Mortgage Loan Underwriting: Research Demonstrates That “Sound Underwriting And Dcoumentation”, Not Higher Down Payments, Is Key To Lower Foreclosure Rates

4 08 2011

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FHA Loans Will Continue To Offer Higher Debt-To-Income Ratios, More Flexible Underwriting, Lower Down Payments And FICO Scores As Private Mortgage Insurance (PMI) Seeks Higher Income Borrowers With Credit Scores Over 720

23 04 2011


  • FHA continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments, and will accept FICO scores that conventional lenders and private insurers won’t touch
  • The FHA put its second premium increase in six months into effect Monday
  • Private mortgage insurance (PMI) now offers significant monthly savings when compared with the FHA
  • The Obama Administration is pushing for greater private-sector involvement in the mortgage arena
  • First-time homebuyers are now needing larger cash resources or higher credit scores to qualify for loans
  • Some analysts are forecasting a 5 percent minimum down payment, up from the current 3.5 percent
  • FHA’s maximum loan amounts might also drop significantly this October if Congress does not renew the $729,750 “high-cost area” limit
  • Radian Guaranty, a major Private Mortgage Insurer, claims a 15 percent savings over FHA for borrowers with FICO credit scores above 720
  • A FICO score above 720 with a $285,000, 30-year loan with 5 percent down at a 5 percent interest rate would have an FHA mortgage costing $1,806 in principal and interest per month as compared with a Radian loan with $1,530 a month to $1,753, depending on the type of premium payment plan you choose
  • The lower cost PMI choice would have upfront cash payment of the insurance premium while the higher-cost alternative would involve standard monthly payments of the premium
  • PMI will be cheaper than FHA when the buyer puts down 5 percent and has a FICO score of 720 or higher or puts down 10 percent and has at least a 680 FICO score
  • The majority of FHA buyers can’t fit into the private insurers’ high-FICO, strict underwriting model

FHA Mortgage Underwriting: Analysis Of FHA Loan Servicing Records Finds That Requiring Larger Down Payments Does Not Correlate With Fewer Defaults; High LTV’s With Higher FICO Scores Are Best Performing Loans

20 04 2011


  • FHA uses both downpayment and FICO scores to allocate credit assistance
  • Downpayment and FICO scores when used together are a much better predictor of loan performance than just one of those components alone
  • FHA insured loans with LTV above 95% and a FICO score above 580 perform better than loans with LTV below 95% and a FICO score below 580
  • FHA loans with an LTV above 95% and a FICO score below 580 perform significantly worse than all other groups

FHA Single Family Insured Loan Claim Rates
Relative Experience by Loan-to-Value and Credit Score Values1

Ratios of Each Combination’s Claim Rate
to that of the Lowest Risk Cell2


Credit Score Ranges3





Up to 90%





90.1 – 95%





Above 95%






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Congress Holds Hearings Critical Of “Qualified Residential Mortgage” (QRM) Requirement Of 20% Down Payment Rule; 10% Down Payment With Other Safeguards Might Be Approved

15 04 2011


  • Federal regulators were criticized for overstepping their authority and ignoring the intent of Congress in proposing the “20% down” rule
  • Banks that package mortgages and other assets would be required to hold 5% of the credit risk on their balance sheets
  • Rep. Scott Garrett (R., N.J.) said regulators should NOT exempt Fannie Mae and Freddie Mac from rules
  • The risk-retention rules will contain several exemptions for mortgages
  • Consumer groups and lenders complain that 20% down payment exemption is too strict
  • Loan-To-Value (LTV) ratios above 80% and with other safeguards will allow QRM definition to produce higher qualify loans
  • A 10% down requirement, allowing for mortgage insurance, lower debt ratios, and other safeguards are being considered

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Lower Down Payment Mortgage Programs Face Uncertainty With “20% Down Rule” Proposed By Regulators As Obama Administration Looks To Phase-Out Fannie Mae And Freddie Mac And Shrink FHA; Senators Object To New Rule

