Home Loan Wholesale

In a recent article, California mortgage broker, Jeff Morris, formerly with GMAC and Ditech estimated that one in ten of homeowners who visit him online are able to get approved for a conventional or FHA refinance.  Morris said, “People simply don’t qualify with the mortgage lenders tighter guidelines and lack of home equity.“ Borrowers seeking home refinancing, outside of California, Arizona and Nevada may have a better chance because fewer borrowers in the mid-west and south are under water with their mortgages being greater than their home’s value.  Even with mortgage lenders extending 97% FHA and 105% mortgage refinancing, California homeowners have little opportunities to be approved because home values have declined so significantly since they bought their properties years ago.   

The goal should be for homeowners to invest in a home that they can afford and if refinancing with a lower mortgage payment is an option, then borrowers would be foolish not to seize the savings opportunity. Morris added that “the demand for loan modifications has not waned and he sees an increase in loan workout requests for borrowers who are stuck in jumbo mortgage loans that have interest rates set to adjust.” The banks just aren’t handing out loan modification agreements to just anyone anymore.  Homeowners seeking foreclosure prevention alternatives from their mortgage lender must be able to document that they have the income to support the modified home loan payment. 

In Maui, Caleb Palmer, a broker, said “Consumers should stop whining about things they can’t control and focus the affordable home buying opportunities that have become available since the housing market crashed in 2006.” Palmer continued, “Mortgage rates were under 5% for thirty year fixed rate loans and inventories were beginning to open up in neighborhoods that haven’t been available for years.”  Palmer believes that 2010 will see more buying opportunities in Hawaii and California before the market shifts back to appreciation mode. 

In addition, if you’re older than 40, shortening your mortgage term now could help leave you mortgage-free in retirement, reducing the income you’ll need to generate from your battered 401(k).
But before you jump in, you should know that most single-family home loans today need to fall within Fannie Mae and Freddie Mac limits — up to $417,000 in most places, and up to $729,750 in certain high-cost cities such as San Francisco and New York. “Jumbo” mortgages, or those larger than those limits, are still very hard to find. Then you’ll need two crucial and tough-to-acquire bits of information: your credit score and your home’s current value. Those will determine whether you can refinance at all and how close you can get to the lowest rates available. Even then, you may find the process unusually long and unpleasant; some banks are taking up to 90 days to complete a refinancing.  If you got your current mortgage in the past few years, when less documentation was needed, you may be surprised by the financial colonoscopy that awaits you. You need pay stubs, bank statements, brokerage statements and maybe tax returns to convince the lender that you can and will repay the loan. If you’re self-employed, you may be asked for a profit-and-loss statement for this year; if you rely on bonus income, expect the lender to assume this year’s bonus will be a lot less than last year’s.

What is home equity? Having some equity in your house is essential to qualifying for a new mortgage loan. If your current mortgage is less than 80% of the value of your home or less than 75% of your condominium, you should have refinancing options as long as you don’t have late mortgage payments and bad credit scores.  Subprime refinancing and bad credit mortgage options have disappeared with the exception of VA and FHA loans.  VA home loans are only offered to military veterans and FHA mortgage guidelines require full income documentation and most bad credit home loan applicants need a stated income program.

If your mortgage is between 80% and 105% of your home value, you’re current on your payments and your loan was bought by Fannie Mae or Freddie Mac, you may be able to refinance under a two-month-old government program called “Making Home Affordable.” Some kinks are still being ironed out, and Fannie and Freddie have different requirements, so go to the program’s Web site at MakingHomeAffordable.gov or contact your mortgage servicer to see if you qualify.

Sometimes under this program, Fannie and Freddie will waive appraisals and other underwriting steps. And if you’re refinancing a Veterans Administration or Federal Housing Administration loan, a new appraisal isn’t needed. 

Washington Post reporters studied federal data and discovered that FHA home mortgage loans defaults are increasing rapidly. The home loan default research shows that the number of borrowers who failed to make more than one payment before defaulting nearby tripled over the past year.

According to the article by Dina ElBoghdady and Dan Keating, “Many mortgage industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers, and most notably, foul play among unscrupulous lenders looking to make a quick buck.”

If someone defaults on their home loan because they have suddenly lost their job or face a health crisis, that’s understandable these days. But, after everything our country has faced since the subprime mortgage lending debacle began a few years ago, it is criminal to think that lenders are once again committing fraud and failing to do the work to make sure the people they are lending to can actual repay their loans. Do we have to learn this lesson again?

