FHA Rules

There’s been a lot of hubbub lately about a new rule that was supposed to go into effect on April 1.
I say “supposed to” because the FHA has since rescinded the rule, at least until July 1, and is now asking for public comment to get their head around it all.
My guess is that it will be overturned, and things will go back to how they are now, but only time will tell.
The Rule in Question
In short, the new underwriting rule requires prospective FHA loan holders to pay off any collection or combination of collections that totals more than $1,000.
So if you happened to have an erroneous medical collection, or were currently disputing a credit card collection, you’d have to settle it before receiving your FHA loan.
Even if the charge happened to be bogus, if you wanted an FHA loan, you’d either have to pay the collection off in full or setup a payment plan with the collection agency (and make three verifiable payments).
Those payments would also factor into a borrower’s debt-to-income ratio, which could limit or jeopardize the mortgage.
Put simply, you’d have to make a commitment to pay off the debt in order to qualify for the mortgage.
In the past (and I suppose currently), the FHA did not require that collection accounts be paid off as a condition of mortgage approval (unless it was a court-ordered judgment).
Sure, underwriters would still need to take a look to see what it was and how it might impact the issuance of a mortgage, but it wouldn’t be an outright roadblock.
Why the New Rule is a Problem
The new rule is problematic for a couple reasons. I suppose the biggest issue is that FHA loans were originally intended for lower income borrowers with little money set aside for down payment.
So those with sizable collection accounts, and presumably little cash on hand, would probably have difficulty paying off the debts while having enough money leftover for down payment, closing costs and future mortgage payments.
Along with that, the rule essentially forces would-be borrowers to pay off the collection account(s), even if they aren’t legit. Or if they are currently in dispute.
There are plenty of erroneous collections out there, so forcing borrowers to settle them isn’t necessarily fair.
*The FHA excludes disputed accounts or collections resulting from identity theft or unauthorized use if appropriate documentation is provided.
All that said, this is a good lesson for first-time homebuyers and current homeowners alike to stay on top of their credit.
That means ordering a credit report several months before applying for a mortgage to see where you stand, and also to ensure that nothing is reporting in error (or legitimately) that could hold you back from obtaining a mortgage.

Is Streamlining Your Refinance the Best Deal?

While a streamline refinance may be your easiest option, it may not be the best choice for you.
Whenever you’re in the market for a refinance, it’d be wise to take the time to shop around.
That means looking beyond your current lender and/or loan type to see if there’s something better out there.
You may find a lower mortgage rate with a new lender that will justify a more lengthy qualification process.
Sure, it can be a pain to refinance your mortgage, but the savings afforded each month and over your lifetime should definitely be worth your time.

Income and Mortgage

When determining how much house you can afford, you need to take into account your entire housing payment, not just the mortgage payment.
And certainly not the interest-only mortgage payment, which used to be the norm before the mortgage crisis reared its ugly head.
For example, you may find that you qualify for a mortgage at a rate of 4.25% on a 30-year fixed.
On a $200,000 loan amount, the monthly mortgage payment would only be $983.88. Pretty cheap, right?
However, you also need to factor in property taxes and homeowners insurance, not to mention maintenance costs and other intangibles.
And if it’s a condo, you’ll also need to factor in the HOA, which can be pretty pricey. In fact, in Los Angeles, many condos have monthly HOA dues that exceed $400.
So let’s assume you buy a condo that sells for $250,000, and put 20% down. As mentioned, your mortgage payment would fall below $1,000, which could be lower than the rents in the area.
But once we add the monthly HOA dues of say $400, and another $350 for taxes, you’d be looking at a monthly housing expense of roughly $1,750.
Assuming you put even less than 20% down, you may also be subject to private mortgage insurance, which could further increase your housing costs.
Wow. What happened to that $1,000 a month mortgage payment? It nearly doubled in the blink of an eye.
Consider All Other Expenses
Aside from your entire housing payment, you also need to consider all your other monthly obligations, such as car lease payments, credit card payments, health insurance, utilities, etc., etc.
All of these items will be a factor in determining your debt-to-income ratio, which banks and mortgage lenders rely upon to determine how much you can borrow. Yes, they have a say in it also.
The DTI ratio is broken down into a front-end ratio and a back-end ratio.
You may see limits of 30/45, meaning your monthly housing payment cannot exceed 30 percent of your gross monthly income, and your housing payment plus all other monthly obligations cannot exceed 45 percent of gross income.
So even if you think you can afford more, the lender will limit you based on their own risk appetite. Of course, their limits are usually pretty high, so if you’re exceeding them, you may be headed for trouble.
The Mortgage vs. Income Rule of Thumb
I hate rules of thumb. Why? Because we aren’t all the same, so one single rule won’t work for everyone.
And it’s just lazy. Instead of actually running the numbers, you’re relying on a rule that someone came up with to sum it all up, which could be completely wrong.
Some say to buy a home that is worth 2.5 times your annual gross salary. So if you make $100,000 a year, you’ll be able to buy that $250,000 condo.
But what if the HOA is $500 a month. Or just $200 a month? That $300 difference is certainly significant. Or what if it’s a house without HOA dues?
And what if you only put down 3.5% down via an FHA loan, as opposed to coming in with 20% down and avoiding mortgage insurance entirely?
As you can see, housing payments can fluctuate wildly, so you can’t just rely on a blanket rule.
Speak with your loan officer or mortgage broker to get a good idea of what you can afford when they get you pre-approved. And make sure you’re comfortable with the payments.
At the end of the day, everyone is different, and you may only want a house that is “X” times your salary, while another person may be comfortable with a housing payment double that.