12 04 2011


  • Legislation enacted last year required banks that pool mortgages and sell them as securities to retain at least a 5 percent
  • The banks were to have some “skin in the game” instead of selling off the loans and hence avoiding losses should the loans go bad
  • A group of senators, led by Sens. Johnny Isakson (R-Ga.), Mary Landrieu (D-La.) and Kay Hagan (D-N.C.), successfully pushed to carve out exceptions for certain types of relatively safe mortgages
  • Regulators were to determine which loans should be exempt
  • Proposals that regulators unveiled last month surprised these lawmakers
  • Under the plan, mortgages with a 20 percent down payment were deemed safe
  • Loans with smaller down payments would become more expensive to borrowers in the form of higher interest rates and fees
  • But lawmakers debated but intentionally rejected imposing a minimum down payment requirement for fear of locking millions of creditworthy borrowers out of the housing market
  • Congress instructed the regulators to consider other factors such as a borrower’s debt, his or her ability to repay the loan, and the features of the loan itself when deciding which loans to exclude from the risk-retention provision
  • The 20-percent-down issue proposed by regulators strayed from the intent of the law said Sen. Hagan
  • Private mortgage insurance is required if borrowers put down less than 20 percent
  • The senators said loans with that kind of insurance result in lower losses for lenders and fewer foreclosures than similar loans that lack insurance
  • “I was definitely surprised and disappointed,” said Hagan, who passed the message along to Treasury Department officials in a recent meeting
  • Last year, six out of 10 borrowers in the United States put less than 20 percent down, according to LPS Applied Analytics
  • The agencies will be collecting public comment on the proposal through June
  • Low-down-payment loans would still be available without the higher rates and fees through Fannie Mae, Freddie Mac and FHA
  • But the Obama administration has said it wants to eliminate Fannie and Freddie eventually and to shrink the FHA’s role

For more:

FHA Underwriting Guidelines: A Homebuyer’s “Liquid Assets” Are Evaluated By “Desktop Underwriter” (DU) Decisions Which Count Verified Gift Funds Toward Funds To Close And Excess Gift Funds As Reserves; Certain Types Of “Cash-On-Hand” Are Acceptable Source Of Funds

7 04 2011



Home Remodels Without Much Equity?: FHA 203K Renovation Financing Allows Homeowners To Finance Most Improvements Using Up To 110% Of The “As-Repaired” Appraised Value For The Maximum 96.5% LTV Loan Amount

25 03 2011


  • The Federal Housing Finance Agency (FHFA) reports that homeowners lost more than half their equity from 2006  to 2009
  • At that point the economic recession ended but home prices have continued to fall
  • Finding a lender to make a loan is difficult although not as hard as 12 months ago
  • Second mortgages all but extinct

THERE IS STILL ONE OPTION: The Federal Housing Administration FHA 203(k) Renovation Mortgage

  • The FHA 203k is not just for buyers who want to purchase distressed properties as it allows them to roll the price of the house and renovations into a single loan
  • Buyers of “non-distressed” homes can use the 203(k) if they want to do some work on their dream houses before moving in
  • Current homeowners can use it to refinance and roll the costs of their home improvements into a new first mortgage at today’s low rates
  • There is no limit on how much you can spend on your improvements as long as the total loan amount does not exceed the FHA maximum
  • FHA maximum loan amounts range from $271,050 to $729,750 in the country’s high-cost areas
  • The “as improved” appraised value of your property must be higher that the maximum loan amount
  • Almost ALL improvements are allowed except for luxury items
  • Cost must exceed $5,000 and the existing foundation must remain in place
  • The home can even be torn down!
  • Inspection fees, architectural fees, closing costs and permits can be included in the new loan amount
  • A $300,000 home can include a $100,000 remodel and the loan can be as high as $424,600
  • If the appraiser says your $100,000 project will add $125,000 in value, then  the loan amount can be $451,100
  • The maximum loan amount, subject county-specific maximum loan amounts,  is 96.5% of the improved value of the property
  • There is no requirement for the property to be “re-appraised” once the work is finished
  • The streamlined version of 203(k) is available for minor home improvements under $30,000