Even scarier is the fact these mortgages are government-backed. So, guess who pays when these borrowers default? Not the FHA lenders who wrote the paper for the bad mortgages. The FHA has make good on those home mortgages from government reserves. If the FHA reserves run out, Congress will be expected to bail out the FHA, with more taxpayer dollars.

Congressman Al Green has introduced H.R. 600, a bill that would reinstate the controversial seller-funded down payment assistance banned last October despite being credited with helping over one million families become homeowners. Scott Syphax, president and CEO of the Nehemiah Corp. of America, Sacramento, CA, a DPA pioneer and supporters applauded the home loan bill that helps broaden homeownership opportunities for borrowers who qualify for FHA loans without using government or taxpayer dollars. “With foreclosure news continuing to report home loan defaults on the rise and banks maintaining their stranglehold on credit, we commend Congressman Green for recognizing the important role down payment assistance can play in the market’s recovery,” he said in a release. FHA home loan programs can’t be expected to carry the complete load for American home financing.

“Through H.R. 600, DPA offers a simple solution that can empower thousands of worthy families to take advantage of depressed home prices therefore reducing the glut of homes on the market. Further, it does so without spending a single government or taxpayer dime, according to the Congressional Budget Office.” Mr. Syphax said DPA is a source of opportunity for responsible, sustainable homeownership in times when the housing market is crumbling. Down-payment assistance supporters hope President Obama’s Administration will help reinstate the program.

Reverse mortgages have long been a way for seniors to turn the equity in their homes into extra cash in their pockets. Now, a higher lending limit is making it possible for some seniors to get more money out of a reverse mortgage than before.  The new $417,000 lending limit for reverse mortgages insured by the Federal Housing Administration was rolled out nationwide (except for parts of Hawaii, which have higher home loan limits) on Nov. 6. To qualify for the lending limit, a home has to be appraised at $417,000 or higher. The actual amount of the reverse mortgage would be a percentage of the $417,000 lending limit or appraised value of the home, whichever is lower.

The higher limit made it possible for Oakland resident Michael Goldsmith to receive a reverse mortgage that was $50,000 larger than he would have under the old loan limit of $362,790 that applied in the Bay Area and other high-cost regions.  “It made a difference of about $50,000 … It’s pretty significant,” said Goldsmith, the 74-year-old owner of a transportation management business.  Goldsmith and his wife, Dorothy, took out a reverse mortgage with Bank of America so they would have funds available to remodel their Oakland condo.  The Goldsmiths were able to qualify for a reverse mortgage loan of about $275,000 on their $450,000 condo. After using most of the proceeds to pay off an existing $180,000 home equity line of credit, they were left with a $95,000 line of credit to draw from when they choose to use the money. “We’ll still have some money left over in case we need it sometime in the future,” Michael Goldsmith said. “I don’t have to use it all but it’s sitting there anytime I want it.”

Seniors who are 62 years or older and have a good portion of equity in their home or have paid off their mortgage can apply for a reverse mortgage, which amounts to a home loan made by a mortgage lender to the homeowner that has to be paid back eventually along with interest payments and other fees that are tacked on.   The homeowner retains title to the house while the loan is active. Interest rates on federally-insured reverse mortgages are adjustable and linked to an index based on one-year yields derived from a basket of various Treasuries. And while the adjustable-rate interest has a built-in cap, the product does not provide the certainty of a fixed-rate loan. The actual cost of repaying the loan will vary depending on whether the proceeds are taken out as monthly payments, a lump sum, or a line of credit. Also, the homeowner has to keep on paying homeowner’s insurance and property taxes.

Since the higher loan limit was announced in October, Bank of America has seen a 40 percent increase in reverse mortgage loan applications compared to October 2007, said Steve Boland, a Bank of America reverse mortgage executive based in Thousand Oaks.   “We really see this as an instant ability to help people who need the additional access to equity,” Boland said. “A number of people see their retirement assets declining and they are finding they are less prepared to meet their cost of living in retirement. A reverse mortgage can really play a big role in supplementing that.”  Even Seniors with homes appraised below the $417,000 mortgage limit can benefit from the reduced loan origination fees, he said. For example, a borrower with a $335,000 home would get $1,350 more in net proceeds due to being charged $1,350 less for the loan origination fee.

