Nationwide Mortgage Loans Blog

The mortgage melt-down started with 80-20 home loans.  Think about it- If you take a person renting with fair or poor credit and then give them a home with no money down you are lending with no collateral.  If the property values declined and the adjustable mortgage rates rose - What would be the motivation for this 1st time homebuyer to stick it out?  We know its not the down-payment, because with 80-20 loans there is no down payment and no mortgage insurance.  The bottom line is that home values dropped and the variable interest rates rose…Of course most of these 80-20 borrowers bailed out and the foreclosure epidemic arrived.  Needless to say that 80-20 loans has disappeared.

The only true 100% home financing left is the VA home mortgage loans.  You need to be a veteran and the mortgage rates are low.  The VA funding fee is only .5% and borrowers can buy a new home with no money down.  like FHA underwriting, the credit scores with VA mortgages are not as important as income and job history.  Veterans who already have VA loans can do streamline refincing up to 100% as long as they keep the new mortgage rate and term.  If Vets want cash out theu can refinance up to 90%.

Like any American consumer product, mortgage loan products can become trendy.  In 2005 and 2006, the Pay Option ARM was the coolest loan product on the planet.  First time homebuyers across the country were lining up for 80-20% purchase loans with teaser rates starting at 1%.  Who wouldn’t want 1% mortgage rate?  Of course it was too good to be true as borrowers saw the negative amortization make their mortgage balances rise. 

For the first time homeowners saw their mortgage balance larger than their mortgage limit and like a revolving credit card, it killed their credit scores.  Borrowers found themselves stuck with an adjustable rate mortgage because their were no refinance loan programs available for sub 600 credit scores with no equity.  Mortgage companies went out of business and homeowners began defaulting on their home loans like never before.  Foreclosure ratios broke records in 2007 and in 2008 more foreclosures records will be broken. 

Along comes the new FHA mortgage refinance…This government mortgage is as old as the great depression, but has with stood the test of time.  In 2007 the FHA Secure and the 95% Cash Out Refinance was introduced by HUD.  In 2008 Congress finally passed the economic stimulus package that mandated increased loan limits across the country.  The raised FHA loan limits are helping borrowers refinance their 1st and 2nd mortgages into a better payment that they can afford. 

FHA mortgage loans differ from option ARMs greatly.  FHA loan terms are calculated with simple interest and provide a hedge against inflation because they are fixed for 15 or 30-years and there is no pre-payment penalty.  Option ARM loans are calculated with negative amortization as the interest deficit is added to the principal balance and once the loan to value has reached 115% or 120% the payment rests to the fully indexed payment that carries an adjustable interest rate.  After a few years, borrowers with option ARMs have reported payment hikes that doubled their monthly payments.  FHA loans are not the new Option ARM’s!  If you have a variable interest rate mortgage, consider refinancing with a FHA loan featuring a fixed rate for 30-years.

Jeff Moran is contributing finance writer who has experience with companies like Countrywide, Lennox, Nationwide and CFB Loan Services.

Borrowers ask me all the time…What is the difference between a FHA Streamline and a Rate and Term Refinance?  These FHA loans are very similar but they do have there differences.  First of all, streamline refinance loans are only available for homeowners who already have an existing FHA mortgage.  If you have a FHA loan then you may qualify for a streamline refi, but you payment history needs to be perfect.  FHA will not reward you with a streamline if you have been more than 30-days late on your existing FHA loan payment. 

The 2nd major difference between a streamline and a rate and term refinance is that streamline refinancing ususally does not require an appraisal.  Rate and term refinance mortgages will always be required to provide a new appraisal.  In a declining market the appraisal can really define the loan.  Since the FHA streamline waives the appraisal, the loan will typically close faster than a standard FHA rate refinance loan.

Of course there are some similarities between these two FHA loans.  There is no cash out allowed in either FHA loan and both refinance products allow lending to 97.5% Loan to Value.  Both FHA loans also require 1.5% mortgage insurance paid at closing and both allow the borrower to finance the insurance cost so they do not have to pay the closing costs “out of pocket.”

