FHA crack down on down payment assistance

 Loan Guidelines, Residential Mortgage  Comments Off on FHA crack down on down payment assistance
Apr 292019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

One of a myriad of causes of the housing collapse during the Great Recession was the absence of “skin-in-the-game.” Borrowers used no-money down loans to purchase homes, then walked away from those homes when the economy went sour. Given that they had put none of their savings into the homes, walking away was easier.

One way to achieve no-money down during that time was to use seller-provided down payment assistance with an FHA loan. The seller provided the necessary 3.5% down payment and usually boosted the home’s sale price a little to make up for it. Congress outlawed this practice in 2008, mandating that no party with a financial interest in the home sale – including the seller, the agents, and the lender – could provide the homebuyer’s down payment funds. However, the law allowed governmental programs to continue providing down payment assistance.

Well, where there’s a will, there’s a way, and an entrepreneurial fellow in UT partnered with the Paiutes tribal government to create a fund, the Chenoa Fund, that lenders could use for down payment assistance. Whereas government down payment programs target homebuyers in the governmental jurisdictions, the Chenoa Fund was available nationwide, and it made a profit on the transactions.

Borrowers in down payment assistance programs become delinquent about twice as often as those who use their own funds, and the Feds see these programs as an increasing risk to the FHA Mutual Mortgage Insurance Fund, which backstops FHA mortgages.

Last week, HUD published new guidelines that clarify which entities can provide down payment assistance. The guidelines seem to target the Chenoa Fund, and it will be interesting to see how it responds.

But that still leaves the bigger issue of higher default rates for down payment assisted loans unaddressed. Many of these programs offer the assistance in exchange for higher-than-market interest rates, which stretch a homebuyer’s ability to repay the mortgage. In addition, they perpetuate the problem Congress thought it had addressed in 2008 – homeowners with no skin in the game.

FHA changes aim to deny riskier borrowers

 Loan Guidelines, Residential Mortgage  Comments Off on FHA changes aim to deny riskier borrowers
Apr 272019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Late last month, FHA made some changes to its automated underwriting system that may prevent as many as 50,000 potential borrowers from qualifying for an FHA loan. FHA said the changes are meant to limit exposure of its insurance fund from higher risk situations.

According to the agency’s annual report to Congress, it’s seeing a concentration of mortgages with high debt-to-income ratios and low credit scores. It also reported a 60% increase in cash-out refinances. (This isn’t an issue in TX as TX homeowners cannot take cash out using an FHA loan.)

An FHA official told The Wall Street Journal that the system changes will affect 40,000 to 50,000 loans each year, which is 4 to 5% of all loans FHA insures.

The changes will flag loans with a combination of higher debt-to-income ratios and lower credit scores for “manual underwriting,” which means underwriting performed by a human being. Unfortunately for borrowers, manual underwriting also means more stringent loan guidelines, and many of those who qualified before the system changes no longer will qualify.

Homebuyer beware of authorized user accounts

 Credit Scoring, Loan Guidelines  Comments Off on Homebuyer beware of authorized user accounts
Mar 142019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The authorized-user account: It’s been a trick folks with weak credit histories have used for a long time to improve their credit scores. Mortgage lenders have grown wise to this trick, and they’re finally clamping down on its use.

An authorized-user account is an account on which a consumer has signing privileges, but the consumer’s credit history wasn’t used to open it. For example, a parent might allow a child to be an authorized-user on one of the parent’s credit cards to help the child establish credit.

A few years back, credit repair companies started promoting this as a way for folks with weak credit to quickly improve their credit scores. Someone with strong credit would allow the consumer with weak credit to sign on an account, even if the two individuals had no other relationship. Unfortunately for creditors, the score improvement didn’t reflect the consumer’s true credit risk.

Fannie Mae and Freddie Mac loan guidelines now instruct lenders to carefully review loan applications for which a borrower has an authorized-user account. The intent is to weed out potential borrowers who used an unrelated individual’s strong credit to try to improve their chances for loan approval.

According to the guidelines, it’s acceptable for a borrower to be an authorized-user on an account belonging to another borrower on the loan, with the borrower’s spouse, or an account on which the borrower makes the payments.

If these situations don’t apply, the guidelines instruct lenders to review the borrower’s credit to make sure an authorized-user account didn’t have a significant impact on the borrower’s credit scores. If the borrower otherwise has weak or little credit, it’s possible the borrower’s loan request will be denied.