While a reverse mortgage loan may offer tax-free income for some seniors, it is not always the best solution. Reverse mortgage loans can be complicated and may not meet the needs of all seniors seeking cash out from their home equity.  There are substantial costs for home financing and mortgage insurance that can run into thousands of dollars that have to be paid on top of principal and interest. Also, the interest that’s due on the loan can erode the equity in a home. Taking out the loan while in your sixties can result in getting a reduced mortgage amount and owing more on the loan when it is repaid than if you waited until you’re in your seventies. Heirs who inherit the home can end up with a substantial home loan to pay off if they want to keep the property.  More than 90% of reverse mortgages are FHA-insured products known as Home Equity Conversion Mortgages (HECM) loans. That number is bound to get higher given that the market for so-called jumbo reverse mortgages, which are above the FHA loan limit of $417,000 and not insured, had dried up in response to the ongoing credit crunch.

The higher loan limit for federally insured reverse home loans was made possible by the passage in July of the Housing and Economic Recovery Act, which among other things included provisions to help struggling homeowners of all ages avoid foreclosure. The legislation also lowered lender origination fees for reverse mortgages while setting a $6,000 cap on origination fees.  The higher lending limit comes at a time when some seniors are using reverse mortgage loans to help avoid foreclosure in addition to the more traditional reasons such as tapping a home’s equity, said Ray Fry, an East Bay certified senior advisor and a specialist in reverse mortgages who goes by the name “Mr. Reverse.”

Some seniors who been caught up in negative amortization mortgage loans — which is when a loan’s outstanding balance gets bigger while monthly payments stay the same — are turning to reverse mortgages to pay off the balance, he said. (A reverse mortgage requires that it be the only home loan on a property so existing mortgages are automatically paid off from the proceeds).  “The key thing right now is that the (falling) value of the home is preventing people from refinancing existing mortgage loans,” said Fry, adding that some seniors then turn to reverse mortgages.

There are many factors that go into figuring out whether a reverse mortgage loan is the right move. How long a homeowner intends to stay in the home is a key factor as is the age of the borrower.  “You are really talking about individuals who want to age in place; they want to remain in their home. If someone was thinking of moving in a few years, a reverse mortgage is not the right product,” Boland said.  The borrower’s age, current interest rates and equity held in the home are used to determine the size of the loan.  “Age is the real determining factor. The older person qualifies for more than the younger person and the interest rate is the second factor. A lower rate means you qualify for more money,” Fry said.  “It is true you get more money when you are older and you have less of a period of time your loan is going up in value, that is in accrued interest,” said Judy Schwartz, a principal at San Carlos-based Reverse Mortgages Only.  Still, Fry and Schwartz point out that age should not be the only consideration.  “It’s really borrower specific,” she said. “You really have to look at the amount of money you are trying to get access to in exchange for the (reverse mortgage) costs.”

A consumer might also want to consider a reverse mortgage now instead of later since home values are falling and the proceeds available from a reverse mortgage would be lower, she said.   Another reason to consider taking out a reverse mortgage now is that mortgage rates are very low — starting in the 3% range when mortgage insurance is included — at a time when the stock market is falling, she said.  “It may make sense to tap the equity in your home rather than deplete an already decimated portfolio,” Schwartz said.  -Article written by Eve Mitchell

US authorities launched fresh efforts Tuesday to unfreeze credit and limit the economic downturn with programs to buy up to 800 billion dollars in mortgage loans and asset-backed securities.  The initiatives call for up to 600 billion dollars in Federal Reserve purchases of home loan securities, and a separate 200 billion dollars for asset-backed securities to assist consumers with more credit lines.  The Federal Reserve and Bush administration continue efforts to stimulate the economy with cash injections intended to jump-start American credit markets that have nearly been frozen shut since October.   The government has not made their intentions to increase liquidity while decreasing the home loans costs for borrowers looking to refinance or purchase a home.  Last month, HUD introduced FHA home loans for distressed homeowners who were 90 days or more delinquent on their mortgage, but after thousands of borrowers completing the applications for this Hope for Homeowners program, only a few actually were approved by FHA mortgage lenders. 

