Dump is really the right word. Fannie Mae and Freddie Mac, says a White House fact sheet, “would be directed to use mark-to-market accounting or other alternatives to manual appraisals for any loans for which the loan-to-value cannot be determined with the GSE’s Automated Valuation Model. This will eliminate a significant barrier that will reduce cost and time for borrowers and lenders alike.”

This sounds great except that the goal of an appraisal is to protect not only borrowers and lenders, it’s also to protect mortgage investors such as pension funds and insurance companies — entities we want to attract or face far-higher interest rates.

The Need For Appraisals

It’s true that appraisals are a cost, but so are food, shoes and tires. The important point is not that appraisal are an expense, it’s that appraisals made by actual humans have value.

For some time there has been an effort to eliminate appraisers from the mortgage process with seers, soothsayers and automated processing. The pretext is that independent appraisals cost money and the computerized systems are pretty good.

Pretty good is an okay standard when you own thousands of loans, but residential borrowers typically have only one or two mortgages. To them, having a property accurately appraised is hugely important so they do not overpay whether they use conventional, FHA or VA financing. Indeed, most real estate sale agreements provide that the deal is off without penalty if the appraisal comes in below the sale price — speak with a buyer broker or attorney for specifics.

But not only home buyers are protected, with a good appraisal the lender does not lend more than it should (thus protecting shareholders) and a mortgage investor does not have excess risk (thus protecting pensions and insurance funds).

If you’re a buyer and make an offer on a property it will not get financed unless the appraiser says the home is worth at least the sale price. Without independent assurance from an appraiser — someone who is paid regardless of the valuation — no lender will provide the mortgage financing necessary to create the sale.

But it’s not just the buyer and the “lender” who are protected, if by “lender” we mean the folks who originate the loan.

Today after most loans are originated they are sold into the secondary market. Packagers gather up 5,000 or 10,000 loans and create a mortgage-backed security or MBS. Investors then purchase a portion of the MBS called a tranche.

One of the most basic protections for buyers, lenders and mortgage investors is an independent valuation of the property. The fact that a buyer and seller have agreed on a price does not mean they have accepted a price that will protect the investor if home values decline or the borrower defaults.

So, yes, let’s move ahead with new and better housing programs to reduce foreclosures and clean-up a system damaged by too many short-cuts. But while we’re at it, let’s not end a basic protection that makes the market safer for buyers, investors and mortgage insurers.

Why Obama Should Favor Mortgage Appraisals is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“The number of people in poverty in 2009 is the largest number in the 51 years for which poverty estimates are available,” according to the Census Bureau.

Few examples better illustrate the changing times we face then the death of Kyle Willis. Mr. Willis, age 24, died from a tooth infection. Why? According to WLWT-TV in Cincinnati, the unemployed and uninsured father and aspiring paralegal could afford either pain medication or antibiotics — but not both. His face swollen, he got the pain medication. Meanwhile the infection spread to his brain.

In a rich country with massive investments in healthcare why should anyone have the dilemma faced by Mr. Willis?

Perhaps Mr. Willis and many other people would have better options had the country adopted the “Second Bill of Rights” proposed in 1944 by President Franklin Roosevelt.

Here’s what Roosevelt said as America fought wars in Europe and Asia:

The Second Bill of Rights

This Republic had its beginning, and grew to its present strength, under the protection of certain inalienable political rights—among them the right of free speech, free press, free worship, trial by jury, freedom from unreasonable searches and seizures. They were our rights to life and liberty.

As our nation has grown in size and stature, however—as our industrial economy expanded—these political rights proved inadequate to assure us equality in the pursuit of happiness.

We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. “Necessitous men are not free men.” People who are hungry and out of a job are the stuff of which dictatorships are made.

In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all—regardless of station, race, or creed.

Among these are:

• The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;
• The right to earn enough to provide adequate food and clothing and recreation;
• The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
• The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
• The right of every family to a decent home;
• The right to adequate medical care and the opportunity to achieve and enjoy good health;
• The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
• The right to a good education.

