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Recent, more stringent rules for mortgages backed by the FHA  mean that borrowers will face higher monthly fees, larger down payments, and will require better credit scores. Perhaps the lower jumbo rates and higher borrowing standards are signaling a revision to the "American Dream" of homeownership that only the rich can afford.

But maybe that's good. Anything that's harder to obtain inherently has more value for most people. And, the economy as a whole will benefit when it's not built on a house of cards.

The mortgage phrase "cleared to close" just lost some of its meaning. 

Why?  Fannie Mae's "Loan Quality Initiative"

It's being called the Loan Quality Initiative. In an attempt to minimize "bad loans", Fannie Mae is asking lenders to take more responsibility for their files, then putting them on the hook if things go bad.

The Loan Quality Initiative is Fannie Mae's response to the foreclosure surge since 2007. The program shifts the onus of mortgage guideline compliance away from the the government-backed group and to the individual banks responsible for making loans.

The LQI scope is broad, taking 9 pages in summary.

For the most part, mortgage applicants won't be bothered with the changes. It's just extra work for the bank. Things like Social Security Number validation checks and borrower occupancy standards.

There is, however, one major consumer hurdle.

Beware The 11th-Hour Credit Score Repull

In the new LQI environment, Fannie Mae wants lenders to verify that an applicant's credit profile did not change while the loan was in underwriting.  If the profile did change and the lender happens to "miss" it, Fannie Mae might then refuse to buy the loan, burdening the bank with a loan (and possibly a loss).

Because of this added risk, it behooves banks to take each mortgage applicant's credit report in hand, and do a complete re-pull just prior to closing.

To make sure the loan is saleable to Fannie Mae, banks will look for evidence of any of the following events occurring while the loan was being underwritten:

• Did the applicant apply for new credit cards?
• Did the applicant run up existing cards?
• Did the applicant finance an automobile, or other major purchase?

If the more recent credit report reveals inconsistencies versus the original credit report, the mortgage is subject to a complete re-underwrite and a possible turndown.

Things An Underwriter Will Scrutinize--Right Up Until Closing

When banks re-pull credit just prior to closing, there are specific things for which an underwriter is looking, and specific actions the bank will take.

What you should do about it: Don't run up credit cards prior to closing -- even for layaway items. Consider paying more than the minimum due, just in case.

What the bank will do: Look at the Credit Inquiry section of your credit report to look for "non-disclosed liabilities". If items are found, the bank will ask for supporting documentation on the inquiry, and will use the information to re-underwrite your mortgage.

What you should do about it: Don't go looking for new credit until after your loan is funded.  Period.  Now re-read that first sentence, please, to help it sink it.

And remember -- this is all happening after your loan has reached "final approval" status.

Loan Approvals Are Tougher, But Not Impossible

The reason Fannie Mae has started its Loan Quality Initiative is to improve its loan pool's performance.  Better loan quality should help keep conforming mortgage rates down while reducing the taxpayer's burden for foreclosures.

Unfortunately, it's also going to lead to more mortgage denials and a lot of busted purchase closings.

Therefore, be extra careful with your credit between the date of application and the date of closing. If you must buy something "big", consider paying cash.  Anything that goes on a card can be used against you as grounds for revoking your approval.

Even if your loan is cleared-to-close.

For help with your mortgage approval, or questions about the Loan Quality Initiative,  always feel free to email me at davidrobnett@leader1.com, or call me directly at (314) 640-3300.  I am always here to answer your mortgage financing questions.

Lately, I’ve been getting a lot of questions about FHA Streamline Refinances, so I thought I’d post some of the key points about this program.

Unlike many of the new programs that have been rolled out by the government recently, FHA Streamline Refinances have been around for years and have helped hundreds of thousands of people refinance their loans and lower their payments with less costs, less documentation, and less headaches than other refinances.  I've personally helped hundreds of clients with FHA Streamline Refinances over the years. 

A FHA Streamline Refinance loan refers only to the amount of documentation and underwriting that is conducted on a loan file by the lender. At LeaderOne Financial, we offer FHA Streamlines at "no cost" (Where we, the lender, pay all of the normal closing costs rather than you, the borrower. However, it’s not a free lunch, as we, the lender, will charge a higher rate in order to pay these for you), or we may roll the closing costs into the new loan. However, we cannot allow you to increase your loan amount more than 1.5% from your previous original principal balance. 

Before deciding which option best fits your needs, it is important to weigh not only the upfront costs but also the long term impact that a higher rate or a higher mortgage payment will have for you. In general, the longer you plan on keeping the property, the more likely you will be better off paying your own closing costs, and possibly even paying “points” to buy down your mortgage rate even further.

FHA Streamline Refinance loans may be completed with or without and appraisal, and do not require credit underwriting. While HUD does not disqualify a borrower for prior late mortgage payments, the typical lender standard is that you must have current on your mortgage payments for the past 12 months. New individuals may be added to title on a streamline refinance without credit review. Deleting individuals from title on a streamline refinance may require qualification (certain exceptions may apply).

The following are basic requirements of an FHA streamlined refinance:

· The mortgage to be refinanced must already be FHA insured

· The mortgage to be refinanced should be current (not delinquent), and the last 12 payments must have been made on time.

