Many FHA loan program changes were included with the Housing and Economic Recovery Act that was passed in July. The big announcement was dropping the seller funded downpayment assistance, which has impacted the home sales market significantly and adversely.
Another change was in the calculation of FHA loan to value for purchases and refinances. The maximum LTV was increased to 100%, to include the FHA upfront mortgage insurance premium. The tiered mortgage insurance premiums were changed to a set premium of 1.75%.
The new 100% LTV maximum had no impact on purchases, because the minimum down payment had been separately increased to 3.5% from the time tested minimum buyer investment of 3%. The impact of the purchase increase is more significant than a mere .5% increase because prior to January 2009 FHA had allowed some of the required investment to be applied toward buyer closing costs. This meant that for buyers paying at least a portion of their own closing costs their down payment could be as low as 2.25%.
The new guidelines require a full 3.5% down payment, plus closing costs.
The imaginary new 100% maximum LTV therefore did not at all apply to purchase loans. With the 3.5% down payment now required, the maximum LTV is 98.25%, including the 1.75% up front mortgage insurance premium.
The new 100% LTV guidelines however did appear to provide for increased loan amounts for refinance loans. I had even hoped that cashout refinances might be included with these new guidelines. At 100% LTV, less 1.75% up front mortgage insurance, a refinance loan would allow an LTV of 98.25%. This LTV would be an increase, and a significant increase for cashout refinances which had been limited to 95%.
The new mortgagee letter, dated December 15, provides clarification. There is no real change to increase LTV's for refinances. Rate term refinances remain at 97.75% and cashout refinances remain at 95%.
Where is the significance of the 100% LTV?
I guess it allows FHA to increase the upfront mortgage insurance at a later date and still keep the effective base LTV's to remain at 97.75% for a rate term refinance and at 95% for a cashout refinance. And my guess is that there are real plans to increase the upfront premiums when the 1 year moratorium expires next October.
This post may be a little technical. I apologize for that. I am just getting out some the frustration that has been building over the last two months. It seems to me that the regulators are doing all they can to restrict home lending.
Additional changes to refinance programs announced in the recent mortgagee letter include dropping the FHA Secure program and requiring two appraisals for cashout refinances over 85% LTV. FHA Secure was a terribly ineffective help for struggling home owners, but at least it was something. Now it is gone.
The good news is that we still have money left to bailout banks.
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