FHA (Federal Housing Authority) is the government agency that provides federally insured mortgages. The majority of people buying homes these days use an FHA mortgage because it is the only option they have. FHA mortgages only require a 3.5% down payment, are more flexible with credit history and score, and have less expensive mortgage insurance than conventional loans. Most homebuyers don’t have a large down payment and usually have less than perfect credit. Conventional loans in Washington state currently require a 10% down payment and the mortgage insurance, although no upfront insurance required, is more costly per month.

Things are changing, though. FHA is committing to tightening their guidelines, and will be announcing the new changes as soon as January. Here are some of the changes that are being discussed:

1. Increasing the down payment requirement from 3.5% to 5%
2. Reducing the amount that sellers can contribute towards their closing costs from 6% to 3%
3. Increasing the amount of mortgage insurance required – both the upfront insurance and the monthly premium amount
4. Increasing the minimum credit score
5. Increasing the interest rate for borrowers with lower credit scores

In addition to the changes being planned for FHA loans, Fannie Mae is also tightening their guidelines, as well. As of December 12, 2009, the following underwriting guidelines will be in place for all mortgages, including both conventional and FHA.

1. Minimum credit score of 620
2. Maximum debt-to-income ratio (total monthly debt divided by total monthly gross income) of 45% (up to 50% for very strong borrowers) -note- Currently there is no set debt-to-income limit. I have seen ratios of up to 67% get an approval.

Underwriting guidelines continuing to tighten. If you are considering buying a home, but are waiting for home prices or rates to come down even more, you may find that you’ve waited so long that you no longer qualify. Rates are the lowest that they have been in 50 years. Home prices may never be this low again. It’s time to put every penny you can into savings, get your credit score up as high as possible, and make your move now. (Whatever you do, DON’T try and improve your credit score on your own! Please give me a call and I’ll be happy to go over your credit report with you.)

It’s important to keep old revolving accounts open, even if you are not using them. 15% of your overall credit score is determined by the length of history. If you close the accounts that you have had for a long time, you will shorten your credit history, thereby lowering your score.

30% of your score is determined by your balance to limit ratio. The higher the balances you are carrying in comparison to your credit limit, the lower your score will be. The credit bureaus recommend keeping your balance to below 30% of the total available limit. If you close accounts, you are lowering your overall credit limit, again, causing a negative effect on your score.

Banks and credit card companies are not making it easy. They have begun lowering credit card limits in the past couple of years, which has automatically made the balance-to-limit ratio higher for anyone carrying balances on their cards.

The government is putting limits on how much the banks and credit card companies can hike up their rates that will take effect in February. Because of this, they are raising their rates now. You have probably received a letter from your credit card companies informing you of the rate hike and giving you a choice to “opt out”. The letters state that if you “opt out”, your rate will not be raised, but your account will be closed. Please keep in mind how this will affect your score when deciding whether or not to keep your account open. If you have had the accounts for a long time and they have a substantial credit limit, the effect on your credit score could be dramatic. The best option would be to transfer the balance to another account, or pay it off if possible, and keep it open.

Navigating the credit scoring system is quite a task these days. The best way to keep a high score is to use each card frequently – at least once every 2 months, but pay the balance off in full. And whatever you do, don’t close old accounts!

Your credit score is made up of 5 components.

1. 35% – Payment History
a. On-time payments
b. Length of time that has passed since the most recent negative item

2. 30% – Credit Balance to Credit Limit Ratio
a. Keep your balances below 30% of the available limit

3. 15% – Length of Credit History
a. The longer the history, the better

4. 10% – Type of Credit
a. Ideal credit profile consists of 3 – 5 revolving credit cards, a mortgage account, an auto loan, and a line of credit

5. 10% – Inquiries
a. Inquiries stay on the report for 2 years but only affect the score for 1 year
b. Auto and mortgage inquiries occurring within a 45 day period are treated as 1
c. Many inquiries don’t count: personal, promotional and job related, insurance & account reviews

Whatever you do, be sure you are making your payments on time, especially if you plan on applying for a mortgage in the near future. The recent history carries the most weight – a 60 day late from 1 year ago will not have as much negative impact on your score as a 30 day late 2 months ago. When applying for a mortgage, your credit history from the most recent 12 months will have the most weight and impact on your score.

Every person who owns a home in the U.S. is losing value and equity in their home because of HVCC. HVCC (Home Valuation Code of Conduct) is supposed to stop appraisal fraud by not allowing loan originators to have any direct contact with the appraiser. The problem is that all appraisals must now be ordered through Appraisal Management Companies, which are owned by none other than, the banks. hmmm… what is wrong with that picture?!