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.

America’s own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for all our citizens.

For unless there is security here at home there cannot be lasting peace in the world.

Some will say that what Roosevelt proposed was simply a form of socialism or an outmoded notion of altruism the country can ill-afford, but you have to wonder what the daughter left behind by Mr. Willis will think when she grows up. Is the cost of treating a toothache really worth the loss of a parent?

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Given such huge losses should the money you pay for homeowner’s insurance go up?

A firm “no” comes from Joanne Doroshow, executive director of the Center for Justice & Democracy.

“The damage from hurricanes is already modeled, planned for, and paid for by homeowners premiums,” said Doroshow, “and rates are not supposed to rise after these events.” In other words, insurance companies are supposed to understand risk, collect cash in advance, invest cautiously and have reserves available to pay off claims when something like hurricanes Katrina or Hugo come along.

Doroshow explained that “in the wake of Hurricane Andrew in 1992, insurers changed the way they set prices for hurricane coverage.In lieu of using the prior 20 to 40 years of recent history to set the prices by state, the industry adopted scientific modeling. These models project, by segment of the coastline called reaches (the anticipated storm damage for different category hurricane storms). The projections are for at least 10,000 years of virtual experience based on the best hydrological, meteorological, actuarial and other inputs available.

“This means,” said Doroshow, “that the 10,000 years of projected experience includes periods of many and very large hurricanes (like a category 5 storm making a direct hit on Miami and causing $200 billion of insured loss) and also periods where no hurricanes make land fall, like recent years.”

The bottom line is that insurance companies employ lots of actuaries and weather professionals to set their rates. Huge reserves should be in place. If company predictions preparations are wrong the result should be smaller dividends rather than higher premiums.

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Don’t believe it? Let’s look at some facts:

Lender Fees

With most forms of mortgage financing lenders have been able to extract such fees as the market would bear — except for FHA loans. HUD rules limited lender fees to 1 percent for most mortgages insured under the program.

All of this changed in November 2008 — two weeks after the presidential election — the outgoing Bush Administration announced that it had decided to “remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan.”

Translation: A gift to lenders.

FHA Refunds

The FHA was originally established as a “mutual” insurance fund. This means that borrowers — the equivalent of policyholders in a private mutual insurance company — would benefit when the program made a profit. In the case of the FHA, the way this was done was to pay borrowers a refund after their loan was paid off (perhaps when the home was sold).

Unfortunately, the FHA refund program ended with loans originated after December 8, 2004. The government now pockets any profit from the program.

Is this a big deal? You bet. An estimated $9.76 billion in FHA borrower premiums will be added to the FHA’s Mutual Mortgage Insurance in fiscal 2011 — what the government calls a “negative subsidy.” That’s in addition to the $2.65 billion generated in fiscal 2010 and $5.01 billion surplus that’s expected in fiscal 2012.

A “subsidy” is something you put into an account, a “negative subsidy” is — in plain language — something you take out. And where does the money go? As past FHA Commissioner David H. Stevens explains: the “FHA is projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011, a significant increase compared to the $565 million of receipts generated in FY 2009.”

Excess Insurance Fees

On April 18, 2011 the FHA’s annual mortgage insurance premium (MIP) for new loans was increased by .25 percent. Doesn’t sound like much, but for most new borrowers the annual cost for FHA insurance will rise from .90 percent to .115 percent or around $30 a month.

That’s $360 extra a year.

So why was the fee increased? There certainly is no financial reason in the sense of insurance program shortages — remember the FHA is shuttling billions of dollars to the Treasury and has never had a taxpayer bailout according to Ron Phipps, president of the National Association of Realtors.

What the fee increase really does is make the FHA mortgage program less attractive to borrowers. That’s good news for private-sector lenders, the very folks who plainly have needed a taxpayer bailout and now worry that the FHA program will be over-utilized.