With the housing sales plummeting and the foreclosure crisis worsening, the government wants mortgage lenders to provide loan modification to prevent foreclosures.  According to mortgage marketing executive, Bryan Dornan, “Clearly, the sub-prime mortgage meltdown ignited sparks through the financial markets and has spread like wild fires burning our economy and many American’s home equity in the process.”  Dornan continued, “The lure of low mortgage rates has faded because the traditional refinance has completely disappeared because lenders continue to tighten credit guidelines beyond Main St. America.”

Economist Marie-Pierre Ripert noted in a recent article, “Both these measures are clearly a significant step in the action implemented by the Fed in trying to avoid a deeper recession and to prevent the economy to fall in a deflationary spiral.”  The US central bank said it planned to buy up to 100 billion dollars of bad mortgages and debt obligations of housing-related government-sponsored entities like Freddie Mac and Fannie Mae in the next week and purchase 500 billion more in a home loan modifications scheduled to roll out by the end of this year.  The 500 billion dollars in mortgage securities is said to be bought by asset managers selected in a competitive mortgage servicing process “with a goal of beginning these purchases before year-end,” the Federal Reserve said.  These purchases “are expected to take place over several quarters.”  Many real estate analysts believe that we have not seen the bottom of the housing market and this foreclosure crisis and lending drama may just be the beginning of a much more severe decline with no real solutions achieving any measurable success rectifying the lack of credit. 

The government’s program to refinance delinquent mortgages into affordable government-insured loans has been enhanced. Among the improvements are increased loan-to-values, extended loan terms and immediate compensation for second mortgage companies.  More than ever before FHA home loans have been the backbone supporting mortgage brokers and lenders with subprime and foreclosure prevention products. 

The maximum LTV on the HOPE for Homeowners program has been raised to 96.5%, the U.S. Department of Housing and Urban Development announced today. The LTV was previously limited to 90, an October mortgagee letter from HUD said.  Many FHA mortgage lenders had indicated that the Hope for Homeowners Programs simply did not connect with the average homeowner that need mortgage refinancing.

The National Association of Realtors said Friday that sales of existing homes rose by 5.5 percent in September compared to August, the best showing since a 5.6 percent increase in July 2003, during the five-year housing boom.

By region of the country, sales soared by 16.8 percent in the West and rose a more moderate 4.4 percent in the Midwest and 2.2 percent in the South. The only region of the country which saw a decline was the Northeast, where sales fell by 1.1 percent. New home sales have increased by 2.7%. And, while median home prices have dropped to the lowest level in four years, investors are pleased that the market is beginning to chip away at an inventory glut.

More Good News
The government will begin doling out $125 billion to nine major banks this week as part of its effort to contain a growing financial crisis, a top Treasury official said Monday. This will mark the first deployment of resources from the government’s $700 billion financial rescue package passed by Congress on Oct. 3.  Home mortgage rates continue to decline, but many mortgage executives are concerned that it’s too little too late.  FHA home loans have been the most popular mortgage for first time homebuyers.

Assistant Treasury Secretary David Nason said the deals with the nine banks were signed Sunday night and the government will make the stock purchases this week. The deals are designed to bolster the banks’ balance sheets so they will begin more normal lending.

Signs of Limited Credit Thaw Emerge in Money Markets
Banks cut the rates they charge each other for overnight loans in U.S. dollars and Euros on Friday, and the rate on one-day corporate IOUs eased from Thursday, providing tentative signs that some corners of the credit market are thawing. But, it will take some time for credit to thaw enough to where consumers can get loans.

The economy didn’t falter overnight, “and it’s going to take a while for the credit system to thaw,” Bush said just before the markets opened, speaking across a park from the White House at the U.S. Chamber of Commerce building, a symbolic headquarters of American business.

While the credit freeze affects conventional mortgage loans, FHA, VA and other government-backed loans still have reasonable credit underwriting. Homes are starting to sell. Prices are low, and sellers are willing to accept offers from buyers who are approved for government-backed loans. Take advantage of the market. Fill out the free loan quote form on this site to see what you may qualify for.

McCain, R-Ariz., rolled out his homeowner bailout proposal (also known as the American Homeownership Resurgence Plan and McCain Resurgence Plan) during Tuesday’s debate with Sen. Barack Obama, D-Ill. According to a summary of the plan posted on the McCain campaign’s Web site, it would wipe out homeowners’ negative equity by buying the mortgage on their principal residence and replacing it with an affordable FHA-guaranteed fixed-rate mortgage. Only borrowers who could prove they were creditworthy when they took out their original loan and provided a down payment would be eligible, the McCain campaign said. Anyone who falsified documents would be disqualified.

