You may recall that back in September ‘08 the federal government essentially nationalized the mortgage buying giants and backing them with $200 billion in guarantees against losses.

Two days ago, on Christmas Eve, they got another federal gift: a removal of the caps to fund losses at Fannie Mae and Freddie Mac.  Now, they are no longer limited to $200 billion each.  They are unlimited.  In exchange, the government gets 80% of the stock in each company paying 10% dividends.

Is this good or bad for the housing industry? Well, it means the government is fully committed to doing all it takes to help the housing market turn and lead us out of recession.  That’s good.  It also indicates that all parties involved expect the losses to exceed the $200b limit and want to prepare for it now rather than wait for a crisis time. That’s bad.

But for now, for the prospective home buyer around Atlanta, the same thing applies: that now is the best time to buy due to the $8000 tax credit, and the low, subsidized mortgage interest rates that, according to the current plan, will rise sharply in April, 2010.

A couple days ago a “Mortgagee Letter” finally came out from HUD clarifying how they would look at Atlanta FHA loan applications where a previous short sale was involved.

If the short sale was simply to take advantage of market conditions and get out of a house that was underwater, in order to purchase a similar or superior property at a reduced price, then the borrower is NOT eligible for an FHA insured loan. My understanding of the definition of that rule is that if the new property is within the same commuting distance as the previous property, then that is considered ineligible for FHA.

Therefore, the argument could be made that if there was a short sale, and then a transfer to the Atlanta market, then a new FHA loan could be made.

Yet that, only if the borrower was current on the mortgage for the previous 12 months prior to the short sale. If the borrower was in default at the time of the short sale, then HUD is viewing that the same as a foreclosure, and the borrower will need to wait 3 years from the date of the sale to qualify for FHA financing.

In summary, then, a short sale is fine to qualify for a new FHA loan so long as the borrower was current on the mortgage and all other installment debt for the previous 12 months, AND, they either relocate to another city or downsize in house.

Any other combination, and it looks like HUD will want any metro Atlanta buyers to wait 3 years to re-qualify for a new FHA loan.

I don’t normally re-post articles – but despite the jarring title, I really liked this article from Marc Roth that appeared in Businessweek Magazine last week.  And, I agree.  Rates are going higher on Atlanta home loans, and precipitously so in the second quarter of 2010 if things remain on their current track.  Enjoy this read:

Well, you may not be stupid or broke. Maybe you already have a house and you don’t want to move. Or maybe you’re a Trappist monk and have forsworn all earthly possessions. Or whatever. But if you want to buy a house, now is the time, and if you don’t act soon, you will regret it. Here’s why: historically low interest rates.

As of today, the average 30-year fixed-rate loan with no points or fees is around 5%. That, as the graph above—which you can find on Mortgage-X.com—shows, is the lowest the rate has been in nearly 40 years.

In fact, rates are so well below historic averages that it should make all current and prospective homeowners take notice of this once-in-a-lifetime opportunity.

And it is exactly that, based on what the graph shows us. Let’s look at the point on the far left.

In 1970 the rate was approximately 7.25%. After hovering there for a couple of years, it began a trend upward, landing near 10% in late 1973. It settled at 8.5% to 9% from 1974 to the end of 1976. After the rise to 10%, that probably seemed O.K. to most home buyers.

But they weren’t happy soon thereafter. From 1977 to 1981, a period of only 60 months, the 30-year fixed rate climbed to 18%. As I mentioned in one of my previous articles, my dad was one of those unluckily stuck needing a loan at that time.

INTEREST RATE LESSONS

And when rates started to decline after that, they took a long time to recede to previous levels. They hit 9% for a brief time in 1986 and bounced around 10% to 11% until 1990. For the next 11 years through 2001, the rates slowly ebbed and flowed downward, ranging from 7% to 9%. We’ve since spent the last nine years, until very recently, at 6% to 7%. So you can see why 5% is so remarkable.

So, what can we learn from the historical trends and numbers?

First, rates have far further to move upward than downward; for more than 30 years, 7% was the low and 18% the high. The norm was 9% in the 1970s, 10% in the mid-1980s through the early 1990s, 7% to 8% for much of the 1990s, and 6% only over the last handful of years.