Of course, private lenders could assure that the FHA program would be less popular by offering better loan products or cheaper ones, a market-based solution that everyone can support.

Exit Fees

Mortgage interest is paid on a per-diem basis, a fair arrangement because for each day money is rented the lender gets compensation. The exception to this concerns the last month of an FHA loan: No matter what day of the month you pay off an FHA mortgage under current rules, the lender gets a full month’s interest.

Here’s an illustration: If you sell your home and closing is on April 5th, you must pay interest for the entire month if the property is financed with an FHA loan. If the total interest cost for the month is $1,000 then you would pay the entire $1,000 — even though you only had use of the money for five days or one-sixth of the month. If you had a conventional loan your cost would be just $166.67.

In other words, in this example the borrower pays $833.33 in excess, unearned interest.

Translation: Another gift to lenders! Multiply by a large number of closings and you have real money.

Sen. Benjamin Cardin (D-MD) and Sen. Johnny Isakson (R-GA) have now proposed an end to this gross overpayment policy. They have introduced a bill — S.488, the Reduce Excessive Interest Payments Act — legislation that would prohibit FHA interest charges on anything but a daily basis, just like all other forms of mortgage lending.

Will this bipartisan bill pass? Not without a fight.

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“Purchase applications fell last week, driven primarily by a sharp decrease in government purchase applications as new, higher FHA premiums went into effect,” said Michael Fratantoni, the Mortgage Bankers Association Vice President of Research and Economics. “This decrease reverses a 20 percent increase in government purchase applications over a four week period, which was likely driven by borrowers attempting to beat this deadline.”

The deadline borrowers were trying to beat was April 18th, the day FHA loan requirements changed with the addition of a .25 percent increase in the annual mortgage insurance premium (MIP). For most new borrowers the annual cost for FHA insurance will rise from .90 percent to .115 percent or around $30 a month.

For marginal borrowers trying to get the biggest possible loans or for people who simply don’t like to pay more than they should, the steeper premium increases costs by about $360 a year.

In March FHA applications were down almost 36 percent when compared with March 2010. Endorsements were off 25 percent. Normally such results would produce cries for new leadership, and in this case former FHA Commission David H. Stevens is moving on to become the President and CEO of the Mortgage Bankers Association. This hardly seems like a demotion.

So who wins with this new policy?

Yes, HUD will get additional dollars for its insurance program but so what. The program already yields huge “receipts for the Treasury,” what normal human beings would call a profit.

As Mr. Stevens has explained, the “FHA is projected to generate approximately $9.8 billion in receipts for the U.S. Treasury in FY 2011, a significant increase compared to the $565 million of receipts generated in FY 2009.”

Taxpayers, of course, pay for none of this. As Lawrence Yun, chief economist for the National Association of Realtors, explains, the “FHA and VA government-backed loan programs turned a modest profit over to the U.S. Treasury last year, and have never required a taxpayer bailout.”

And unlike in past years, excess FHA premiums now go to the government instead of being returned to borrowers, as was the practice until December 8, 2004 when the policy changed under the Bush Administration.

How The Public Loses

With less FHA financing available there will be artificially-reduced buyer demand, higher costs and fewer home sales. Is this really a good idea given the critical condition of the housing market?

Home sales — despite claims to the contrary — are down. As the National Association of Realtors explains, existing home sales in March were 6.33 percent below March 2010.

Prices are also off — they’re down 18.6 percent from the peak in April 2007 according to the government.

Given this environment, the obvious path is to stimulate home sales because more real estate transactions are inherently good for the economy. We did that with the tax credit for first-time home buyers and it was a program which boosted real estate sales.

Today, the equally-obvious path with the FHA is to simply keep the standards which made the program a success. That means a 3 percent or 3.5 percent down payment and not more than a 1 percent fee for lenders. This was the standard fee for FHA loans until — in an outright gift to lenders from the Obama Administration — the cap on lender fees for most FHA programs was eliminated on December 30, 2009, a date when media coverage would be at an absolute minimum.