The plan does not call for new spending.
The program would be funded from the $700 billion debt authorization Congress approved to allow the Treasury Department to buy up toxic assets from banks and other accounts, the McCain campaign said, and could be implemented quickly.

The FHA HOPE for Homeowners program that just started on October 1st requires FHA mortgage lenders to pay for the difference between the original loan and the new cheaper FHA loan. But, the McCain Resurgence Plan wouldn’t require lenders to write down the principal of loans it refinanced. Additionally, McCain’s plan does not require homeowners to share any of the profit they might make off the program if their home value increases beyond their cheaper, government mortgage.

McCain’s plan would likely help more homeowners keep their homes than Congress’s plan. Since Congress’s plan requires all parties involved (mortgage lender, homeowner, government) to reach a compromise agreement, it has been estimated that it will only help about 500,000 people. But, McCain’s plan may attract more participants, since it’s a full-price government buyout that requires no write-downs.  Stan Humphries, vice president of data and analytics for Zillow.com, estimates that at the end of June, about 11.7 million single-family homes were “underwater,” with negative equity totaling about $676 billion.

McCain’s Plan Draws Fire
The McCain campaign tweaked the document overnight Tuesday in a slight but very significant way, removing a single sentence that indicated the government would buy mortgages from lenders at a discounted rate. The McCain campaign said the plan did not change and they merely edited out “language [that] was mistakenly included in the initial draft.” But, with that sentence gone, the plan morphed into a shifting of $300 billion worth of losses to the taxpayers, which is why it’s now drawing criticism.

Some critics of the Hope for Homeowners plan have said that it will help only a fraction of the borrowers envisioned by Congress. Others said it might provide an incentive for some borrowers to default on their loans in order to unload their negative equity on the government.  The Wall Street Journal’s editorial on October 9, The Next $300 Billion, despite overly praising McCain for getting “the diagnosis right” by recognizing that “the economy won’t recover until home prices find a bottom,” criticized the proposal for offering “no upside for taxpayers.”

They take all the losses up front and don’t participate in any rebound in house prices, so borrowers who overextended and lenders who made reckless refinance loans are made whole, and taxpayers get the bill. At least the $300 billion FHA program imposes at least a 10% haircut on lenders.  The FHA refinance program refers to a $300 billion Federal Housing Administration mortgage program (HOPE for Homeowners) that started on October 1st. Further, the $700 billion bailout plan signed by President Bush last week already gives the Treasury secretary the power to buy up bad mortgages, although it’s yet to be seen how the Treasury will exercise its authority in that regard.

Obama Campaign Economic Policy Director Jason Furman said in the campaign statement opposing McCain’s plan: “John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money and put them at risk of losing even more if home values don’t recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud.”

Will the plan work?
McCain believes his plan will offset the need for the complete bailout sum.  McCain is also hopeful that this will alleviate the burden on taxpayers over the long run. But, the problem is that the average taxpayer will be responsible for the difference in the value of millions of loans instead of the lenders that took the reckless risks. I liked the plan before the tweaks too place. Now, I’m not so sure. 

Recently HUD modified the FHASecure loans. See FHA Mortgagee Letter 08-13 and the detailed discussion regarding the expansion of FHASecure:

·            To include applicants delinquent on their non-FHA ARMs due to a rate reset or the occurrence of an extenuating circumstance but experienced no more than two 30-day or one 60-day late payment in the 12 months prior to the rate reset or extenuating circumstance that caused the delinquency; or

·            To include homeowners delinquent on their non-FHA ARMs due to a rate reset or the occurrence of an extenuating circumstance but experienced no more than one 90-day late payment or no more than three 30-day late payments prior to the rate reset or extenuating circumstance that caused the delinquency provided the loan-to-value on the FHA insured 1st mortgage loans that do not exceed 90%.

·            Borrowers delinquent on their interest-only and/or payment option ARMs are not eligible for this expansion: borrowers with these types of mortgages must demonstrate that a rate reset caused the delinquency and that they were making the monthly mortgage payments within the month due during the 6 months prior to the rate reset.

