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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2009

Government-Lending Changes to Know

FHA, VA and USDA are important and evolving options in today's market

During the melee and finger-pointing that took place as part of the subprime (aka, nonprime) meltdown, the U.S. Department of Housing and Urban Development (HUD) introduced changes to continue helping borrowers qualify for home loans through the Federal Housing Administration (FHA).

Government-loan programs represent an important segment of today's mortgage market, and mortgage brokers should pay attention to the changes. These programs include mortgage insurance, loan guarantees and direct loans. Brokers also should know which programs work for specific borrowers. This includes programs offered by FHA, the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).

In the past few years, for example, FHA's market share has increased dramatically. FHA insured 21.5 percent of all new mortgages in 2008 compared to less than 6 percent in 2007. FHA- insured lending also has changed in several ways.

The upfront mortgage-insurance premium has increased from 1.5 percent of the loan amount to 1.75 percent, and the monthly mortgage-insurance premium for most loans has increased from 0.5 percent to 0.55 percent. These changes help generate a larger fund to offset losses.

In addition, the use of downpayment-assistance programs supported by seller contributions stopped, and the minimum downpayment requirement increased from 3 percent to 3.5 percent.

Although FHA has no minimum credit score for borrowers, individual lenders have started putting their own overlays on the product. It's now common to see lenders that won't accept FHA-insured loans for borrowers with middle credit scores lower than 620. Some lenders require middle scores of 660, especially for manufactured homes.

Many lenders have stopped taking FHA manufactured-home loans entirely. Although a few lenders still accept these types of loans -- and a few still accept lower-than 620 credit scores -- underwriting often presents many challenges.

Tighter guidelines

Generally speaking, underwriters have tightened their standards and don't want to be responsible for their company repurchasing FHA loans that can't be insured or that don't meet investor standards. They complete verifications on nearly everything. They also pull copies of tax returns as part of the process, order review appraisals, and complete verbal verifications of employment with copies of pay stubs and W-2 forms on file.

Letters of explanation for late payments, short job gaps and anything remotely suspicious are common. Bank statements are reviewed, gift funds are sourced and changed incomes often are averaged. Many of these things are familiar to more-experienced mortgage brokers, but they can seem foreign to newer members of the industry.

Some of the most-recent changes to FHA include modifications to streamline refinances. Previously, FHA customers often could refinance their homes for a lower interest rate with no out-of-pocket money and no new appraisal. Now, that same refinance can require either money to close or a new appraisal. Minimum seasoning requirements also exist.

In addition, as of Jan. 1, FHA has changed appraiser requirements, and there are new net-worth requirements for FHA lenders. Moreover, mortgage brokers no longer can order appraisals for FHA-insured loans after Jan. 1.


FHA isn't the only government lending program to experience changes. Offering financing for U.S. veterans and their spouses, VA changed its guarantee amount and increased the maximum loan size without a downpayment to $417,000 in most areas. VA also offers an enticing jumbo-loan option with a limited downpayment. It involves a fairly complicated formula. As an example, the program will allow veterans to buy a $600,000 house with about 5-percent down and a reduced funding fee. The potential maximum loan amount is slightly more than $1 million.

Active-duty members of the armed forces also qualify for VA loans, as do active members of the reserves and National Guard, following fulfillment of specific service requirements. Find more information about VA-loan eligibility at homeloans.va.gov/elig2.htm.

Meanwhile, USDA's rural guaranteed-loan program can be especially helpful in nonurban areas. There are income limitations, but those limitations are quite liberal as the result of recent changes. Previously, there were income limits based on family size that went from one to eight members in steps. Now, the income limits are for one- to four-person families and five- to eight-person families with additional tiers for families of more than eight.

Those limits vary by county. In Oregon's Lane County, for example, a family of one can earn as much as $73,600 and qualify for 100-percent financing for a home in a rural area.

USDA's rural guaranteed-loan program shouldn't be confused with USDA's direct-loan program for low-income borrowers.

Many areas also are receiving money from HUD's Neighborhood Stabilization Program, which targets specific areas for the purchase of foreclosures for principal residences. The program also is designed to assist nonprofit groups in purchasing these homes for low-income housing. These loans are designed to return foreclosed-upon properties to productive status.

Also, FHA now allows reverse mortgages to be used to purchase homes, a great assistance for borrowers ages 62 or older who want to downsize and reduce their monthly expenses.

•  •  •

Mortgage brokers should pay careful attention to government loan-program modifications and know which programs work for specific borrowers. The share of mortgage lending involving some form of government assistance -- including direct loans, loan guarantees and mortgage insurance -- seems poised to continue its growth in 2010.

Brokers who educate themselves and their borrowers can take advantage of the trend toward government-supported lending and thrive. Whether you work with FHA, USDA or VA loan programs, it's important to know how changes affect your borrowers and your business.


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