The FHA has traditionally been a leading financing option for first-time buyers and those in the lower- and middle-income brackets. Now access to that choice is being made unnaturally less attractive so that borrowers will be increasingly forced to obtain private-sector financing. This artificial lack of choice — a choice not based on better products or lower costs from private lenders — is not good for the housing market or the country.

Less FHA Mortgage Loan Demand Undermines American Home Prices is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Imagine that a household has two wage-earners who take in $100,000 per year. Lenders allow them to finance with monthly payments equal to 31 percent of their income or $2,583 per month. If $100 per month goes to property insurance and $400 a month goes for property taxes, that leaves $2,083 per month for mortgage interest and principal payments. At 5 percent interest that’s enough to borrow $388,025.

Okay, now go back to that household income. If the household income is paid out with a check on the 15th and the 30th of each month then each check is worth $4,166 — before taxes, social security and Medicare. Subtract those costs and you’re looking at roughly $3,500 twice a month.

That sounds like a lot of money, at least until you mention auto insurance, car payments, credit card debt, student loans, state income taxes in most jurisdictions, health insurance and other costs. Suddenly the monthly mortgage bill looms large.

But what if interest and principal payments could be reduced to $1,041.50 every two weeks? Not only that, the loan will be paid off several years earlier, saving more than $63,000 in lifetime interest costs. Would you be ahead?

The Bi-Weekly Diversion

With monthly payments for principal and interest we’re paying $2,083 per month for the standard 30-year mortgage. That sum, times 12 monthly payments, equals $24,996 per year.

With the bi-weekly we shell out $1041.50 per payment. A payment every two weeks means there are 26 payments per year or a total of $27,079 annually.

The reason a bi-weekly mortgage results in a shorter loan term is not because of magic, it’s because you’re paying more to reduce the loan balance each year. The result is a shorter loan term, around 25 years rather than 30. Most of the interest savings come from not having to make mortgage payments for the last five years of the mortgage.

Bi-Weekly Marketing

We all routinely receive third-party bi-weekly mortgage offers, third-party meaning not from our lenders. Such third-party companies want to set up a bi-weekly loans for us, usually for a start-up fee and a charge with each payment. And they’re willing to do this without the need for a credit report or loan application.

So what’s the problem?

1. A mortgage is a contract between a borrower and a lender.
2. The third party bi-weekly company is not your lender.
3. Because the third-party bi-weekly company is not a lender it does not need your credit report or a loan application. It has nothing at risk, no money has been advanced to you.
4. While the third-party bi-weekly company collects your money, your lender is not obligated to accept payments every two weeks.
5. In other words, the bi-weekly company collects your money and simply makes 12 larger payments.
6. The money given to a third-party bi-weekly mortgage company is money that could have gone to reduce your mortgage or other debts.
7. If you’re paid on the 15th and 30th of the month you receive 24 paychecks a year — not 26. This means your paycheck schedule differs from a bi-weekly payment plan.

But wait, isn’t the third-party company audited? Maybe, but so what. Even if a third-party company is audited the point remains that you have to make required payments to your lender every month.

How about insurance for the third-party company? Insurance to cover what? How much coverage is available? Who is the beneficiary? How long will it take to collect? And, again, so what? Your agreement to repay the loan is with your lender and no one else.

Of course, no one mentions what happens if your third-party bi-weekly helper makes your payment late — or worse, doesn’t make the payment at all. It’s your credit that will be impacted, you who will have to quickly come up with any unpaid balance and you who will face foreclosure if you don’t have the money.

Lastly, are you ahead prepaying your mortgage or is the money better spent reducing credit card balances and other debt?

The Right Way To Get Bi-Weekly Benefits

If bi-weekly mortgage payments make sense from a math and personal finance perspective why not take advantage of the concept in a way that costs nothing extra?

First, see if your loan allows prepayments in whole or in part without penalty. Most payment forms allow you to add extra principal with each payment and that’s what you need.