Andrew Cuomo is receiving an early Christmas present today -

Mark Sevitt, past president of NAMB (National Association of Mortgage Brokers), along with Frank Garay and Brian Stevens, are delivering 50 boxes of signed petitions (120,000 signatures) of people in the mortgage industry, real estate industry, and consumers, to Andrew Cuomo’s office today, requesting that HVCC be stopped. HVCC has done nothing to stop fraud, actually appraisal fraud is up by 46% in Q3 2009. Since brokers haven’t been able to have any direct contact with appraisers since March 2009, it appears that they have been incorrectly targeted as the problem. HVCC has done nothing but slow down the housing industry recovery and cause transaction after transaction to not close. That is the last thing the housing industry needs right now.

Here is a partial list of what HVCC does:

1. The loan originator must order the appraisal through the AMC – which on average adds about one or two weeks to the process.

2. The appraisal ordered from one lender cannot be transferred to another lender, so if something with the 1st lender doesn’t work out, the homeowner has to pay for a new appraisal to be done. ($500-$600)

3. The appraisal has to be paid upfront by the homeowner, out of pocket, before he even knows if the transaction will be approved or not. The approval, of course, is based upon the value of the home. Since no one can talk to the appraiser ahead of time, there is no way to determine if the value will be there, or not.

4. The AMCs don’t choose appraisers based upon what areas they are familiar with, as loan originators used to do. The appraisals wind up being done by appraisers who don’t even know the area the home is in.

The bottom line is that HVCC, which was intended to protect homeowners from fraudulent appraiser/lender relationships, is doing nothing but hurting them, instead. It’s only accomplishment has been to give the big banks even more power and control (along with a new revenue source) than they already have. It’s time to put a stop to HVCC – now.

These days keeping your credit score as high as possible is more important than ever. Just one point can make a difference in your interest rate, costing you thousands of dollars over the life of your loan, or even stop you from qualifying all together.

Each Friday I’ll be posting a credit tip of the week, highlighting important facts that can have an impact on your score.

Today’s tip is about collections and judgments:

If you have any outstanding collections or judgments, they will come off your credit report after 7 years. If they are still appearing on your report after 7 years, you can simply contact the bureaus that are reporting them and provide them proof of the original date to have them removed. However, if the debt is owed to the government on any level, including child support and student loans, the debt can remain indefinitely. Surprise, huh?!

All three bureaus can be contacted online at:

www.experian.com

www.transunion.com

www.equifax.com

Here is an excerpt from www.nahb.org on the new and extended Homebuyers Tax Credit. Please feel free to contact me if you have any questions.

2009-2010 Homebuyers Federal Tax Credit Fact Sheet

Who is Eligible

• First-time home buyers, who are defined by the law as buyers who have not owned a principal residence during the three-year period prior to the purchase, may be eligible for up to an $8,000 tax credit. 
• Existing home owners who have been residing in their principal residence for five consecutive years out of the last eight and are purchasing a home to be their principal residence (“repeat buyer”), may be eligible for up to a $6,500 tax credit. 
• All U.S. citizens who file taxes are eligible to participate in the program. 

Income Limits

• Home buyers who file as single or head-of-household taxpayers can claim the full credit ($8,000 for first-time buyers and $6,500 for repeat buyers) if their modified adjusted gross income (MAGI) is less than $125,000.  
• For married couples filing a joint return, the combined income limit is $225,000. 
• Single or head-of-household taxpayers who earn between $125,000 and $145,000, and married couples who earn between $225,000 and $245,000 are eligible to receive a partial credit.  
• The credit is not available for single taxpayers whose MAGI is greater than $145,000 and married couples with a MAGI that exceeds $245,000. 

Effective Dates

• The eligibility period for the tax credit is for homes purchased after Nov. 6, 2009, and before May 1, 2010. However, home purchases subject to a binding sales contract signed by April 30, 2010, will qualify for the tax credit provided closing occurs prior to July 1, 2010.  

 Types of Homes that Qualify

• All homes with a purchase price of less than $800,000 qualify, including newly-constructed or resale, and single-family detached, townhomes or condominiums, provided that the home will be used as their principal residence. Vacation home and rental property purchases do NOT qualify.   