Paul Proffitt is a contributing finance writer for Nationwide and a Senior Loan Manager for CFB Loan Services.  His published loan articles can be found online at sites like CNN and Nationwide Mortgage Loans.

Each lender office has a “Lending Area” which is composed of clusters of States where a FHA registered branch or the home office of a FHA approved lender can originate new single family loans for FHA insurance. This geographic restriction does not apply to streamline refinance loans. In the FHA Connection, a lender can see the lending area of each of its registered branches and its home office under the section entitled Areas Approved for Business. The AAFB is a listing of all HUD field offices located in the States within the lending area and is located under the Institutional Profile tab in the Lender Approval section.

As long as the lender meets State requirements to be a mortgage broker or lender in a specific State, they can originate loans eligible for FHA insurance in any of States in their lending area. The following are the current lending areas:

Most real estate experts agree that housing prices will continue to drop in most metropolitan markets in the near future. Consider the impact that the adjustable interest rate home loans originated between 2003 to 2006 have had. In the past, these ARM loans that were popular for new homebuyers because the mortgage rates were low for a teaser period.

During that period borrowers got used to low lending costs that are just not possible anymore.  Many people find themselves rate shopping for a refinance loan that no longer exists.  Homeowners need to realize that if their mortgage has a varaiable rate that they need to refinance while they have enough equity to qualify.  According to mortgage lender, Paul Proffitt, “With home values plummeting the window for refinancing may shut sooner than later.” 

Adjustable home mortgages accounted for over 65% of foreclosures in the 4th quarter of 2007. It used to be that, If you only plan to remain in a house for a few years, then a low teaser rate mortgage was an appropriate choice of loans, but this has changed.  Many borrowers think they will move and buy up, but often times this option disappears as they are unable to sell their existing home.  Therefore a secure fixed rate mortgage makes more sense because if they don’t move, then at least they know they have a mortgage payment that they can afford.  The threat of inflation brings into focus the dull, but risk-averse, fixed-rate mortgage. In a rising-rate environment, it’s the best deal around. It provides complete insulation from higher borrowing costs once you lock in a rate.

Last year the government rolled out the FHA Secure loan that was supoosed to help people save their home’s.  Unfortunately the FHA Secure is difficult to qualify for and very few lenders are providing access to the program because it is so risky.  The FHA Secure was designed for people who had never been late on their mortgage payment prior to their ARM adjusting.  Our loan officers have commented that is very rare to mind borrowers who are late on their adjustable rate mortgage who had a perfect payment history.  The other issue is that most FHA lenders require a 580 fico score and if a borrower is late on their mortgage, then their credit score is almost always below 580.

Nationwide Mortgage Loans introduces new loan limits for FHA mortgage refinance and home purchase loans. The increased loan limits for FHA mortgages offer a unique opportunity for homeowners to refinance into a lower interest rate loan that is fixed with fifteen or thirty year amortization schedules. The lender announced a new FHA mortgage loan product that allows cash out up to 95% loan to value. With out cash out, borrowers can complete a rate and term refinance up to 97.5%. If financing a new home, applicants can also buy a home with less than 3% down.

This unique government insured mortgage product allows homeowners to escape their adjustable rate mortgage that has been draining their savings. The FHA mortgage was created by the HUD to ensure fair lending and has since evolved into a powerful refinancing tool for first time homebuyers, people with less than perfect credit scores and for people who recently lost the equity in their homes due to the declining home sales that caused a foreclosure epidemic. The recently increased FHA loan limits open the doors for many homeowners residing in high cost areas across the country. For example in 2007 borrowers in Los Angeles, California were restricted to $362,000 for FHA loans and in 2008 the economic stimulus package recently enacted by Congress increased the loan amounts to $729,750 in the high cost areas in California and other states. Last year, borrowers found it extremely difficult to get approved for a mortgage refinance or FHA home loans because their first and second mortgages exceeded the conforming and FHA loan limits.