Second, take your current mortgage payment — the amount you pay for principal and interest — and add 8.5 percent. Make the larger payment each month. Example: If you owe $1,000 for principal and interest add $85 for additional principal. Remember that you must also pay taxes, insurance and other required costs.

Third, check your mortgage balance each month to assure the additional payment is being properly recorded.

Notice that if you do it yourself you do not have pay any additional fees or charges. No one else is touching your money but you. No more than 12 payments are being made each year so your lender is happy.

Foreclosure

You can still default and be foreclosed if you prepay your mortgage. You must make your required payment, on time and in full, each month and without exception until the debt is completely repaid. That you have made voluntary prepayments does not change your contractual obligation with the lender.

Calculators

Good bi-weekly mortgage calculators which do not require your name or other information are provided by MortgageCalc.com and BankRate.com.

Can Bi-Weekly Loans Stop Mortgage Foreclosures? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Reverse mortgages are often in the news, an unusual loan program intended for home owners age 62 and above. In essence, a reverse mortgage is a huge, negatively amortizing loan secured with property and not the borrower’s credit. It requires no monthly payment for principal or interest but the owner still needs to pay for taxes, insurance and repairs.

The usual idea is that a homeowner gets a reverse mortgage and can then stay in place in their home. Once the borrower moves or passes on the loan is repaid by the heirs (perhaps by refinancing the property), sold to pay off the debt or simply turned over to the lender. Since a reverse mortgage is non-recourse financing there’s no claim against the borrower or the estate beyond the property.

The FHA comes into the picture because it insures most reverse loans, or what it calls home equity conversion mortgages (HECMs). If the lender has a loss on the transaction it can turn to the FHA for compensation.

Because of the financial risks such loans represent, most reverse mortgages are only available with FHA insurance. For this reason it’s big news when the FHA changes its reverse mortgage program, and now we have a whopper.

HECM Saver

To this point there has been what can be called the HECM Standard loan. This is an FHA-insured reverse mortgage which often has been criticized because of the up-front costs.

Initially, HECM fees could be and often were equal to 2 percent of the home’s value. Since the home’s value was always more than the actual loan amount, the effective fee could be substantially larger than 2 percent. Moreover, the size of the origination fee was unlimited

In 2008, the rules changed for FHA-backed reverse mortgages. The loan origination could be no more than 2 percent of the first $200,000 of the mortgage, 1% for any higher amount but not more than $6,000.

In addition to the origination fee, HECM loans also had a big up-front cost for FHA mortgage insurance, 2 percent of the loan amount in most cases. This is a huge number because in many cases borrowers elected to get their HECM in the form of a line of credit, meaning that not all of the money was received at closing.

New Fee, Almost No Fee

Under the HECM Saver program the new up-front fee is virtually nothing. Here’s an example:

Smith gets a $250,000 reverse mortgage. Under the old program — the HECM Standard — the up-front insurance fee is equal to 2 percent or $5,000.

Under the HECM Saver program the new fee is equal to .01 percent — or $25.

That’s an up-front saving of $4,975.

The HECM Saver reduces HUD’s risk because it lowers the amount available to borrowers. The annual insurance premium remains the same under both the Standard and Saver programs.

The question is whether the reduced loan amounts and lower up-front insurance premiums are sufficient to offset the inherent risk associated with HECMs. HUD asked Congress for $800 million to subsidize the reverse mortgage program in fiscal 2010 and $250 million for fiscal 2011. In contrast, HUD says its forward mortgage program will earn as much as $6 billion in profits during fiscal 2011.

The HECM Saver program is an attempt to right the risks associated with FHA-insured reverse mortgages. It will take several years to see if the new program works, or if reverse mortgages will slowly become rare and exotic loans, if not entirely extinct.

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But there’s one charge that military borrowers can’t escape — the VA Funding Fee.

