Loan Modification

Few Changes For FHA Mortgages

By Peter G. Miller

There have been worries that the FHA mortgage program will be changed to include a steeper down-payment and a higher annual MIP. The way the world is going such changes would be minor compared to what’s going on with other loan concepts.

Remember the interest-only loan? Something not offered by the FHA for the obvious reason that such financing is risky for all but the best-qualified borrowers.

Now Fannie Mae has come out with new standards for interest-only mortgages. It says the company “will continue to make available an interest-only loan product, but will change its qualification criteria. The maximum loan-to-value ratio cannot exceed 70 percent, the borrower’s credit score must be 720 or higher and the borrower must have a minimum of 24 months of liquid asset reserves remaining after loan closing. Balloon mortgages, which typically offer lower initial interest rates but leave a significant balance due at maturity, will no longer be eligible, except with special approval.”

Translation: Fannie Mae wants to see 30 percent down for interest-only financing PLUS reserves for two years PLUS a 720 credit score. Do you see a lot of borrowers lining up for such loans? Do you think Freddie Mac will not soon adopt similar standards?

“Our goal is to make sure consumers can sustain their mortgages and remain in their homes over the long term, while helping our lender partners offer a range of mortgage products for qualified borrowers,” said Marianne Sullivan, Senior Vice President of Single Family Credit Policy and Risk Management at Fannie Mae. “These policy changes reflect our intention to continue providing liquidity to different market segments by ensuring that support for ARM products remains in appropriate circumstances.”

ARM

As to ARMs in general Fannie Mae says “For ARMs with initial periods of 5 years or less, Fannie Mae will require that borrowers be qualified at the greater of the note rate plus 2 percent or the fully indexed rate (index plus margin).”

The question that ought to be asked is this: Where was such thinking a few years ago?

If you were a buyer who met FHA loan guidelines you could get an option ARM or an interest-only loan a few years ago. You could borrow more with such programs — but then what? FHA loans have no prepayment premiums. FHA loans have no negative amortization, except for FHA graduated payment mortgages (GPMs under Section 245(a) have scheduled negative amortization for a few years but the loan is still a self-amortizing mortgage over its term).

Given what’s been happening in the world of mortgages and finance the changes seen during the past year or so with the FHA program are minor. Don’t believe it? Just go out and speak to lenders about an interest-only mortgage.

Full post as published by FHA Mortgage Guide on May 12, 2010 (boomark / email).