·            FHA Secure refinance loans allow borrowers refinancing opportunities with delinquent non-FHA ARMs the Up-front mortgage insurance premium (UFMIP) is set at 2.25% of the base loan amount (loan amount excluding UFMIP) regardless of the loan-to-value (LTV) ratio. For LTV ratios greater than 95% (excluding UFMIP) the Annual premium (collected monthly) is set at .55%.

The Housing and Economic Recovery Act of 2008 was signed into law by the President on July 30, 2008. It began on October 1, 2008 and sunset on September 30, 2011. It was designed primarily to address the subprime mortgage loan crisis. But, one of the features of this legislation is a tax credit that the government hopes will help stimulate the housing market. This tax credit is only available to first time homebuyers. A first time homebuyer loan is financing for a borrower that is defined as someone who has not owned a primary residence for 3 years prior to the home purchase.  FHA home loans have been helping new homebuyers for years, but their recent expansion for 1^st time home-buying should reach out to more consumers.

How to Qualify for the Tax Credit
First time home buyers who finance a home between April 9, 2008 and July 1, 2009 are eligible to take a tax credit equal to 10 percent of the purchase price of a principal residence, up to $7,500 on their 2008 tax returns. A qualifying home purchase is a single-family detached home, townhouse, condominium, manufactured home, or even a houseboat. Single taxpayers with modified gross incomes up to $75,000 and married taxpayers with a joint modified gross income of up to $150,000 are eligible for the full amount. Above those incomes, the tax credit begins to phase out.

Getting Started with the Tax Credit
All you have to do is claim the tax credit on your federal income tax return. No additional paperwork is required. If you don’t want to wait until you file your return to claim the credit, you can simply reduce your income tax withholding.

The NAHB reports, “Buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding.”

Important Notes about the Tax Credit
Here are some important things to not about this tax credit, so you know just what to expect if you decide to take it:

• This tax credit is basically an interest-free loan, which must be paid back over the course of 15 years.

• This is a tax credit, and not a tax deduction, meaning that it is a dollar for dollar reduction on taxes owed, as opposed to a tax deduction, which reduces the amount of your adjusted gross income that can be taxed.

• The credit is refundable, meaning if you owe $2,000 in taxes and take the $7,500 credit, you will receive at $5,500 refund.

• The credit must be repaid to the government over 15 years or when the house is sold. For those taking the tax credit in 2008, the first $500 payment would need to be made when the buyer files their 2010 tax return.

What if I sell the house?
If you sell your home within 15 years, and the gain on the home is less than the amount of the credit, then the remaining portion of the tax credit is forgiven.  If the gain is greater than the remaining portion of the tax credit, then the balance will be due for that year’s income taxes.

The foreclosure phenomenon has changed the lending landscape for some time to come. With Countrywide almost going under before being bailed out by BOF, IndyMac going under, Freddie MAC and Fannie Mae being taken over by the government, Lehman Brothers going bankrupt and Washington Mutual being bought by Citigroup along with all the other continuing financial bad news, the confidence level in U.S. lending institutions is at an all-time low. The San Diego Union-Tribune reports that due to the fear of losing more money on faulty investments, banks have stopped lending to each other and have stopped the flow of so-called commercial paper (essentially corporate IOUs that fund short-term expenses).

The economic stimulus package didn’t have the desired effect, and it’s about to expire in December. Foreclosures are still on the rise, and housing prices are still dropping. The credit crunch hasn’t eased. Instead, it continues to dry up. A first time home buyer who lacks a 20% down payment pretty much can’t get a conventional home loan, especially if they have a credit score of less than 700. FHA remains the best choice for first time home buyers and for those with credit scores of less than 700. That’s not likely to change anytime before the end of next year. It could take longer if Congress continues to disagree on the bailout.  Home loan modifications have increased significantly, as more and more lenders are accepting requests to modify the mortgage note.

While the bailout is not a popular choice, watching the market fall by more than 700 points is a clear indicator of what happens when no action is taken. Also seeing the market rebound on the news that the bailout is being worked on and stands a better chance of passing this time around indicates that action is needed now. It’s time for politicians to stop playing the blame game and get the bailout fixed and passed. Today, there are reports that the bailout has more tax breaks for businesses and alternative energy along with higher government insurance for bank deposits. Democratic opponents of the bill said they would be willing to back an increase of bank deposits of $250,000. Currently, bank deposits of up to $100,000 are insured by the Federal Deposit Insurance Corporation (FDIC). Few details on the revised bailout plan are available, but hopefully the revisions are enough to get it passed.