Higher FHA and VA loan limits, too

 Loan Guidelines, Residential Mortgage  Comments Off on Higher FHA and VA loan limits, too
Dec 172018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

We found out a couple weeks ago that the conventional loan limit increased to $484,350. Over the weekend, FHA released its 2019 loan limits. By statute, the minimum FHA loan limit is 65% of the conventional limit, or $314,827 for a single-family home in 2019.

However, FHA allows higher limits in areas where 115% of the median home price exceeds the minimum. In TX, higher limits apply once again in the Austin, San Antonio, Dallas-Ft. Worth, and Houston metros, and for the first time, higher limits also apply in the Midland area and the city of Fredericksburg (Gillespie Co).

Unlike past years, the higher metropolitan area limits did not rise much this year. The DFW limit rose the most, by more than $9000, to $395,600. Austin’s limit rose about $6000 to $389,850. The limit in Houston and San Antonio remained the same at $331,200 and $359,950, respectively. Remember that these limits apply to all the counties in the metro, not just the cities themselves.

Among the new entrants to the higher limit list, Fredericksburg took the prize rising almost $30,000 to $324,300. The Midland area limit, including Midland and Martin Counties, rose $24,000, to $318,550.

The limit for the VA program mirrors the conventional loan limit at $484,350.

USDA programs shouldn’t be affected because loan size is driven by annual income limits, not median home prices.

Finally, these limits apply to single-family homes. Higher limits apply for two- to four-unit properties.

Higher loan limits for 2019

 Loan Guidelines, Residential Mortgage  Comments Off on Higher loan limits for 2019
Dec 032018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Rising home prices have prompted federal regulators to raise the loan limits for conventional loans starting in Jan. The maximum loan amount for a conforming loan on a single-family home, one eligible for acquisition by Fannie Mae or Freddie Mac, will rise to $484,350.

The Federal Housing Finance Agency (FHFA) reviews the loan limits each year as established by the Housing and Economic Recovery Act (HERA) and adjusts them as necessary to reflect changes in home prices. FHFA reported its housing price index rose 6.9% since the third quarter of last year, so it adjusted the loan limit higher by the same amount.

Higher limits apply in certain “high cost” areas where 115% of the local median home price exceeds the new limit; however, FHFA hasn’t indentified any of those “high cost” areas in TX. Higher limits also apply to two, three, and four unit properties.

For some historical perspective, conforming loan limits go back to the early 1970’s, when the single-family loan limit was $33,000. Congress set the limit to $417,000 in 2008, where it remained for several years until average home prices rebounded from the great recession.

FHA and VA set their loan limits independently of the conforming loan limit, and I’ll report those as soon as they’re available.

Mortgage insurance companies tighten credit

 Loan Guidelines, Residential Mortgage  Comments Off on Mortgage insurance companies tighten credit
Feb 232018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

As you’re probably aware, when buying a home, if your down payment is less than 20%, your mortgage payment will include mortgage insurance. This insurance is the lender’s way sharing some of the risk associated with more highly leveraged loans.

We call companies that specialize in this form of insurance mortgage insurance or MI companies – pretty clever, huh – and they often have special guidelines that apply to loans that require their product.

Recently, the MI companies expressed concern about Fannie Mae and Freddie Mac increasing the amount of debt they’re willing to accept for a borrower receiving a conventional loan. Both now accept loans for which the borrower’s debts equal up to 50% of the borrower’s gross income.

Four of the MI companies announced that starting next month, they will require a 700 credit score anytime the borrower’s debt exceeds 45% of gross income. One company further is requiring a min 5% down payment in such cases. (Recall that it’s possible to get a conventional loan with as little as 3% down.)

I don’t expect this will affect a huge number of borrowers as most folks having lower credit scores and making small down payments find it more advantageous to use the FHA program. However, it does represent the first tightening of credit standards I’ve seen in a while.

Moving mortgaged rental property to LLC is okay

 Investment, Loan Guidelines  Comments Off on Moving mortgaged rental property to LLC is okay
Jan 292018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Investors in residential real estate have long been dogged by the “due on sale” clause in the standard promissory note. It states that the lender may call the note due upon the sale or transfer of ownership of the property. A preferred vehicle for ownership of investment properties is a limited liability company because it provides some legal separation between the property and the investor’s other assets.

Fannie Mae requires that a borrower be personally liable on a note, meaning the borrower must sign the note in his/her name. Fannie won’t allow the name on the property’s title to be different from the name on the note, so investors sometimes quit claim the property title to their LLC after closing. However, this could trigger the due on sale clause if the loan servicer chooses to enforce it.