Unfortunately, many of our loyal clients who run into credit problems that hindered them from refinance qualifications. FHA loans offer significant value to consumers because the interest rates are low with fixed monthly payments and mortgage insurance is now tax deductible. Since FHA promotes evaluating credit by looking at the entire picture, there are no minimum credit score requirements so many people who were recently denied financing from a traditional lender now have an opportunity to secure a good loan. Unlike most bad credit mortgages, our FHA loans do not have any pre-payment penalties so if the interest rates drop again you will be eligible for a streamline refinance that reduces the interest rates at a minimal cost.

Jeff Moran, a CFB loan specialist, said, “The fha refinance loans enable my clients to refinance into a secure thirty year fixed rate mortgage at a competitive rate and a monthly payment that they can afford. Homeowners can get access to cash at the same time they are refinancing their adjustable rate mortgage.” According to Mr. Moran, “The sub-prime mortgage programs evaporated in 2007, so FHA home loans have become the home refinance loan in 2008. With home values declining nationally, many homeowners have been stuck in a high rate ARM, until HUD finally increased the loan amounts.” Moran continued, “Many of my clients in California, Florida, Washington and New Jersey have been held hostage by the mortgage meltdown on Wall Street.” With the new FHA home loans limits being increased between $400,000 and $729,000, thousands of homeowners finally have an opportunity to refinance into a mortgage that makes sense with their budgets.

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Loans backed by the Federal Housing Administration are poised to make up a bigger share of the mortgage market than they have in many years. The FHA predicts it will insure nearly $224 billion in single-family home mortgages during 2008, up from about $60 billion in 2007, according to agency projections.

“They are becoming a critical component in home financing market,” says Frank Watters, chief economist at Natiowide Mortgage Loans.

The FHA offers insurance on mortgage loans that FHA-approved lenders make to borrowers in the United States. The FHA’s original intent was to spur homeownership in the wake of the Great Depression. The agency is now the largest mortgage insurer in the world, having guaranteed 34 million properties since its inception.

For decades, FHA-insured loans were the mortgage of choice for many first-time home buyers and borrowers with substandard credit who could not secure conventional mortgages. But these mortgages had lost popularity as borrowers with poor credit moved towards subprime loans. Many subprime loans have low initial “teaser” rates, making payments more affordable — at least until the rate adjusts later in the loan’s term.

However, the subprime market meltdown and stricter lending standards have caused many mortgage shoppers and Realtors to give FHA-insured loans a 2nd look.

Since the economic stimulus package, real estate brokers are letting homebuyers know that there is a window of opportunity with Federal Home Administration loans, according to mortgage FHA lenders.

FHA mortgage loans lost their popularity especially in such high-cost areas as California in the 1990s, as home values began inching upward, surpassing FHA mortgage limits. Also, many felt FHA had very strict credit standards and too many stringent and burdensome appraisal requirements, and often it took too long to close an FHA loan.

With conventional and FHA loan limits raised to $729,750 for Santa Clara County, FHA loans have become a very feasible option for homebuyers, especially since the county’s median price is now less than the maximum loan amount. DataQuick Information System’s recently disclosed the median price paid for a Santa Clara County home in March 2008 was $620,000.

Raising the loan limits should allow a larger pool of borrowers to qualify for lower-cost mortgages or to refinance existing mortgages. FHA mortgage loans offer many benefits that other loan products do not provide. FHA insures the mortgage, so the lender can offer a borrower a better deal. FHA requires very little down payments with low closing costs and they even allow low credit scores.

• FHA home mortgages are assumable loans.

• Credit requirements are more flexible than conforming loans. You may qualify for an FHA loan even if you have low credit scores. If you have filed for Chapter 7 bankruptcy in the past, you can obtain an FHA mortgage 2 years from the date of your bankruptcy discharge.  FHA actually allows you to refinance out of a Chapter 13 Bankruptcy if you have been in it for more than a year. as long as you’ve maintained good credit since your debts were discharged.

• FHA maintains a debt to income ratio of 31/43%  

• Co-signing borrowers need not be occupants of the home.

• FHA appraisal requirements mandate certified FHA approved appraisers

• The FHA scorecard has helped standardize automated underwriting with DU, DO and LP.

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