Mortgage Topics

In the last 12 months the credit crunch has tremendously affected conventional mortgage loans giving way to Federal Housing Administration (FHA) loans. Clients have been increasingly asking questions on how FHA loans can help them. Here are the 10 must know facts that will help you understand if this is the right option for you.

1. If you are purchasing a home, you are required to put a minimum of 3% down payment. However, starting January 1^st, 2008 you will be required to put down 3.5%.
2. You can refinance up to 95% of the value of your home.
3. Loan amounts are as follows:
      - High Cost Areas: $729,750 (the limit will be $625,500 starting January 1, 2009)
      - Other Areas: 125% of the area median home price (the limit will be 115% starting January 1, 2009)
4. Blemishes on credit scores are okay without your interest rates getting affected much. Your credit score can be as low as 580.
5. All down payment proceeds can be gift funds from parents, relatives or other source.
6. There are two types of mortgage insurance (MI) you are responsible for paying: upfront MI (at the time of purchase and included in your closing costs) which is 1.5% of the loan amount (it will go up to 1.75% starting October 1, 2008) and monthly MI (paid with your monthly mortgage payments) which is 0.5% of the loan amount paid in equal monthly installments (it will go up to 0.55% starting October 1, 2008). 
7. If you have filed for bankruptcy in the past, you will need to wait 2 years from discharge of Chapter 7 BK and 1 year for Chapter 13. If you have had a foreclosure in the past, you will need to wait for 3 years.
8. You will have to qualify with full documentation i.e., show your income, assets and employment details.
9. Property types include single family, 2-4 multi family as primary residence, town homes, condominiums (require HUD project approval). Investors can assume FHA loans on HUD REO properties.
10. Available FHA Programs include:
       - Fixed Rate Mortgages: 30 and 15 year
       - Adjustable Rate Mortgages: 1, 3, 5, 7 and 10 year (only fully amortized payment options)

We have not seen opportunities to purchase homes at these reduced prices in many years. I cannot underline the value of being qualified for a home mortgage in these times. An FHA loan might allow you to be in the driver’s seat to purchasing your dream home.

Mortgage rates are down more than 0.5% just this morning on news of the U.S. Government bailout of beleaguered mortgage giants, Fannie Mae and Freddie Mac.

ACTION STEPS
Homeowner:

• If you missed out on refinancing in January and April of 2008 when mortgage rates were lower, this is a golden opportunity to secure your mortgage into a low fixed rate loan. Rates on 30-year fixed mortgage had gone up to 6.875% this summer.

Homebuyer:

• If you are in the midst of purchasing a home, the timing couldn’t be better to secure a solid low rate.
• Keep in mind the deadline for lower conforming-jumbo loan limits. Conforming loan amounts will go down from the current $729,750 to $625,500 starting January 1, 2009.

BACKGROUND
Fannie and Freddie the two government sponsored entities have been leaking major cash since the advent of the credit crises 12 months ago. The two firms have reported $14 billion in losses over the past year. There was mounting concern over the companies rapidly shrinking capital and increasing nervousness that large holders of their debt, including overseas central banks, would pull their money by selling mortgage bonds issued by Fannie and Freddie. If the companies were allowed to fail, this could have a devastating effect on the economy, leading to higher interest rates in overall consumer finance and further deterioration of the financial and housing crises, as we reported in our June newsletter.

IMPACT OF THE US TREASURY’S ACTIONS ON THE MORTGAGE MARKETS
Large institutions and foreign governments (most notably Europe, China and Japan) that have huge stakes in the two firms through holding of mortgage backed securities (MBS) issued by them can breathe a sigh of relief on assurance from the U.S. Treasury that their investments will be safer. This action has also given investors a lot of confidence to step in and buy more mortgage bonds. For a higher rate of return, investors can now buy mortgage bonds with the same guarantee as lower yielding Treasury Bonds, propelling investors to move money into mortgage bonds this morning. As we have noted in our February and June 2008 newsletters, purchase of mortgage backed securities makes yields attractive and thus go higher, while mortgage rates that can be offered on these MBS go lower. That is exactly what we are experiencing today, a rally in MBS purchases on increased investor confidence leading to lower mortgage rates.