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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2016

Find Your Groove With Government-Backed Loans

With interest rates rising, now may be the time to tune into Uncle Sam’s loan channels

For the past several years, mortgage originators, as well as their clients, have enjoyed historically low interest rates. That environment is changing, however, with the Federal Reserve’s decision this past December to begin bumping up short-term interest rates for the first time in nearly a decade. Increasing interest rates, over time, may sting potential homebuyers who are just on the cusp of qualifying for a loan.

To help these clients and boost business, mortgage originators should be aware of the opportunities available to them through various government-lending programs. Today’s originators should take advantage of all the tools in the market, including programs from the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).

Rising loan volumes

When looking at the combined figures for the FHA, VA and USDA programs, loan volumes increased 105 percent in the first three quarters of the federal government’s 2015 fiscal year, ended June 30, when compared with the same period a year earlier. Loan counts also increased, up 33 percent over the same time frame.

USDA numbers have been largely flat, however, with some declines in volume and loan count. The VA, on the other hand, has seen increases in its loan-program activity, primarily driven by refinances to attain lower interest rates. This past fiscal third quarter, VA loan volumes increased 58 percent, and loan counts increased 46 percent, compared to the prior year.

The biggest changes have been in FHA loan activity. In February 2015, the FHA implemented a significant reduction in its mortgage-insurance premiums (MIP) for new borrowers. By reducing the premium by 50 basis points, from 1.35 percent to 0.85 percent, the FHA hoped to drive more home sales, particularly among first-time homebuyers. The reduction in the MIP resulted in lower monthly payments, allowing more potential borrowers to qualify for a mortgage and, by some estimates, saving borrowers an average of $900 a year.

Since the policy has been in place, FHA loan activity has increased significantly. In the government’s fiscal 2015 third quarter, FHA loan volumes hit $66 billion, a 101 percent year-over-year increase. Loan counts also climbed 73 percent compared to the same period in the previous year. In addition to this increased activity, the MIP reduction seems to have given borrowers more buying power and allowed them to take out larger loans than in prior years. For FHA purchase loans, the average loan amount went from $187,718 in first-quarter 2011 to $197,315 in second-quarter 2015, according to data from RealtyTrac. These figures represent a 16-quarter high for FHA purchase loans.

FHA landscape

With such promising figures, it seems inevitable that more homebuyers will soon be looking to FHA and other government programs, but for many mortgage originators, these programs still remain merely a niche in the market. It may be a niche that merits further investigation, however.

The FHA numbers seem particularly promising, though it is important to note that much of the recent activity has been spurred by refinances — particularly involving borrowers who are refinancing their current FHA loan into another FHA loan with the lower premium. These types of refinances jumped 257 percent in fiscal 2015’s third quarter, and overall refinances climbed 198 percent year over year. This represents a significant benefit to existing borrowers, as they were able to take advantage of the lower MIP and reduce their monthly payments. It’s also good news for their originators, who worked to help them close so many of these refinances.

Mortgage originators who are unfamiliar with FHA, VA, and USDA loans
should look to work with lenders specializing in these types of loans.

Refinances are clearly up, but the activity hasn’t been limited to refinances alone. Mortgage originators who work more on the purchase side should know that FHA purchase-loan originations also have increased. This past calendar-year second quarter, FHA purchase-loan originations jumped 73 percent from the previous quarter and climbed 36 percent from second-quarter 2014. Some homebuyers have clearly begun to take advantage of the increased buying power that the FHA premium reduction has afforded them, but mortgage originators who are aware of the advantages of this loan program can help even more potential homebuyers turn into homeowners. Look for activity to continue to increase in this area.

Besides the recently lowered premiums, what else does the FHA have to offer? A lot — and these loan programs will become even more appealing as an alternative to conventional loans as interest rates begin to increase. Typically, FHA loans require a lower downpayment, often as low as 3.5 percent, and many lenders that specialize in these loan also allow for lower credit scores — some as low as 550. This means that mortgage originators working with clients with smaller incomes and challenging credit histories may still be able to help their clients secure the financing they need to buy a home.

Mortgage brokers and originators should be aware of the various financing vehicles that the FHA offers, including these major programs:

  • The basic home mortgage loan, 203(b): This is available for purchases or refinances.
  • The rehabilitation mortgage, 203(k)7: This program helps borrowers roll the costs of repairs and rehabilitation in to the overall mortgage.
  • Streamline refinance mortgage: This is available for current FHA mortgages.
  • The FHA also offers programs for condominiums, manufactured homes, energy-efficient mortgages, reverse mortgages and more.

VA and USDA programs

VA and USDA mortgages tend to be even smaller niches within the government-loan market. And for good reason: The requirements necessary to qualify for these loans fit a much smaller portion of the population.

VA loans, just like the name implies, are for current U.S. service members, veterans, certain reservists and National Guard members, and eligible surviving spouses of military members. But for qualified borrowers, VA loans can be attractive financing vehicles. They offer a no-downpayment loan with no mortgage insurance (unlike FHA loans). There is no maximum loan amount, but the VA does have specific guidelines that need to be reviewed. Without a downpayment, consumers can borrow up to $417,000 in most of the U.S. There also is no minimum credit score required by the VA, but every lender has different parameters that they will work within, so be sure to research lender requirements thoroughly.

Many people (and mortgage originators themselves) are under the impression that USDA loans are only for farms. This, however, is a misconception. The USDA Rural Development office offers home loans in qualified rural districts throughout the U.S.

There are two main USDA programs: the Section 502 Direct Loan Program and the Guaranteed Loan Program. The Direct program is aimed at applicants with low or very low income, and it provides payment assistance for qualified borrowers seeking housing in eligible rural areas. The Guaranteed program is for low- or moderate-income borrowers to purchase or rehabilitate a home in an eligible area. Both programs offer attractive loan terms, and the Direct program offers a zero-downpayment option for qualified borrowers.

•  •  •

Mortgage originators who want to increase their business moving forward should look into the government loans. These loan programs may assist a variety of clients, from those with good credit scores and a reasonable downpayment to low-income borrowers with challenging credit. Loan volumes in these programs are up, and as interest rates rise, these loans will look increasingly attractive to borrowers.

Mortgage originators who are unfamiliar with FHA, VA and USDA loans should look to work with lenders specializing in these types of loans. These lenders will be able to explain the finer points of the loans, and they also will be able to better serve potential borrowers, particularly if those borrowers have lower credit scores and smaller incomes. For originators serving this client pool, it makes sense to be on the lookout for lenders that can manually underwrite loans and provide a broad spectrum of support for their borrowers.

Another key to success in the government-loan market is finding lenders that service the loans they originate, because this can be particularly critical in finalizing deals for borrowers with challenging credit. By researching and partnering with lenders who are experienced with the full range of government loans, originators can take their business to the next level in the niche of their choice. 


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