New FHA Streamline Guidelines Spring 2011FHA Streamline Refinance guidelines are changing. For the better.

In an effort to improve its loan portfolio, the FHA is loosening approval standards on its popular refinance program, rendering large groups of homeowners suddenly FHA Streamline-eligible.

Now, that may seem counter-intuitive — lowering qualification standards in order to reduce loan defaults — but in the FHA’s case, it makes complete sense. It’s because the FHA doesn’t make loans. It insures them. What’s good for FHA-insured homeowners is good for the FHA, therefore.

All things equal, lower housing payments for its insured homeowners should correlate to fewer FHA loan defaults in Arizona and   nationwide.

One interesting facet of the FHA’s new rulebook is the manner in which the government group is applying common sense to the approval process. So long as the homeowner is current on their mortgage and there’s a demonstrable benefit in the refinance, the FHA reasons, there’s good reason to insure the new loan.

The FHA defines “current on the mortgage” as being up-to-date on payments, and having zero 30-, 60-, or 90-day lates within the last 12 months. Demonstrating benefit is a little more tricky.

According the FHA, “benefit” is defined by refinance type.

When refinancing any fixed rate mortgage, or an existing ARM to a new ARM, the borrower’s new monthly (principal + interest) + (mortgage insurance premium) must be 5% or more below the current levels to meet the FHA’s minimum benefit requirements

The refinance of any ARM to a fixed rate mortgage is considered an acceptable benefit.

Beyond that, Streamline Refinance guidelines are simple:

  • Income is not verified, or required
  • Employment is not verified, or required
  • Assets are not verified, unless required to meet closing costs

Note that an appraisal is not required, either This allows “underwater” homeowners to refinance their FHA-insured home loan without penalty. The downside is that without an appraisal, the new loan size may not exceed the current principal balance plus the FHA’s 1% upfront mortgage premium. All other charges must be paid as cash at closing.

The FHA Streamline program is a refinance program special to FHA-insured homeowners. To confirm your own eligibility, check with your lender.

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LLPA rising April 1 2011Beginning April 1, 2011, Fannie Mae is increasing its loan-level pricing adjustments. Conforming mortgage applicants in Arizona should plan for higher loan costs in the months ahead.

If you’ve never heard of loan-level pricing adjustments, you’re not alone; they’re an obscure mortgage pricing metric and, thus, are rarely covered by the media. That doesn’t make them any less relevant, however.

LLPAs are mandatory closing costs assessed by Fannie Mae and Freddie Mac, designed to offset a given loan’s risk of default. LLPAs were first introduced in April 2009.

This April’s amendment is the 6th increase in 2 years. LLPAs can be costly.

In addition to an up-front, quarter-percent fee applied to all loans, there are 5 additional “risk categories” in the LLPA equation:

  1. Credit Score : Lower FICO scores trigger additional costs
  2. Property Type : Multi-unit homes trigger additional costs
  3. Occupancy : Investment properties trigger additional costs
  4. Structure : Loans with subordinate financing may trigger additional costs
  5. Equity : Loans with less than 25% equity trigger additional costs

Adjustments range from 0.25 points (for having a 735 FICO score) to 3.000 points (for buying an investment property with just 20% downpayment). And they’re cumulative. This means that a borrower that triggers 3 categories of risk must pay the costs associated with all 3 traits.

Loan-level pricing adjustments can be expensive — up to 5 percent or more of your loan size in closing costs. The fees can be paid a one-time cash payment at closing, or they can be paid in the form of a higher mortgage rate.

The loan-level pricing adjustment schedule is public. You can research your own loan scenario at the Fannie Mae website, but you may find the charts confusing.

Phone or email your loan officer if you’re unsure of what you’re reading.

Taxes due April 18 2011

April 15 is the traditional due date for federal income taxes. It’s a deadline so ingrained in the American psyche that the April 15 calendar date is often called, simply, “Tax Day”.

In 2011, however, federal taxes aren’t due April 15. They’re due April 18. It’s because of a combination of holiday, calendars, and tax law.

The change centers on Emancipation Day.

Emancipation Day is a public celebration in the District of Columbia. Named a holiday in 2005, Emancipation Day honors President Abraham Lincoln’s April 16, 1862 signing of the Compensation Emancipation Act.  

Emancipation Day is a non-working day in the nation’s capitol but, this year, Emancipation Day falls on a Saturday. The municipality will observe the holiday Friday instead. This means that all of Washington, D.C. will be “closed” Friday, April 15 — the usual tax filing deadline date.

This includes the IRS.

Therefore, to accommodate Emancipation Day, the government is extending this year’s federal tax filing deadline to April 18, 2011. This year marks the second time Emancipation Day has forced the change of federal tax filing deadlines.

Also, as a non-related coincidence, tax filers in Arizona taking extensions to October 15 will also get a few extra days. October 15 is a Saturday so the extended tax deadline rolls over to the following Monday — October 17, 2011.

Home Opportunity Index 2004-2010

Home affordability reached an all-time high in 2010’s last quarter. Unfortunately for home buyers in California , it’s been a different story since, however.

As mortgage rates cratered, and with home values soft, the Home Opportunity Index reached its highest level in 20 years. The index is published by the National Association of Home Builders. 

Close to 74 percent of the new and existing homes sold between October-December 2010 were affordable to families earning the national median income of $64,400. It’s the 8th straight quarter in which the Home Affordability Index surpassed 70 percent.

Prior to 2009, the HOI rarely topped 65 percent.

That said, though, as with everything in real estate, home affordability is a local event. For example, take the Elkhart/Goshen area of northern Indiana. 97 percent of homes sold there last quarter were affordable to families making the area’s median income. 