What I plan to STOP

The Department of Justice filed a lending discrimination case against New York-based GFI Mortgage Bankers, claiming the lender violated fair lending laws by charging minority borrowers higher interest rates on mortgages when compared to other borrowers with similar credit profiles.

The U.S. Attorney's Office for the Southern District of New York accused the firm of charging African-American and Hispanic borrowers higher interest rates, violating the Fair Housing Act and Equal Credit Opportunity Act.

The DOJ asserted that white borrowers in similarly-situated situations obtained different mortgage rates. GFI Mortgage Bankers could not be immediately reached for comment early Tuesday morning.

U.S. Attorneys claim from 2005 to 2009, GFI charged minority borrowers excessive rates, with the average African-American borrower paying an average of $7,500 more in the first four years when compared to similarly-situated white borrowers. For Hispanic borrowers, the difference was approximately $5,600 or more.

"The disparities, based on race or national origin, are statistically significant, and are unrelated to credit risk or loan characteristic," the DOJ claimed in a press release.

GFI Mortgage Bankers did not immediately respond to a request for comment.

Refi Rules

If you’re considering refinancing your mortgage, you may have searched for the “refinance rule of thumb” to help you make your decision.
Of course, there isn’t a single refinance rule of thumb. One popular one is that you should only refinance if your new interest rate will be two percentage points lower than your current mortgage rate.
Only Refinance If the New Mortgage Rate is 2% Lower
For example, if your current mortgage rate is 6%, that rule would tell you refinance only if you could snag a rate of 4% or lower.
But clearly this rule is much too broad, just like any other rule out there. When it comes down to it, a refinance decision will be unique to you and your situation, not anyone else’s.

This old rule assumes most mortgage amounts are pretty small, unlike the jumbo loans we see nowadays.
Let’s take a look at some math to illustrate why this refinance rule falls short:
Loan amount: $500,000
Loan type: 30-year fixed-rate mortgage
Current mortgage rate: 5%
Refinance mortgage rate: 4%
Cost to refinance: $4000
In this scenario, the existing mortgage payment is $2,684.11. If refinanced to 5%, the monthly mortgage payment falls to $2,387.08. That’s a difference of nearly $300 a month, which will certainly make it easier to meet your mortgage obligation.
However, it will take 13 months to recoup the cost of the refinance ($4000/$297).
That said, the refinance “breakeven period” (time to recoup your costs) is very short here. So we don’t need to follow that “2% lower rate” refinance rule.
But what if the loan amount is only $100,000? The game changes in a hurry. Your mortgage payment would drop from $536.82 to $477.42. That’s roughly $60 in monthly savings, not very significant.
Assuming the cost of the mortgage was still somewhere around $3,000, it would take 50 months, or more than four years, to recoup the costs associated with the refinance.
So if you were thinking about selling your home in the short term, it probably wouldn’t make sense to throw money toward a refinance.
This is probably why this old refinance rule exists. But home prices are higher these days, so it’s not a good rule to follow for everyone.

Only Refinance If You’ll Save “X” Dollars Each Month
Another common refinance rule of thumb says only to refinance if you plan to live in your home for “X” amount of years, or only to refinance if you’ll save “X” dollars each month.