The VA Funding Fee is a set fee applied to every purchase loan or refinance. The proceeds go directly to the VA and help cover losses on the few loans that go into default. In essence, the Funding Fee helps keep the VA Loan Guaranty program afloat. The fee changes slightly depending on the down payment amount, whether the borrower has a prior VA loan and the nature of the borrower’s service. There are exemptions for borrowers with service-connected disabilities and for qualifying surviving spouses. This is a closing cost that’s unavoidable for almost every VA borrower. You can’t negotiate or sweet talk your way out of paying it.

Fee Schedules

For home purchases, regular military members pay slightly lower Funding Fees than Reservists and National Guard members. Here’s a look at the fees on purchase loans for regular military:

The percentages shift slightly for members of the Reserves and the National Guard:

Funding Fee Sources

Veterans aren’t required to come up with the Funding Fee from their own pocket. Borrowers can roll the cost into their loan amount, which adds a few dollars onto their monthly mortgage payment. For example, the 2.5 percent funding fee on a $200,000 mortgage comes out to $5,000. On a fixed-rate loan at 30 years and 6 percent, rolling in the funding fee adds an additional $30 per month.

Veterans refinancing their loans must also pay a Funding Fee. The VA has two major refinancing programs, the Interest Rate Reduction Refinancing Loan, better known as the VA Streamline, and a VA cash-out refinancing. For the no-frills Streamline, veterans are required to pay a 0.5 percent Funding Fee (that’s one-half of 1 percent). Veterans who want a cash-out refinance pay a little more than their Streamline counterparts. The current fee for a first refinance is 2.15 percent of the loan amount for regular military and 2.4 percent for Reserves and National Guard members. The fee jumps to 3.3 percent for both demographics for each subsequent refinance.

____________________

About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

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For instance, in many communities the water company is actually a governmental agency. Don’t pay your water bill and there can be a lien against the property, Don’t pay the lien and the property can be foreclosed. Think about it the next time you take a shower….

And then, of course, we have property taxes. Fail to pay your property taxes and your house can be sold at auction to pay the debt.

Foreclosure Taxes

Taxes take precedence over any other claims. This is the reason why lenders want to escrow money each month from those who buy with less than 20 percent down. Lenders absolutely want to assure that property taxes are paid because otherwise their security for the loan — the house — could be at risk.

The deal with property insurance is a little different. Don’t pay your property insurance and you will be in violation of your mortgage agreement. Break your mortgage agreement and…you guessed it, you can be foreclosed.

Lenders also escrow money to pay property insurance premiums for those who purchase with less than 20 percent down. Again the reason is to protect the lender’s security. The lender does not want the house to burn down if only because the security for the loan will then have a reduced value.

I used to think that borrowers were better off paying their own taxes and insurance so they could control the money and perhaps get some interest, but now I prefer to have the lender collect the money each month as part of the mortgage payment. Why? Property taxes have turned into huge bills and it’s easier from a budgeting perspective to pay a little each month rather than a huge amount when taxes are due.

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Since the program began in 1934 the government has insured more than 37 million mortgages under Federal Housing Administration (FHA). Today you can get 30-year and 15-year loans insured under the FHA program. These loans can be fixed-rate or adjustable. In addition, the FHA also insures reverse mortgages.

The FHA does not insure all loans. Instead it only insures mortgages which meet its standards. If it’s an FHA mortgage you can be certain that the loan features little down (3.5 percent plus closing costs), forbids prepayment penalties and does not contain those infamous “gotcha” clauses found in toxic mortgages.

Insurance Premiums

FHA interest rates are established in the marketplace and not by federal regulation. The government guarantees the loan’s repayment to a lender, an incentive that greatly benefits borrowers because lenders will finance a home with little down if a borrower is backed by FHA insurance.

To obtain an FHA-insured loan under what is generally known as the FHA 203(b) program, one must pay FHA insurance. At this time, the upfront insurance fee is generally equal to 1.00 percent of the amount borrowed PLUS an annual fee equal to 1.15 percent of the loan amount for those who buy with less than 5 percent down.