This level of affordability is likely related to state capital Indianapolis, a perennial top-scorer itself.

For the second straight quarter — and the 22nd time dating back to 2006 — Indianapolis led all major metropolitan areas with a 93.5 affordability rating.

Meanwhile, on the opposite end of the home affordability spectrum, the “Least Affordable Major City” title went to the New York-White Plains, NY-Wayne, NJ area for the 11th consecutive quarter. Just 25.5 percent of homes were affordable to households earning the area median income.

It’s a a 6-point improvement from Q2 2010, however.

The rankings for all 225 metro areas are viewable on the NAHB website but regardless of where you live, it’s important to remember that rising mortgage rates this year have made homes less affordable in all markets across the United States. We won’t see a repeat record in this quarter’s HOI once it’s calculated and published.

Home buyers in Scottsdale have lost 10% of their purchasing power since November, and mortgage rates look poised to rise even more.

If your plans call for buying a home later this year, consider moving up your time frame. The long-term costs of homeownership are rising, and affordability, therefore, is falling.

Tax credit extended for military householdsFor certain members of the military, and for certain federal employees, there’s just 2 months remaining to get use the federal home buyer tax credit.

Eligible persons include members of the uniformed services, members of the Foreign Service, and intelligence community employees who served at least 90 days of qualified, extended duty service outside of the United States between January 1, 2009 and April 30, 2010.

Spouses of persons meeting the above criteria are eligible as well.

The federal home buyer tax credit ranges up to $8,000 for first-time home buyers, and up to $6,500 for existing homeowners. Existing homeowners must have lived in their “main home” through 5 of the last 8 years to be eligible.

Claiming the federal tax credit is a two-step process. First, eligible persons must be under contract for a new home on or before April 30, 2011.  The home’s closing must then occur on or before June 30, 2011. 

The IRS does not make date exceptions.

Furthermore, both the buyer(s) and the subject property must meet certain minimum eligibility requirements:

  • The home may not be purchased from a parent, spouse, or child
  • The home may not be purchased from an entity in which the seller is a majority owner
  • The home may not be acquired by gift or inheritance
  • Each buyer must meet tax credit eligibility standards
  • The home sale price may not exceed $800,000
  • Buyers may not earn more than $125,000 as single-filers; $225,000 as joint-filers

The complete program description is published on the IRS website.

Another important note is that the IRS is giving eligible buyers a tax credit as opposed to a deduction.  This means that a taxpayer qualifying for the full $8,000, and for whom the “normal” 2011 federal tax liability is $8,000, will have zero federal tax liability in 2011.

For additional information regarding your tax credit eligibility, call an accountant. Speaking with a tax professional is often worth the cost.

FHA Mortgage Insurance Increase April 18 2011For the third time in 12 months, the FHA is changing its mortgage insurance costs. 

Effective for all FHA case numbers assigned on, or after, April 18, 2011, annual mortgage insurance premiums (MIP) will increase 25 basis points.

The change will add $250 to an FHA-insured homeowner’s annual loan costs per $100,000 borrowed, and applies to all borrower’s equally. Current FHA borrowers are unaffected.

To understand the FHA is to understand why premiums are rising.

As an institution, the Federal Housing Administration plays a much larger role in the U.S. housing market today than it did just 5 years ago. According to its own records, the FHA’s percentage of purchase money business in Arizona and nationwide expanded from 4 percent in FY 2006 to 19 percent in FY 2010.

Rapid growth like this has strained the FHA’s capital and, indeed, in its official statement, the FHA alludes to this, stating that the MIP increase will “significantly strengthen” its reserves. By law, the FHA must maintain a certain minimum level of reserves.

FHA mortgage insurance varies by loan term, and by loan-to-value and, beginning April 18, 2011, the new insurance premiums are as follows:

  • 15-year loan term, loan-to-value > 90% : 0.50% per year
  • 15-year loan term, loan-to-value <= 90% : 0.25% per year
  • 30-year loan term, loan-to-value > 95% : 1.15% per year
  • 30-year loan term, loan-to-value <= 95% : 1.10% per year

To calculate your monthly mortgage insurance premium, multiply your starting loan size by your insurance premium, and divide by 12. 

There is no change planned to the 1 percent upfront mortgage insurance premium charged by the FHA.

Unemployment Rate 2008-2011Mortgage rates could move higher beginning tomorrow morning. The Bureau of Labor Statistics releases its February jobs report at 8:30 AM ET.

Home buyers and rate shoppers in Phoenix would be wise to take note. The jobs report is almost always a market-mover.

Consider last month.

Although net job creation fell well-short of expectations in January — just 36,000 jobs were added — the national Unemployment Rate dropped to 9.0%, its lowest level in 2 years. The marked improvement surprised economists and sparked inflationary concerns within the investor community.

This, in turn, caused mortgage rates to rise.

In the days immediately following the jobs report’s release, conforming rates across Arizona jumped 0.375 percent. That’s equivalent to a mortgage payment increase of $22 per month per $100,000 borrowed.

A similar spike could occur tomorrow.

Wall Street scrutinizes job growth because with more working Americans, there’s more consumer spending, and consumer spending accounts for 70% of the U.S. economy. A blow-out number tomorrow would change expectations for the future, and lead rates higher again.

The economy shed 7 million jobs between 2008 and 2009 and has barely made 1 million of them back. Tomorrow, analysts expect to see 183,000 jobs created. If the actual reading is lower-than-expected, mortgage rates should fall and home affordability will improve.

Anything else and mortgage rates should rise. Likely by a lot.

Therefore, if you’re shopping for a mortgage right now, consider your risk tolerance. Once markets open tomorrow, you can’t get today’s rates.