Again, as seen in our example above, you can’t just rely on a blanket rule to determine if refinancing is a good idea or not.
Some borrowers may need to stay in their home for five years to save money, while others may only need to stick around for just over a year.
But plans change, and you may find yourself living in your home much longer (or shorter) than anticipated.
And if you look at the refinance savings in dollar amounts, it will really depend on the cost of the refinance and how long you make the new payment.
If it’s a no cost refinance, you won’t even have to worry about the break-even period.
So it’d be foolish to get caught up on this rule unless you have a bulletproof plan.

Consider the Mortgage Term
Finally, consider the mortgage term when refinancing, and the total amount of interest you can avoid paying over the life of the loan.
If you’re currently five years into a 30-year fixed mortgage, and refinance into a 15-year fixed mortgage, you’ll shave 10 years off your mortgage term.
Assuming mortgage rates are lower at the time of refinance, you’ll save both in monthly payment and in total interest paid, which will shorten your break-even period and maximize your savings.
Also factor in your current loan type versus what you plan to refinance into. If you’re currently holding an adjustable-rate mortgage that will reset higher soon, the decision to refinance may be even more compelling.
At the end of the day, you shouldn’t use any general rule to determine whether or not you should refinance.
Doing so is lazy, especially when it’s not that hard to run a few numbers to see what will make sense for you.
If you feel overwhelmed by all the math, ask a loan officer or mortgage broker to run some scenarios for you to illustrate the potential savings and break-even periods.
And take your time – you’re not shopping for a big screen TV, you’re making one of the biggest financial decisions of your life.

FHA vs Conventional

Our latest mortgage match-up pits FHA loans against conventional loans, both of which are popular options for homeowners these days.
In recent years, FHA loans have surged in popularity, largely because subprime lending (and Alt-A) was all but extinguished as a result of the ongoing mortgage crisis.
Some even claim FHA loans are the “new subprime,” mainly because of the low down payment and credit score requirements, despite originally being designed for low and moderate-income borrowers.
But you don’t have to be a subprime borrower to take advantage of an FHA loan.
FHA Loans Are a Great Low Down Payment Option
As noted, these government-backed home loans have become insanely popular. The main selling point of an FHA loan is the 3.5% minimum down payment requirement.
However, in order to qualify for the flagship low down payment option, you need a minimum credit score of 580.
And 580 is just the FHA’s guideline – individual banks and mortgage lenders still need to agree to offer such loans.
So there’s a decent chance you’ll need an even higher credit score. Of course, a 580 credit score is pretty dismal…

FHA Loans Good for Those with Poor Credit
The other major selling point to an FHA loan is that the minimum credit score is 500. Again, this is subject to lenders actually offering programs for scores this low. And scores between 500 and 579 require a minimum down payment of 10%.
But FHA loans can be a good option for those with poor credit who are determined to get a mortgage.
Another benefit to going with an FHA loan is the higher loan limit, which is as high as $729,750. This can be a real lifesaver for those living in high-cost regions of the country.
Meanwhile, conventional conforming loans backed by Fannie Mae and Freddie Mac are capped at $625,500. Anything above that is considered a jumbo loan, and will come with a higher mortgage rate.
FHA Loans Subject to Mortgage Insurance
We’ve talked about some benefits of FHA loans, but there are drawbacks as well.
The major one is the mortgage insurance requirement. Those who opt for FHA loans are subject to both upfront and annual mortgage insurance premiums.
The upfront mortgage insurance requirement is unavoidable, and the annual premium can only be avoided if you have 22 percent or more home equity and a loan term of 15 years or less.
All other borrowers must pay the annual mortgage insurance premium for a minimum of five years, which will clearly increase the cost of the mortgage.
[Note that FHA insurance premiums are also slated to increase!]
Keep in mind that FHA loan offerings are pretty basic. They offer both purchase money mortgages and refinance loans, but the choices are slim.

How are Mortgage Rates Determined?