In other words, if you borrow $150,000 there’s an upfront FHA mortgage insurance premium (known as an MIP) of $1,500. This fee can be financed with the mortgage, meaning you do not have to pay it in cash at closing. Instead, the upfront MIP is added to the loan amount.

In addition to the upfront MIP there’s also an annual MIP equal to .115 percent of the remaining mortgage balance. If you owe $150,000 then the monthly fee will be equal to $150,000 x .115 divided by 12 or $143.75. Since the loan balance falls a little with each mortgage payment, so does the monthly MIP cost.

Canceling FHA Mortgage Insurance

Generally the FHA MIP is automatically canceled after 15 years or if the loan-to-value (LTV) ratio of the mortgage falls to 78 percent of the original debt. The MIP cannot be canceled in less than five years.

FHA Refunds

When the FHA was first established it was designed to be a mutual insurance program. This means that borrowers — the equivalent of policyholders in a private mutual insurance company — would benefit when the program made a profit. In the case of the FHA, the way this was done was to pay borrowers a refund after their loan was paid off (perhaps when the home was sold).

The FHA’s First 25 Years

Unfortunately, the FHA refund program was ended with loans originated after December 8, 2004. The government now pockets any profit from the program.

If you have a loan originated prior to December 8, 2004 you can see if you qualify for a refund WITHOUT any cost or charge by going to the FHA refund page. You’ll need your loan case number to use the system. This should be available on your closing papers from settlement.

FHA Loan Limits

Historically the amount you can borrow with FHA financing has been less than the amount available with a conventional loan. At the end of 2008, however, the system was changed. Now there are at least three sets of FHA loan limits — a basic loan limit, a loan limit for “high cost” areas in the continental U.S. and a third loan limit for properties in Alaska, Hawaii, Guam and the Virgin Islands.

There are different FHA loan limits for single-family, duplex, triplex or four-unit properties. The loan limit increases with the number of units.

Under the FHA program you can buy a property with up to four units, but you MUST live in one of the units to qualify for financing. Pure investment financing under the FHA program is currently prohibited.

To make matters more complicated the FHA loan limit can differ even within a state. This happens because the limit is based on the county where you live. Also, the FHA loan limits can change, typically at the end of the year.

It sounds complicated but actually the system is fairly straight-forward. Just check the latest FHA loan limits and look at the chart for your county.

Reverse Mortgages

The FHA insures most reverse mortgages originated in the US. Because the reverse mortgage program has had recent losses, borrowers should see if the program is available and how much cash can be raised from financing your home. Be certain to get independent advice from an attorney who specializes in “elder law” or a fee-only financial adviser BEFORE signing up for any reverse mortgage program.

Be aware that the FHA reverse loan limit is different than the limit for properties under the 203(b) program.

Buy & Repair Loans

In addition to the 203(b) program, the FHA also has a 203(k) plan for residential purchasers (but not for investors). Under 203(k) you can get financing to buy a home and to also make repairs and improvements. This program has a number of standards and requirements which differ from the 203(b) plan so speak with lenders for specifics.

How Much Can You Borrow?

Lenders qualify borrowers in part on the basis of their income. In general terms, under the FHA program no more than 31 percent of your gross (pre-tax) monthly income can be used for housing costs such as mortgage principal, mortgage interest, property taxes and property insurance (PITI). As much as 43 percent of your income can be used for PITI plus recurring bills such as credit card payments, auto loans, etc. These numbers are sometimes expressed as 31/43.

Let’s imagine that you have two household members with a combined income of $90,000 annually or $7,500 per month before taxes. Under general FHA rules, the buyers would be allowed to spend as much as $2,325 on housing costs (PITI) and as much as $3,225 for all regular monthly debt.

Higher ratios are available with energy efficient FHA loans (33/45) and under the government’s HAMP mortgage modification program (31/55).

