really hurting the first time home buyers who may have good jobs and good credit, but just couldn't save back enough money for their down payment. Up to now, there have been several programs available to buyers to get into a home for $0 down/$0 closing costs and with the passage of this new bill, those Seller Down Payment Assistance programs are going away!
- 79% of al transactions, year to date, were FHA mortgages
- 80% of those FHA transactions involved some form of seller assistance
- Supply and demand data in Maricopa County shows that these loans are a solid solution to correcting our housing market
While there are pros and cons regarding Down Payment Assistance programs, the new bill states that the Down Payment Assistance programs will end October 1st, 2008. When this legislation goes into affect, it will drastically affect a home buyers ability to buy or sell a home.
WHAT IT MEANS TO YOU: Many lenders are stipulating that the last day they will fund one of these loans will be August 29, 2008. This will give them time to sell those loans and get them off their bank lines. So basically, you have until August 29 to obtain one of these loans, if this is the type of financing you will need to purchase a home. Once down payment assistance is gone, it's gone...
While some may see the abolishment of these programs as a good thing, not all borrowers defaulted on these loans and it really will effect many first time home buyer's ability to get into a home and away from renting.
Additionally, you know when you drive by those beautiful "new builds" and they have signs out that say "$0 Down/$0 Closing"....well those will be going away too because these are the loans that the builders were using to make those promotions...so new builders will also be hit very hard by this change.
8. Now for the really hush, hush one that we've heard very little about...and that's the fact that basically the $250,000/$500,000 Capital Gains exclusion is now gone!!!! Hhmm....they haven't been sharing much about this, now have they. We want to be sure to get this one correct, so we'll pull over an article from one of our favorite mortgage blogs, Dan Green with The Mortgage Reports. Here's how Dan recently broke it down:
Under the former Capital Gains Exclusion rule, home sellers could claim $250,000 of home sale profits tax-free ($500,000 if filing jointly) provided they physically lived in the home for 2 of the previous 5 years. Savvy real estate investors exploited this tax rule by moving between residences every two years.
Even "regular" homeowners were coached to stay in their homes for at least 2 years for tax reasons.
Under the new Capital Gains Exclusion rule, however, this sort of tax-minimizing behavior is rendered impractical. The new Capital Gains Exclusion formula is not an all-or-nothing proposition. Instead, it's a ratio.
The new formula for Capital Gains Exclusion accounts for a home's actual usage as a primary residence over its qualified life:
In other words, if a home seller occupied a property as a primary residence in 2 of the last 5 year, under the new system, he would be entitled to 40% of his capital gains tax-free versus 100 percent of those gains before the new housing law passed.
WHAT IT MEANS TO YOU: The effective date for the new Capital Gains Exclusion rules is January 1, 2009 so homeowners selling in 2008 are exempt. This should lead to flurry of housing activity prior to the New Year because home sellers will want to capture as much of their real estate gains as possible tax-free. As always, though, remember that I am a mortgage guy and not a qualified accountant. If you think the new Capital Gains Exclusion rules will impact you personally, get professional advice about it.
And on a final note, we see that credit is now a much bigger issue than in years past (due to all the short sales and foreclosures).
If you don't check your credit on a regular (or at least yearly) basis and would like to check out your credit (before your lender does), you can get your report from the three top credit reporting agencies - Experian, Trans Union and Equifax all for FREE (once a year). Just go to https://www.annualcreditreport.com/cra/index.jsp, fill in the information, and retrieve your free reports. The free reports do not include your credit score, but at least you can see how your credit is looking. You can get your score, but you will have to pay extra for it. And if you're still wondering why credit may be such a huge issue when it comes to mortgages, last year a study was published regarding the percentage of mortgage delinquencies as compared to FICO (credit) scores. Here's how it broke down:
FICO Score % Delinquent
Up to 499 87%
500 - 549 71%
550 - 599 51%
600 - 649 31%
650 - 699 15%
700 - 749 5%
750 - 799 2%
We hope you found this helpful and if you would like more information on buying or selling your home or would like to speak with one of our preferred lenders regarding changes in the mortgage market, please do not hesitate to contact us!!!
As always...thanks for "hanging out" with us!