I have great news! Late last year, Fannie changed its servicing guidelines so that a change of ownership to an LLC in which the borrower owns a majority interest is acceptable and does NOT violate the terms of the note.

A couple important caveats:

– The change applies only to loans purchased by Fannie after 6/1/16; and

– The title must revert to the borrower prior to refinancing.

Fannie still will not allow the LLC to sign the note, and it still requires the property’s title to match the borrower’s name. However, Fannie will allow the time the property was held in the LLC to count towards the 6-month seasoning period for a cash-out refinance.

I did check with Freddie Mac, and it has not followed Fannie’s lead on this issue.

Equifax data breach prompts Fannie to change guidelines

 Loan Guidelines, Residential Mortgage  Comments Off on Equifax data breach prompts Fannie to change guidelines
Jan 202018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The recent Equifax data breach affected millions of consumers. One of the remedies suggested by cybersecurity experts was for consumers to freeze their credit files with Equifax. The credit bureau made it easy for consumers to initiate the freeze, so many followed the advice.

Unfortunately, cybersecurity experts aren’t mortgage experts, so they didn’t realize the potential ramifications of freezing one’s credit. Mortgage guidelines require a lender to obtain credit information from all three major credit bureaus. If credit has been frozen, the applicant must unfreeze the file before the lender can approve the loan.

Fannie Mae recognized the potentially significant impact of this situation and changed its guidelines. For now, if a borrower’s credit file is frozen at one credit bureau, a lender can proceed as long as credit data is available from the other two bureaus and at least one of them reports a score.

Rising home prices lead to higher loan limits

 Loan Guidelines, Residential Mortgage  Comments Off on Rising home prices lead to higher loan limits
Jan 172018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Rising home prices have prompted regulators to increase loan limits for standard loan programs. Fannie Mae and Freddie Mac raised the limit for their conventional, conforming loans by almost 7% to $453,100. This limit applies to all areas of TX and is in effect now.

FHA also raised its loan limit, but the limit varies by county. FHA sets the limit to 115% of the median home price in an area with a ceiling of $679,650 and a floor of $294,515. The floor applies to areas where 115% of the median home price does not reach that level.

TX home prices haven’t reached levels at which the ceiling would apply; however, four TX metros do have a limit greater than the floor. Austin’s limit rose $23k to $384,100 for a single-family home. The DFW limit rose about the same amount to $386,400, still the highest in the state. San Antonio’s limit rose by the greatest amount, over $32k, to $359,950. Houston, still recovering from the oil industry downturn, didn’t see any change, with the limit remaining $331,200. Remember that these limits apply to all the counties in the metro, not just the cities themselves.

The limit for the VA program mirrors the Fannie/Freddie limit at $453,100. USDA programs shouldn’t be affected because loan size is driven by annual income limits, not median home prices.

These limits apply to single-family homes. Higher limits apply for two- to four-unit properties.

Two troublesome quirks in the new TX home equity rules

 Loan Guidelines, Owner-occupied, Residential Mortgage  Comments Off on Two troublesome quirks in the new TX home equity rules
Jan 042018
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

As we discussed last year, Texans changed the rules for homeowners who want to take equity out of their homes. TX Equity loans, what we call cash out loans, are a special type of conventional loan because the TX constitution provides homeowners some unique protections. As a result, the loans have slightly higher interest rates and higher closing costs than other conventional loans.

The changes approved by voters last fall mainly benefited homeowners with lower-priced homes and homeowners in rural areas. However, attorneys, as they’re apt to do, have noticed a couple quirks in the wording that could cause problems.

– The rules now allow a lender to charge closing costs equal to 2% of the loan amount, down from the previous limit of 3%. However, this amount now excludes the appraisal and survey fees and a fee for a title policy and policy endorsements established in accordance with state law. It’s the “in accordance with state law” part that is at issue. Our attorneys are recommending a conservative reading, which could add a few hundred dollars back to the total subject to the 2% limit.

– The rules also now allow homeowners on ag-exempt land to take out home equity loans. The issue is the state tax code says an ag-exemption is not allowed on land that secures an equity loan. While this likely was an oversight, and the Comptroller may correct the problem soon, the risk for homeowners is that they’ll lose their ag-exemption. That raises the horror of property tax rollbacks.

Even with the issues, the changes are a welcome relief for homeowners wanting to use their home equity, and in time I suspect the state will resolve the issues in the favor of homeowners.