 Tax Credit is Refundable

• A refundable credit means that if the amount of income taxes you owe is less than the credit amount you qualify for, the government will send you a check for the difference. 
• For example:  
  • A first-time buyer who qualifies for the full $8,000 credit who owes $5,000 in federal income taxes would pay nothing to the IRS and receive a $3,000 payment from the government. If you are due to receive a $1,000 refund, you would receive $9,000 ($1,000 plus the $8,000 first-time home buyer tax credit).  
  • A repeat buyer who owes $5,000 would pay nothing to the IRS and receive $1,500 back from the government. If you are due to get a $1,000 refund, you would get $7,500 ($1,000 plus the $6,500 repeat buyer tax credit). 
• All qualified home buyers can take the tax credit on their 2009 or 2010 income tax return. 

Payback Provisions

• The tax credit is a true credit. It does not have to be repaid unless the home owner sells or stops using the home as their principal residence within three years after the purchase.

First-time Homebuyers Tax Credit Extension Is Official

Great news! The extension for the First-time homebuyers tax credit is official. And it’s not limited to first-time homebuyers, either! First-time homebuyers (that is, people who have not owned a home within the last 3 years) may be eligible for the tax credit of 10% of the purchase price of the home, up to $8,000.

Homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years, may qualify for a tax credit of up to $6,500.

 In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

It’s important to remember that the tax credit is just that… a tax credit – a dollar-for-dollar tax reduction, rather than a reduction in a tax liability. If you owe nothing, you will receive the tax credit in full. If you have a refund coming back, you will receive the refund plus the tax credit. If you owe taxes, you will receive the tax credit minus the amount you owe.

The amount of income someone can earn and qualify for the full amount of the credit has been increased.

Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit, however, single filers who earn $145,000 and above are ineligible.

Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit, however, joint filers who earn $245,000 and above are ineligible.

Qualifying buyers may purchase a property with a maximum sale price of $800,000.

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Remember, the new tax credit program includes a number of details and qualifications. For more information or answers to specific questions, please call or email me today.

In addition, you may be able to benefit from additional housing related provisions, including the following:

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Tax Incentives to Spur Energy Savings and Green Jobs

This provision is designed to help promote energy-efficient investments in homes by extending and expanding tax credits through 2010 for purchases such as new furnaces, energy-efficient windows and doors, or insulation.

Landmark Energy Savings

This provision provides $5 Billion for energy efficient improvements for more than one million modest-income homes through weatherization. According to some estimates, this can help modest-income families save an average of $350 a year on heating and air conditioning bills.

Repairing Public Housing and Making Key Energy Efficiency Retrofits To HUD-Assisted Housing

This provision provides a total of $6.3 Billion for increasing energy efficiency in federally supported housing programs. Specifically, it establishes a new program to upgrade HUD-sponsored low-income housing (for elderly, disabled, and Section 8 to increase energy efficiency, including new insulation, windows, and frames.

Expanding Housing Assistance

This provision increases support for several critical housing programs. It includes $2 Billion for the Neighborhood Stabilization Program to help communities purchase and rehabilitate foreclosed, vacant properties.

WARNING: Banks are coming after more of your money again – or still…..

 As the Federal Reserve is continuing to keep interest rates artificially low, the great interest rates that we are seeing are allowing banks to fund mortgages with some pretty fat margins. The same banks that were bailed out are now in part benefactors of the same Fed policies that are intended to get people buying houses again.  It makes sense – our economic recovery is dependent on our mortgage recovery, but if recovery is the goal, and the banks are already double dipping on rate margins and bail out money, then is it fair that they are triple dipping by raising credit card rates?

 After telling the banks that they have to get their credit card rate hikes under control, the banks told Congress that they need more time to get geared up for the Congressionally  mandated changes. Congress granted them an extension through February.  So how are the banks using that time to gear up for the required changes?? They are hiking their rates!  All in time for the holiday shopping season.  Isn’t that a great way to stimulate the economy?! Chase and Citi have both raised their rates to as high as 30% – for people who have never had a late payment – ever.

 Here is what you can do about it. The banks are required to send you a letter that will trigger the higher and permanent rate.  If you get a rate hike letter in the coming weeks, you need to stop using the card. Call the bank and tell them you are opting out. This will freeze your current rate until you can transfer the balance to a card with a lower rate or simply pay it off.

Barney Frank and friends are working overtime to get rid of all those unscrupulous mortgage brokers. You know, those dishonest people who shop rates for you at the different banks. His goal is to get rid of any competition for the banks. There are now 4 major bank entities left, thanks to the government’s involvement. Citi, Bank of America, Chase and Wells Fargo – all now deemed “too big to fail”.  How any of this is good for you, the consumer, is anyone’s guess. The banks continue to show over and over again that their only concern is their own pockets.