Until recently FHA mortgage loans have been slipping into obscurity. Congress has even been talking about doing away with the FHA program; however, the recent meltdown of the sub-prime (bad credit) mortgage industry has brought FHA insured mortgage loans back into the spotlight. President Bush has proposed expanding the FHA program this year (FHASecure) to assist homeowners that are struggling with Adjustable Rate Mortgages they cannot afford. If you are considering refinancing your home with an FHA insured mortgage loan here are several tips to help you decide if this type of mortgage is right for you.
FHA mortgage loans are insured by the Federal Housing Administration. The FHA does not lend money; they simply insure your debt. If you qualify for an FHA mortgage your loan will be funded by a conventional mortgage lender. Because your mortgage is insured against default by the government, FHA loans offer significantly less risk for lenders, allowing homeowners, even those with poor credit to qualify for lower mortgage rates.
FHA Mortgage Guidelines
The FHA will accept homeowners with blemished credit… especially if you are working on improving your finances and can document your current situation. There are limits to the amount you can borrow which vary by region of the country but will not exceed the conforming loan limit. In 2007 this conforming loan limit is $417,000. The FHA will not insure interest-only or option Adjustable Rate Mortgages…and probably never will.
If you are a homeowner with tarnished credit and are concerned that the current “mortgage crisis” will prevent you from refinancing before your lender begins adjusting your interest rate and payment amount, FHA backed mortgage refinancing could be your answer.
How is The FHA Program Expanding?
President Bush announced that the FHA program will be expanded to help nearly 250,000 families refinance their mortgages. This program, called “FHASecure” is geared specifically to homeowners that have kept their existing mortgage payments current and have fair or better credit histories. The Federal Housing Administration will also begin risk-based premiums where homeowners with poor credit will pay more for the insurance and these new FHA rules start January 2008.
FHA loans had become increasingly less popular due to the abundance of sub-prime financing available to homeowners with poor credit. The recent implosion of the sub-prime mortgage industry has left many homeowners with poor credit histories unable to qualify for mortgage refinancing. This has created a strong demand for FHA backed mortgage loans.
FHASecure mortgage refinancing will fall under the same rules as the current FHA mortgage program. Homeowners looking to refinance their mortgages under FHASecure will have to meet the program requirements and pay mortgage insurance premiums. These premiums reduce the risk incurred by the Federal Housing Administration when guaranteeing loans made to homeowners with poor credit.
Charging homeowners with poor credit higher premiums on their mortgage insurance will allow the FHA to insure homeowners that would not otherwise qualify due to adverse credit histories. These loans will require that taxes and insurance be paid in escrow to further reduce the risk of foreclosure. Pre-payment penalties or teaser rates are not allowed with FHA backed mortgage loans; however, you still have to worry about Yield Spread Premium…more on this later.
The basic criteria for qualifying for an FHASecure loan is that you must have a history of making your monthly mortgage payment on-time before your loan reset or is scheduled to reset. Your loan must have reset or be scheduled to between June of 2005 and December 2009. You must also be employed, be able to demonstrate a history of employment and have the income necessary to keep your mortgage payments current.
The FHASecure program is intended to help homeowners that may have been tricked into expensive Adjustable Rate Mortgages with teaser interest rates. The agency hopes that the program will bring stability to the mortgage market offsetting the current crisis that threatens to drag the US economy into a recession.
Buyer Beware Still Applies
Many people think that because they qualify for FHA mortgage insurance they don’t have to worry about lenders taking advantage of them. Unfortunately this is simply not true… FHA mortgages are originated like any other loan and are subject to the abuse of Yield Spread Premium. If you’re not already familiar with Yield Spread Premium this is the unnecessary markup your broker adds to your mortgage interest rate to receive a commission from the lender. This markup is frequently added without the borrower’s knowledge or consent.
When you refinance your mortgage with a conventional mortgage loan or one insured by the FHA you will need to find a broker willing to work for a reasonable origination fee without charging you Yield Spread Premium. Negotiating on this simple point could save you hundreds of dollars every month in unnecessary mortgage interest. If you’d like to learn more advice about refinancing with an FHA insured mortgage loan without paying too much, register for this free mortgage refinancing blueprint.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
