New Changes To FHA Loans

Announced on Wednesday, the Federal Housing Administration (FHA) will be implementing important new changes to FHA home loans. Set to begin early spring of 2013, FHA has made key changes to help increase the reserves for the Federal Housing Administration as well as minimize loan defaults.

Increased Mortgage Insurance Premium (MIP)

The first change to take effect is the increased MIP on FHA loans. Government has stated the premium will increase 10 basis points, or .10 percent. Currently the MIP is 1.25, but beginning spring of 2013, the MIP will increase to 1.35. Jumbo mortgages ($625,500 or larger) will receive a 5 basis point increase, or .05 percent.

Lifetime Up-Front Mortgage Insurance

The second change that will be taking place is requiring borrowers to pay the annual premiums for the life of their loan. Originally, FHA cancelled MIP on loans after  22 percent of the original principal balance had been paid. However, with the new changes, the MIP will no longer be cancelled and the borrower must pay the MIP until their loan is paid off.

Why did FHA make this change?

The reason a borrower must now pay the MIP for the lifetime of their loan is due to the fact that FHA is responsible for insuring 100 percent of the outstanding balance throughout the entire life of the loan. Also, FHA has foregone billions of dollars by cancelling the MIP after a loan reaches 78 percent of the original principal balance. By making this change, FHA revenue will significantly increase.

Increased Down Payment For Loans Over $625,500

With an FHA loan, a borrower only has to put down 3.5 percent of the purchase price. However, FHA made a change to the down payment requirements for loans greater than $625,500. Beginning this spring, a borrower must have a minimum down payment of 5 percent for an FHA loan.

According to the risk management team of the Federal Housing Administration,

“The changes announced this week will further contribute to the efforts made throughout the Obama Administration’s tenure to improve risk management at FHA and protect the Mutual Mortgage Insurance Fund.  Because of these commitments, the changes made at FHA over the past four years have already added more than $20 billion in value to the MMI Fund.”

These new changes to FHA loans are set to take place Spring 2013.

What Documentation Is Needed When Applying For A Loan?

Many times borrowers that are doing a refinance or home purchase don’t realize all the documentation that is needed when applying for a loan. It’s not that the mortgage broker wants to irritate you to see if you know where you social security card is located, or if have your tax returns on hand and in order. These items are crucial and required for all home loans. In fact, most home loans could be completed much faster if all the documentation is provided in a timely manner when requested.

The idea behind this blog post today, is to share valuable information to borrowers about how to create the perfect loan file. We share an article by Mark Greene with our clients when we process their loan because it perfectly explains why so much documentation is needed to process a loan.

What things can you expect a mortgage broker to ask you for?

Be prepared to have the following:

1. Most recent one month of pay stubs
2. Most recent 2 years of W2’s
3. Most recent 2 years of tax returns
4. Most recent 2 months bank statements for ALL your bank accounts
5. Your driver’s license and social security card

These are the items needed for a basic loan approval. More complicated files depending on the borrower’s history have to include:

6. Divorce decrees
7. Child support documentation
8. Self-employed borrowers need profit & loss statements
9. Real Estate owned documentation

The list can go on and on depending on each borrower’s credit profile and history, but this is just to give you an idea of what is necessary.

Why is all this documentation needed?

Well, the lender is giving you a hefty loan and they need to be 100% sure that you are a person that will pay the loan back on time. They need to make sure you have the assets on hand and make enough income to support the payment.

Mark Greene makes a perfect statement stating, “If the lender asks for a specific document, give them exactly what they are asking for, not what “should be OK,” – because it won’t be.”

We couldn’t have said it better ourselves. This is so true in this industry. Lenders are very specific about what they request, and won’t approve your loan until you provide exactly what they asked for.

This isn’t to intimidate you in purchasing or refinancing a home, it’s meant to prepare you. Work with your mortgage consultant and loan processor and provide the documentation they request. If you aren’t sure what something is, it’s better to ASK than to ASSUME; it will help you from doing things twice. Hoping this information will prepare you and give you a better understanding of what documentation is needed when applying for a loan.

Mortgage Forgiveness Debt Relief Act Extended Through 2013

It’s the first week into the new year, and many financial changes have already occurred that will affect many households. However, one change did not take affect that could have devastated struggling homeowners. The Mortgage Forgiveness Debt Relief Act was extended for another year.

Before the end of 2012, we had discussed in previous blog postings, the negative implications this could have caused for many struggling homeowners. This Mortgage Forgiveness Debt Relief Act waived forgiveness of mortgage debt from being counted as taxable income from homeowners who had a short sale or mortgage loan modification. The Mortgage Forgiveness Debt Relief Act was implemented in 2007 and was set to expire Dec. 31, 2012. It was recently reported to be extended to the end of 2013.

How does this Mortgage Forgiveness Debt Relief work? Well as a simple example, many homeowners are struggling with having an “underwater mortgage.” This meaning, they owe more on their home that what it is currently worth in today’s market. In many instances, homeowners are agreeing to short sell their home which gets a bank to agree that they can sell their home for less than what they owe on it.

Example: A homeowner owes $250,000 on their mortgage. They bank agrees they can short sell their home for $200,000. This Mortgage Forgiveness Debt Relief waives them from having to pay taxes on the $50,000 difference.

If this act didn’t pass, many homeowners would be paying taxes on debt that would not have been considered forgiven. Thankfully, for the year 2013, homeowners do not need to worry about this tax affecting them because the Mortgage Forgiveness Debt Relief Act was extended.