“The credit markets are in shambles,” says Mark Goldman, finance professor at San Diego State University. “Now we’re seeing it in homes, autos and other big-ticket items. Soon I think we’ll be seeing it in retail, as credit cards dry up. How bad will it get? I don’t think anybody realizes the true depth of the problem.”  Marty Gold, the managing mortgage broker who recently worked with FHA Home Loan Services recently said, “Credit scores are like liquidity to homeowners.” The higher credit scores homeowners have the more opportunities they will have in the future to refinance.

People with credit scores of 620 used to be able to get a car loan without any trouble. Now, scores need to be at least 650, and some places want FICO scores of at least 700. For a home purchase loan conventional home lenders now expect a credit score of at least 680 for someone with a 20% down payment and at least 700 for those with less than 20% startup equity. FHA mortgages still provide lenient credit standards. At this point, lenders require a score of typically around 580. You can still buy a home with a 3% down payment, although that will be increasing to 3.5% in January. If you’re a cash-strapped first time homebuyer or someone with a credit score of less than 700, FHA is your best bet until things ease up.

How the Mortgage Market has Changed Lenders and Brokers

The current mortgage market mess is a direct result of the subprime mortgage meltdown and foreclosure phenomenon. It all began with the bursting of the U.S. housing bubble, which launched the high default rates on subprime adjustable rate mortgages (ARMs) and spread to the exotic hybrid ARM (negative amortization and interest-only loans). Now, even the prime mortgage market is experiencing high default rates.

Loan incentives, such as easy initial terms, in conjunction with an acceleration in rising housing prices encouraged borrowers to assume difficult mortgages on the belief they would be able to quickly refinance at more favorable terms. But, when housing prices started dropping in 2006, refinancing these loans became difficult. The default and foreclosure rate started rising dramatically upon expiration of the initial teaser rates and upon ARM interest rates adjusting higher as home prices failed to appreciate. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.

Subprime mortgage lenders were the first to be affected by the borrowers unable or unwilling to make their payments. Major banks and other financial institutions around the world have reported losses of approximately U.S. $435 billion as of July 17, 2008. But, as the securitized loans sold in the form of mortgage-backed securities (MBS) and collateralized debt obligations (CDO) declined in value, Corporate, individual and institutional investors holding MBS or CDO started getting hit with heavy losses, and stock markets in many countries declined.

Countrywide almost going under before being bailed out by BOFA (Bank of America) and IndyMac going under seemed to spark off a trend of mortgage companies going bankrupt that seems to be continuing. As a result of the significantly increased credit risk and decreased confidence in the financial market, lending activity decreased, credit standards tightened down and the spread on higher interest rates widened–the current “credit crunch”.

Now, in order to get a conventional mortgage loan, whether you’re looking to buy or refinance, you now have to have excellent credit. Down payment and equity requirements are now tighter, as well. And, while the interest rates have now dropped below 6%, the lending standards haven’t loosened up at all. To purchase a home with a conforming Fannie Mae or Freddie Mac loan, you need a credit score of at least 660 if you’re putting 20% down and a score of at least 700 if you’re starting with less than 20% equity. Refinancing has similar standards–you need an excellent credit score and low loan to value (LTV), typically around 75% to 80%.

As a result of the conventional loan tightened lending standards, and the new increased lending limits under the Economic Stimulus package passed earlier this year, FHA loans have been making a serious comeback. The lower interest rates that resulted from Freddie Mac and Fannie Mae being taken over by the government has also benefitted FHA because FHA rates have also decreased. But, the advantage that a home buyer has with FHA loans is that the credit standards are nowhere near as stringent for FHA loans as they are for conventional loans. You’re eligible if you have a score of around 580 and a good 12-month payment history on your bills. Plus, if you don’t have credit, FHA accepts non-traditional forms of credit like a positive rent paying history and positive payment histories with your utilities and cell phone.

For those looking to refinance, FHA allows you to refinance up to 95%, which is a lot better than the 75-80% LTV on conventional loans. Credit standards are reasonable for refinance loans, as well. As long as you have a positive 12-month payment history (particularly on your mortgage) and you are current on your mortgage, you’re eligible.