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Which type of mortgage is more risky, FHA or conventional? FHA mortgages target borrowers with credit scores at or under a range around 620 and/or where a loan is at or over 95% loan to value. Read more about getting a better mortgage in this the book- Winning Mortgage, Winning Home. Depending on the credit score and LTV, there are a small number of combinations where an FHA loan may be less costly for the first few years.
But, lower LTVs and better credit scores make non-FHA loans usually less expensive for the greatest majority of borrowers. FHA mortgages can eat up more of your income. Because of these reasons, FHA borrowers go delinquent 3 times as often as conventional borrowers. Triple the foreclosure rate risks loss of all equity. Learn how to avoid this and get a better mortgage.
What Do I Do After Forbearance?
Have you asked for Forbearance, or know someone who needs help with Forbearance, on a mortgage loan? Fannie Mae and Freddie Mac provide guidance to servicers–those companies which collect your loan payments and handle your loan. Fannie Mae and Freddie Mac don’t provide guidance to you, the borrower. Read the information from these companies to servicers to see if there is help available. The servicer first must establish a QRPC (Qualified Right Party Contact) for the loan. This identifies the true borrower or authorized party to talk with the servicer.
Be prepared to ask your servicer questions. They must appoint a SPOC (Single Point of Contact) for you–the person assigned to help you with options. The appointment of a SPOC avoids starting over with whoever answers the phone and who knows nothing about your loan forbearance or loan modifications. You may establish a TPP (Trial Payment Plan) which requires at least 3 months of payments on time and in full before a loan modification can be made. Restrictions to what type of modification can be made resides with who owns the loan. So ask questions!
Read the information provided by Fannie Mae to get a start.
COVID FORBEARANCE FAQs
FANNIE MAE-FREDDIE MAC ASSISTANCE REQUEST FORM
LENDER LETTER FEBRUARY 2021
Proposed HomeBuyer Tax Credit – Still a DTI Issue.
The National Association of Realtors (NAR) released its 2021 Snapshot of Race and Home Buying in America, which showed that nationwide, those who could afford to buy the typical home broke down along these lines:
- 43% of Black Americans
- 63% of White Americans
- 71% of Asian Americans
- 54% of Hispanic Americans
The study found many home buyers rejected primarily due to high DTI Ratios. A high debt-to-income ratio may be tied to the student loan debt. As a candidate, President Biden promised to cancel $10,000 in student loan debt.
Biden’s initially proposed a $15,000 tax credit for first-time home buyers. Perhaps that may marginally help some home ownership rates, but that amount would do nothing to change the fundamental problem of high debt-to-income ratios. It’s also likely that a first-time home buyer credit would help those in small markets instead of expensive markets. How would an upfront $15,000 credit help a buyer where the average home price is $200,000? It’s 7.5% towards a down payment. Compare the credit to a high-cost market like in California cities and northeastern metros. Here the average home price may exceed $500,000 or more. There the credit may be 3% or less of the purchase price. Conversely, it is quite likely that it may drive up home prices in affordable areas and negate much of the advantage by buyers over-paying in the short term.
Proposed Tax Credit
Update: The proposed tax credit continues modifications in committee in Congress in April 2021. In the bill, a direct grant of up to $20,000 replaces a tax credit for first time home buyers. A few criteria, such as first time home buyer and income below a not yet determined threshold apply. An additional $5,000 may be available in certain circumstances. That is currently 120% of the area median for normal markets and higher for high cost locations such as New York and California. Is this good or bad. We’ll leave it to you to decide and stay out of politics. We will point out the federal government’s track record on this type of program. Hint-corruption, scamming and creative application have doomed every such effort to failure on a giant scale.
In general, down payment assistance sounds like a win-win for everyone. But with every government program, the likelihood of it doing what it intends remains unlikely.
Comparison to 2009 Tax Credit
In 2009, the first time home-buyer program was a market driven program without heavy handed governmental oversight. Not without oversight, but with demonstrated qualifying through a tax credit. Still, it was open to abuse for many who indeed owned a home before. No accounting ever occurred on the accuracy and benefits of the program. Remember, measurement makes someone accountable!
In 2009, buyers received a tax credit if they met the criteria. The current proposal appears to use a heavy handed governmental administration to favor certain individuals over others. Politics usually governs winners and losers in these types of programs in general. As is common knowledge, the prior housing crisis from 2008 had many root causes in doing things which sounded noble. These noble programs included expanding access to low to moderate income buyers with poor credit. These programs were pushed by Congress, the executive branch and Fannie/Freddie/FHA. This was probably the biggest single factor in the 2008 melt-down.
It is one thing to get people into a home. It is another to get them into a home which they actually cannot afford to maintain. There is no question that home ownership is more expensive than just PITI+PMI. The ongoing maintenance and repairs significantly impair low to moderate income home owners and can end up creating more harm than good.
Supply, Demand, Overpaying, Foreclosures
Will history repeat itself? In the new grant proposal, as with any supply/demand issue, more buyers competing for the same homes will raise the entry prices. Think back to the Nehemiah programs and essentially free down payments. Another large plank in the 2008 crisis. Home-builders knew exactly how to turn a program started with good intentions into a pure marketing ploy. It boosted profits for the home builders, but led to foreclosure of tens of thousands (or hundreds of thousands) of homes. No real equity ever existed for buyers of these homes.
Buyers paid more than the homes were worth to get the free Nehemiah grants. The grants ended up in the pockets of home builders and did little to actually benefit buyers in the long term. It isn’t helpful to end up buying a home which a lender forecloses. The buyer actually ends in a worse overall situation after only a short term benefit.
The draft proposal continues with more updates. Past experience doesn’t bode well beyond the initial feel good stage. We invite comments and opinions. Have you had any first hand experience with Nehemiah program buyers? How did that go?