· The refinance must lower the principal and interest payment of the previous mortgage payment

· The borrower may not receive cash from loan proceeds in excess of $500.

· Any subordinate financing may remain in place as long as it is subordinated on title.

· The term of the new mortgage must be the lesser of 30 years or the unexpired term of the mortgage plus 12 years. A borrower cannot refinance from a 15 year loan to a 30 year loan.

· An appraisal is not required.

· A termite report is not required

· The borrower cannot be late, delinquent, or in default of any federal debt.

For those that wish to consolidate their bills or get cash out for home improvement, that is not the purpose of an FHA Streamline Refinance. However, if you do have paid down your original principal balance, you may very well be able to free up a little cash at closing. Please feel free to contact me for more details on this.

For those that need a large amount of cash out, they should consider a FHA Cash Out Refinance, which can be for up to 85% of the appraised value of the property.

I thought I would write a weekend blog regarding closing costs.  We are heading into a refinance boom so many readers are going to be refinancing and many readers are going to ask, should I or should I not pay closing costs?  It does not matter what lender or what loan originator you use, when you refinance a home or purchase a home there are closing costs.  For example, your credit must be run so the lender can quote you the interest rate you qualify for.  When your credit is pulled, it costs money.  More than likely, you will have to have an appraisal done on your home, and it costs money.  A title company will handle your closing, and they expect to be paid for the service they provide.   You may see ads that state no costs or free refinance.   Some lenders, including myself, have done refinances where the client didn’t pay for the closing costs.  This is referred to as a no cost refinance.  There are costs, but what it actually means is someone else is paying the costs for you (or you can view it as you are paying the costs in return for taking a higher interest rate).  I will explain this below. 
 
Anybody you use to complete your refinance has to make money.  I feel most consumers know this and want their loan originator to make a living and there are 2 ways that we get paid.  You can pay us directly or the lender pays us in the form of yield spread premium when we sell your loan (or a combination of the two).   I get emails all the time saying I got whatever rate with no points.  Every time I see that I think, how much lower of a rate would you have received if you paid a point?  When we get a rate sheet from a lender, it has a range of rates not just one rate.  Lenders offer what is called a par interest rate which means at that rate the lender does not compensate the loan originator.  So, for the loan originator to make money and give their client the par interest rate, they must charge the client origination, points or a set fee.  The loan originator can also give their client a higher interest rate then par, and the lender compensates the loan originator with yield spread, since the loan originator placed the client into a loan with a higher interest rate which will allow the lender to make more money in interest over the life of the loan.  This method is how loan originators make money without charging points or a set fee.  So, for a consumer to get a par interest rate, that consumer must pay all the costs associated with the loan and they must compensate the loan originator for the work they do.  As a general rule, if you are planning on staying in your home for more then 3-4 years and since interest rates are at historic lows, it makes much more since for consumers to pay the closing costs and to pay the loan originator directly, so they can get the best rate.  Over time, the lower interest rate will offset the total costs
 
Now, let’s say a consumer is only planning on staying in their home for another year.  Would it really make sense for them to pay several thousand dollars in closing costs for a lower interest rate since they will only be in the home for a year?  No.  In a case like that, the consumer can elect to take a higher interest rate.  At a higher interest rate, the lender will pay closing costs for the client and still make their profit.  It’s not that the closing costs went away, it’s the closing costs were paid by the lender from the money they are paid by giving the client a higher rate of interest.  As another general rule, if you are planning on staying in your home for less then 3 years a no cost or low cost loan with a higher rate is a better option.  A low cost loan would be a loan where the client paid the costs but no points.
 
I do find quite often that the consumer cannot see the forest for the trees.  Everyone has heard that quote before and I feel it is very relevant to this blog.  Why should I pay $4000 in closing costs to get a lower rate?  Well, lets say you have a loan balance of $150,000 and a rate of 6%.  If you refinance, and lets say reduce the rate to 5% and it costs $4000, does it make sense to refinance?  Well, a 1% lower interest rate on this loan size will save the consumer about $100 per month.  If it costs $4000 and they are saving $100 per month, they recouped the closing costs in under 40 months.  If this consumer is keeping the home for longer then 40 months, it was a good move to pay the costs to get the lower rate. 

Some people might point out that if this consumer refinances they are going back to a new 30 year loan.  This is true, so lets say the client has had current loan for 2 year so they would have 28 more years to pay off the mortgage at the current rate and payment.  If they refinance to the lower rate but they keep making the same payment, they would pay off the home in 23.5 years thus saving them 4.5 years of payments.  So, what makes more sense to make the same payment for 28 years or 23.5 years?
 
If you are shopping for a mortgage and you are quoted a rate with no costs ask the loan originator how much lower your rate will be if you pay closing costs and origination.  You will see that you will be offered a lower rate, then take what it costs divide it by the monthly savings to determine a break even point.  If you plan to keep the home for longer then the break even point then it makes sense to pay the costs.
 
I hope this helps everyone reading to determine the most optimal mortgage for you and your family.  As always, feel free to call me at (314) 640-3300 if you would like me to review your particular situation.

Dave Robnett