During a face to face prequalification this past Saturday, I got to talking to a client. It turned out my prequalification amount was about $85,000 lower than the last one she had gotten. As we discussed further, I tried to work with her numbers to try to figure out how to make it work at a higher loan amount, but couldn't find a way. My back end ratio was up at about 56%. In layman's terms, that means 56% of her gross income (before taxes) would go to her monthly bills. These monthly bills do not include utilities, groceries, car maintenance or car insurance. In other words, she'll be lucky to be able to afford to live once she gets in to this house.
As I apologized for not being able to qualify her for more, we discussed the perils of such a prequalification. I explained her income has not changed in the last two years, she didn't pay rent and she was going to get a gift for her down payment. I told her I, personally, would not risk giving her a prequalification so high putting not only her Good Faith Deposit in jeopardy but also her financial well being. I got to thinking about how many times I've said no to a client, understanding what my underwriters do and do not allow, just to hear from them later that another lender was able to do it. Believe me, it stung to hear someone else could do what we could not.
Sure enough, just a few days later, HUD has released a press release announcing FHA Commissioner David Stevens announced intent to change policy with the goal of strengthening the shrinking reserves that have resulted from defaulting mortgages. Here's a quick synposis of the new policies:
1. Upfront Mortgage Insurance to be increased from 1.75% to 2.25% - This will mean higher loan amounts or higher payments due to monthly mortgage insurance being increased.
2. Update the combination of fico scores and down payments. Under current policy, the down payment requirement is 3.5% across the board. The new policy would change it so that buyers with fico scores below 580 would need 10% down payment.
3. Allowable seller concessions to be reduced from 6% to 3%
4. Increase enforcement on FHA Lenders including
· Publicly reporting performance rankings on FHA website
· Stricter indemnification regulation
· Monitor lender performance in regards to FHA guidelines.
Item #4 should be taken seriously and is the reason behind today's blog. While I've questioned why other lenders could do what we couldn't as it relates to higher housing ratios, it looks like FHA lenders have been failing to comply with FHA guidelines thus resulting in these changes. Realtors and Loan Officers should think twice before trying to put people in homes they cannot afford. The foreclosure market and overwhelming number of buyers are making prices go up and offers go up. We have to be careful to continue to have our buyer's best interest at all times, rather than raising the price for the sake of getting the offer accepted.
Hector Amendola is a Real Estate Loan expert in the Los Angeles area and has been in the field for 8 years. He may be reached at email@example.com