How Are Mortgage Rates Determined?
One of the most important aspects to successfully obtaining a mortgage is getting the best interest rate. For most homeowners, this means securing the lowest, fixed interest rate (no negative amortization!).
Many homeowners rely on their bank or mortgage broker to secure their interest rate, often without researching mortgage lender rates or inquiring about how they move. Whether you’re interested in rates or not, it’s wise to get a better understanding of how mortgage rates move, and why.
After all, a change in rate of a mere .125% to .25% could mean thousands of dollars in savings each year.
So how are mortgage rates determined?
Although there are a slew of different factors that affect interest rates, the movement of the 10-year Treasury bond yield is said to be the best indicator to determine whether mortgage rates will rise or fall. But why?
Though most mortgages are packaged as 30-year products, the average mortgage is paid off or refinanced within 10 years, so the 10-year bond is a great bellwether to measure interest rate change. Treasuries are also backed by the “full faith and credit” of the United States, making them the benchmark for many other bonds as well.
Additionally, 10-year Treasury bonds, also known as Intermediate Term Bonds, and long-term fixed mortgages, which are packaged into mortgage-backed securities (MBS), compete for the same investors because they are very similar financial instruments.
However, treasuries are 100% guaranteed to be paid back, while mortgage-backed securities are not, for reasons such as payment default and early repayment, and thus carry more risk and must be priced higher to compensate.
How will I know if mortgage rates are going up or down?
Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.
How Are Mortgage Rates Determined?
One of the most important aspects to successfully obtaining a mortgage is getting the best interest rate. For most homeowners, this means securing the lowest, fixed interest rate (no negative amortization!).
Many homeowners rely on their bank or mortgage broker to secure their interest rate, often without researching mortgage lender rates or inquiring about how they move. Whether you’re interested in rates or not, it’s wise to get a better understanding of how mortgage rates move, and why.
After all, a change in rate of a mere .125% to .25% could mean thousands of dollars in savings each year.
So how are mortgage rates determined?
Although there are a slew of different factors that affect interest rates, the movement of the 10-year Treasury bond yield is said to be the best indicator to determine whether mortgage rates will rise or fall. But why?
Though most mortgages are packaged as 30-year products, the average mortgage is paid off or refinanced within 10 years, so the 10-year bond is a great bellwether to measure interest rate change. Treasuries are also backed by the “full faith and credit” of the United States, making them the benchmark for many other bonds as well.
Additionally, 10-year Treasury bonds, also known as Intermediate Term Bonds, and long-term fixed mortgages, which are packaged into mortgage-backed securities (MBS), compete for the same investors because they are very similar financial instruments.
However, treasuries are 100% guaranteed to be paid back, while mortgage-backed securities are not, for reasons such as payment default and early repayment, and thus carry more risk and must be priced higher to compensate.
How will I know if mortgage rates are going up or down?
Typically, when bond rates (also known as the bond yield) go up, interest rates go up as well. And vice versa. Don’t confuse this with bond prices, which have an inverse relationship with interest rates.
10-year bond yield up, mortgage rates up.
10-year bond yield down, mortgage rates down.
To get an idea of where mortgage rates will be, bond investors typically use a spread of about 170 basis points, or 1.70% above the 10-year bond yield to estimate interest rates. So a bond yield of 4.00% plus the 170 basis points would put mortgage rates around 5.70%. Of course, this spread can vary over time, and is really just a quick way to ballpark mortgage interest rates.
There have been, and will be periods of time when mortgage rates rise faster than the bond yield, and vice versa. So just because the 10-year bond yield rises 20 basis points doesn’t mean mortgage-backed securities will do the same. In fact, MBS could rise 25 basis points, or just 10 points, depending on other market factors.
What other factors move mortgage rates?
Factors such as supply come to mind. If loan originations skyrocket in a given period of time, the supply of mortgage-backed securities will rise beyond the demand, and prices will need to drop to become attractive to buyers.
Timing is also an issue. Though bond prices may plummet in the morning, and then rise by the afternoon, mortgage rates may remain unchanged. That’s because sometimes the bond movement doesn’t always make it down to the wholesale markets, or simply because it takes more time to do so.
Inflation also greatly impacts mortgage rates. If inflation fears are strong, interest rates will rise, but in times when there is little risk of inflation, mortgage rates will most likely fall.
Economic activity impacts mortgage rates.
Mortgage rates are more susceptible to economic activity than treasuries, mainly because the average consumer or homeowner may lose their job or be unable to make their mortgage payment, while the US government typically doesn’t miss payments.
For this reason, jobs reports, Consumer Price Index, Gross Domestic Product, Home Sales, Consumer Confidence, and other data on the economic calendar can move mortgage rates significantly.
And don’t forget the Fed. When they release “Fed Minutes” or change the Federal Funds Rate, mortgage rates can swing up or down depending on what their report indicates about the economy. Generally, a growing economy leads to higher mortgage rates and a slowing economy leads to lower mortgage rates.
As a rule of thumb, bad economic news brings on lower rates, and good economic news makes mortgage rates climb.
The situation is a lot more complicated, so consider this is an introductory lesson on a very complex subject. And remember, the par mortgage rates you see advertised don’t take into account any pricing adjustments or fees that could drive your actual interest up or down considerably.