Second, the last time the long-term trends reversed from low to high, it took more than 20 years (1970 to 1992) for the rate to get back to where it was, and 30 years to actually start trending below the 1970 low.

Finally, the most important lesson is to understand the actual financial impact the rate has on the cost of purchasing and paying off a home.

Every quarter-point change in interest rates is equivalent to approximately $6,000 for every $100,000 borrowed over the course of a 30-year fixed. While different in each region, for the sake of simplicity, let’s assume that the average person is putting $40,000 down and borrowing $200,000 to pay the price of a typical home nationwide. Thus, over the course of the life of the loan, each quarter-point move up in interest rates will cost that buyer $12,000.

LOAN COSTS

Stay with me now. We are at 5%. As you can see by the graph above, as the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again. If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000.

Let’s put that into perspective. You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring). Or you may be waiting for the news to tell you the economy is “more stable” and it’s safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes between now and the time you decide you are ready to buy. And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several months.

If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you’re borrowing $300,000 to $600,000. At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.

What I’m trying to impress upon everyone is that if you are planning on being a homeowner now and/or in the foreseeable future, or if you are looking to move your family into a bigger home, then pay more attention to the interest rates than the price of the home. If you have a steady job, good credit, and the down payment, then you really are being offered the gift of a lifetime.

1. $8,000 First-time Home Buyer Tax Credit at a GlanceThe $8,000 tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
2. The tax credit does not have to be repaid unless the home is sold or ceases to be used as the buyer’s principal residence within three years after the initial purchase.
3. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.  This applies most often to Atlanta FHA Loans, in my experience.
4. The tax credit applies only to homes priced at $800,000 or less.
5. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
6. For homes purchased on or after January 1, 2009 and on or before November 6, 2009, the income limits are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
7. For homes purchased after November 6, 2009 and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

The $6,500 Move-Up / Repeat Home Buyer Tax Credit at a Glance

1. To be eligible to claim the tax credit, buyers must have owned and lived in their previous home for five consecutive years out of the last eight years.
2. The tax credit does not have to be repaid unless the home is sold or ceases to be used as the buyer’s principal residence within three years after the initial purchase.
3. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500.
4. The tax credit applies only to homes priced at $800,000 or less.
5. The credit is available for homes purchased after November 6, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, the home purchase qualifies provided it is completed by June 30, 2010.
6. Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

This is a post first put here.  I thought it so important for you to know that I have reposted it.

Reports that FHA may be the next ’sub-prime’ implosion have been swirling for some time now.  The reason is that an FHA loan is simply a mortgage that is insured by HUD against default, to protect the lender, and the reserve insurance funds are dwindling.  And if HUD were to run out of money to insure these loans, then FHA lending would die.

That scenario is unlikely to happen, which was attested to by HUD Secretary Shaun Donovan yesterday before the House Committee on Financial Services.  However, what it does mean is changes, and possibly BIG changes are in the works for FHA lenders.

Nothing has been decided yet, but HUD has floated out there several changes that are likely to be implemented in the coming few months.  An overview of the changes that affect Georgia FHA loans the most are:

• Increased minimum FICO scores for home buyers:  Currently, HUD does not mandate a minimum credit score to qualify for FHA financing.  However, nearly all lenders have instituted their own minimums, ranging from 620 to 660.  HUD has not indicated what the minimum will be; but my guess is to look for it to be in the 620-640 range.
• Seller concessions will be lowered: Currently the sellers can contribute up to 6% of the sales price to pay closing costs, pre-paids and any points to buy down the interest rate.  That will likely be lowered to 3% maximum.  Now, 3% covers the closing costs and pre-paids in the vast majority of circumstances – but this will stop sellers from ’sweetening’ the deal by offering to pay for a permanently lowered interest rate by offering to pay points to buy the rate down – a practice that has been catching on somewhat, and is very attractive to a potential buyer.
• Cash required from the buyer will increase:  This one is unclear at present what form it will take.  Currently an FHA buyer needs to bring a down payment of  at least 3.5% of the purchase price.  There has been talk of raising the minimum required down payment to 5%.  However, it is not clear if this will be the outcome or not.  What is clear, is HUD wants its FHA buyers to have more “skin in the game”.
• MIP Premiums to increase:  Conventional loans with lower down payments are insured by private companies with the PMI payment.  Similarly, FHA loans have an Up Front Mortgage Insurance Premium, which is what replenishes HUD’s insurance pool so that they can insure against default, and of course the monthly MIP payment.  Currently on an FHA purchase HUD collects 1.75% of the loan amount as the Up Front MIP, and .55% of the loan amount annually, as part of the monthly mortgage payment.  Not sure how much, but it looks likely that the Up Front MIP amount will increase.  And from my reading of the Secretary’s comments, the monthly premium amount may remain the same.