Streamline Refiancing

Under new streamline refinancing rules established in November 2009, HUD will refinance FHA loans under the following basic conditions:

• The borrower has made the last six payments in full and on time.
• For mortgages with less than a 12 month payment history, the borrower must have made all mortgage payments within the month due.
• For mortgages outstanding more than a year, the borrower is allowed no more than one 30-day late payment in the preceding 12 months and has made all mortgage payments within the month due for the three months prior to the date of loan application.
• The refinancing must result in a reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens) or allow the borrower to move from an adjustable rate mortgage (ARM) to a fixed rate mortgage or reduce the loan term. In other words, there must be a net tangible benefit.
• If subordinate financing such as a second mortgage or home equity loan remains in place, the maximum combined loan-to-value (CLYV) ratio is 125 percent. For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property. For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.

As always, speak with lenders for specifics.

Shop Around

Most residential borrowers will be insured under what’s known as the FHA 203(b) plan. Every FHA 203(b) loan has the same terms (length, no prepayment penalty, etc.) as every other FHA 203(b) loan. What may not be the same is the cost: Different lenders can and will change different combinations of interest and points so it pays to shop around and compare rates. One of the best ways to compare loan offers is to ask lenders to provide a quote with “par” interest — the rate with zero points.

How To Apply

In recent years the loan application process has been greatly simplified, however proper information from borrowers is still required. The FHA — to its credit — demands fully-documented loan applications. This may sound intimidating, however it’s not a big deal. Just take these steps:

• At least three months BEFORE you finance or refinance real estate get a copy of your credit report. The reason to do this is to check and see if there’s any information on your credit report which is factually incorrect or out-of-date (most negative items can stay on a credit report for seven years, 10 years for a bankruptcy). You can get a free credit report with no strings attached by going to AnnualCreditReport.com.
• Get your paperwork in order. Have in hand your last three pay stubs, your last three tax returns, and statements for all savings and checking account, mutual funds, retirement accounts, credit cards, student loans, car loans, etc. Make a file and stick the paperwork in it. You want to show ALL income and you must show ALL debts. When in doubt add it to the file.
• Ask some questions: Do you expect to receive “bonus” income now or in the future? Do you expect to receive “overtime” income now or in the future Will “other” income in addition to your salary continue at current levels? If you own your home and use it as a prime residence, what’s the estimated fair market value? What’s the value of all financing now secured by your current home if you’re refinancing?

Seller Contributions

Because it’s tough to sell home these days in many markets, some owners are willing to pay some or even all buyer closing costs. FHA rules allow so-called “seller contributions” of as much as 6 percent of the purchase price at this writing to help offset closing costs, depending on the amount you put down. A seller contribution may be used to offset various closing costs however you must always provide your downpayment in cash. Speak with your real estate broker and FHA lender for specifics because HUD wants to limit seller contributions to 3 percent.

Gifts

Gifts are allowed under the FHA program and gifts may be used to cover some or all of the downpayment. A “gift letter” from the donor will be required. This is a letter which says the money given is really a gift and that no repayment or interest will be sought. Speak with lenders for specifics.

Important Points

___ You do NOT need a co-borrower to apply for a mortgage. However, the additional income represented by a co-borrower may allow you to obtain a bigger mortgage.

___ If you own rental property, lenders will generally add back the depreciation deducted each year on “improvements” such as a house, but not stoves, clothes washers, etc.

___ You are NOT required to disclose the receipt of alimony, child support payments or separate maintenance to a lender. However, disclosure of the additional income represented by such payments may allow you to borrow a larger amount.

___ In addition to the minimum down payment, you may and are likely to have other closing costs as well. Such additional costs can include prepaid expenses, points, mortgage insurance premiums paid in cash, non-realty expenses, taxes, title insurance, transfer fees, settlement charges and miscellaneous costs. Always obtain a Good Faith Estimate from any lender who offers you financing. This government-mandated form outlines the loan-related costs you will be required to pay at closing.

FHA Mortgage Basics is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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