FHA Mortgage Guide Updates - Deferment & Interest
With FHA loans seeing a resurgence in the marketplace thanks to the recently reduced mortgage insurance premiums, it's once again important to keep up to date on the program changes, which happen pretty often as the program changes with the marketplace. Today I'll focus on 2 updates - one which is already in effect, and another that lenders (and borrowers, and real estate agents) need to be aware of when pre-approving buyers or submitting loan files.
Deferred Debts
In the updated FHA lending guide, there is specific advice on debts that are in a deferment or forbearance. In the past, any installment debt that was defered or in forbearance for 12 months or longer could be excluded from debt/income ratios. This is no longer the case. Now lenders will need to get the actual payment OR use a % of the balance if no payment is available.
Many, many buyers over the past few years have put their student loans in deferment in order to qualify for higher home prices, and this change to the lending guide will (in my opinion, thankfully) put a stop to that practice.
While some may view this change as a bad thing because it makes lending guidelines more restrictive, in my opinion this is a great way to keep people out of financial ruin. While as a lender and advocate for the housing industry I want to see more people buy homes, I also want to see them stay in those homes. Default rates, especially for lower-FICO FHA loans are still much higher than they should be, and this change will help home buyers qualify for a payment they can really afford.
Collection of interest in mortgage payoffs
This change is more pertinent to refinance transactions, and is causing some confusion. As of January 21, 2015, lenders can no longer collect a full month of interest when paying off an FHA loan. For example, on FHA loans prior to that date, if a loan was paid off in the beginning of a month, the lender would still collect interest for the entire month, sometimes collecting excessive fees of hundreds or even thousands of dollars.
The CFPB ruled that this excessive charge constituted a pre-payment penalty, and HUD made arrangements to stop the practice.
The confusion comes into play with how the rule is implemented - the new rules are in play for all FHA loans originated on or after 1/21/15. So for anyone that just bought a house or refinanced using FHA, the next time they refinance, they'll pay interest only through the date their loan is funded.
For borrowers that have an FHA loan originated prior to 1/21/15, they are still subject to the old rules - which in my opinion is absolutely ri-freakin-diculous. It's like HUD said "Ok, we know we're ripping people off, we promise to stop....but is it OK to continue ripping people off if they already got a loan?". This has long been a HUGE problem in the lending industry, because it clogs the pipeline with FHA loans that all need to fund at the end of the month (or become subject to another entire months worth of interest charged). This causes delays on other loans (sometimes purchase loans with settlement deadlines toward the end of the month), and additional charges to borrowers who have loan delays (sometimes at no fault of their own) and need to extend rate locks through the end of an additional month ONLY because of this rule. Again...ri-freakin-diculous. But at least for borrowers going forward, things will make more sense.
These 2 rules are important for the industry to recognize going forward, and the first one should place even more focus on the student loan fiasco that the country is going to need to address at some point. Whereas FHA allowed student loan debt to be "swept under the rug" if it was deferred, that will no longer be the case, and student loans will become a bigger burden to housing than we've already seen.
Comments (10)Subscribe to CommentsComment