Changes are coming fast and furious.  So, on top of all the other reasons you have to buy a home financed with an FHA mortgage now, i.e. historically low mortgage rates, a tax credit for most buyers and historically low housing prices, now you have yet another reason to act now and buy.  FHA financing will become more costly and more difficult to qualify for in the near future.

I have written about this before, but in a mortgage environment with guidelines continuing to tighten, folks looking to purchase their home in outlying areas, somewhat rural areas, owe it to themselves to consider and USDA Rural Housing mortgage loan.

You see, these loans have two distinct advantages that no other loan product can compare with:

• 100% Financing for the home.  That’s right, no down payment is needed.  So, for a Georgia first time home buyer who has amassed a small savings – a few thousand dollars – may be better served to count that as their reserve funds, and finance 100% of the purchase price, at extremely low interest rates.
• No Monthly MI Payments: Right.  That dreaded PMI that protects the lender against default, but the buyer has to pay for, is not there on a USDA loan.  Too good to be true? You got me.  There is what would correspond to MI, and it is equal to 2% of the loan amount, but much like an FHA mortgage, that 2% is added to the loan amount and financed.  So, on a monthly payment basis, it is nearly painless.

As you can see from the chart below, rates have been steadily getting better over the month of November.  Remember that as yields increase, rates decrease.  In fact, as of this morning we were on track to match the best rates of the year.

What a month November was for rates; and based on this first day of December, this month could be just the polar opposite.  If you look closely, we may get lucky and find a short-term floor of support on the 10 day moving average.  More likely, however, is to find that floor on the 30 day average.

And that spells a hike in mortgage rates that would not be much fun at all.  Hang on tight, we may be in for another wild ride.  Oh, and if you have been on the fence considering refinancing, then jump in and let’s do it, before it is no longer available.

We have known for a long time the percentage effects that differing credit mistakes can have on your score.  For a review of that, go to this previous post.

Just recently, the good folks at the Fair Isaac have drawn back the curtain to give us a glimpse of the real drop in points that each credit mistake will have on your score.  And, it does correspond to the percentage that each mistake will have on your credit score.  The higher the score before the blemish, the bigger the point drop.  Percentages remain the same.

Let’s take a look at the chart that they published:

As you can see, a maxed out credit card will have your score drop by up to 45 points if you started with a 780 score – but only 10-30 points with a starting score 100 points below that.

And, one thing they revealed about this chart is that it made an assumption that the credit user profiled in these numbers has a nice mix of credit, including multiple credit cards, car loans, a mortgage, student loans and installment loans.  In my experience, the less types of credit that you have, the greater a blemish will impact your score.

I think this is very enlightening, especially for those of you around Atlanta that are planning on buying a home or refinancing your home in the coming year.  Maintaining a good credit score is really fairly simple.  Just pay on time, maintain low credit card balances, and accept new credit sparingly.

And, in these tough economic times, there have been a number of people who have asked me about possibly going with a debt consolidation company to help get out of those credit cards that are so easy to run up significant balances on.

My advice is to avoid that at all costs – and if needed, call and negotiate with your creditors yourself.  The reason is that even though you are trying to do the right thing and pay the bills, just with some help, your score will drop between 45 and 125 points – and from a mortgage perspective, you will be penalized just as if you declared Chapter 13 bankruptcy.

A whole other thing is credit repair (as opposed to debt consolidation).  And you can do that yourself, or you can use a reputable company that specializes in helping you clear up items on credit that need corrected.  If you are interested in that, just contact me.  I have worked with various companies that do this credit repair over the years, and know the good from the scammers.

So, if you are wanting to buy or refinance a home around Atlanta, this information should take some of the mystery out of the credit scoring models.