Loan Type Select One Purchase Home Equity Refinance Debt Consolidation FHA/VA State Select a State Alabama Alaska Arizona Arkansas California Colorado Connecticut D.C. Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Credit Rating Select One Excellent Good Fair Poor View Privacy Policy

How To Play The New Mortgage Game -- And Win Peter G. Miller - Mortgage Lenders Plus.com Add to Delicious, diggit, reddit, technorati favs

Just when everyone thought they had the mortgage market figured out, whoops -- along comes the meltdown of 2007 and with it an end to many old borrowing strategies and ideas.

Despite recent changes it's important to know that not only is real estate financing available, it's easily and readily available for most borrowers. Current interest rates at this writing are well below 7%, a low rate by the standards of the past 50 years and hardly evidence of a general credit shortage.

The low interest rates seen in today's market show that investors worldwide are still willing to put money into U.S. mortgages. That's the good news. However, while there are lots of prime-rate mortgages available for those with great credit, the story is different with subprime loans, a sector which has been being demolished by investor fears, lender closings and rising foreclosure levels.

Does this mean you can't get a mortgage if you have a spotty credit record? Yes and no. No, you're not likely to have the same financing options that were available a year ago. Yes, there are new financing options out there. In some ways the new choices are far better than the old ones.

The New System

Today when you get a mortgage the odds are overwhelming that your loan will be quickly be resold, bundled with other mortgages and used to create mortgage-backed securities. These securities are then sold to investors around the world. The money raised from the sale of mortgage-backed securities goes back to local lenders so they can create new loans.

Like all investors, the ones who buy mortgage-backed securities want to get the highest rates of return with the least possible risk. The result is that mortgage-backed securities contain various combinations of subprime loans, "Alt-A" loans and prime mortgages. Since subprime loans are most risky, mortgage-backed securities with lots of subprime mortgages produce the most interest -- and also the most risk. (Alt-A loans are generally for people with credit between subprime and prime. Like subprime, investors today are also less interested in ALT-A loans, though the situation with ALT-A is not as bad.)

With so many subprime foreclosures, investors today either want mortgage-backed securities with few subprime loans or they want interest rates which are higher than most borrowers are willing to pay.

Without a market to sell subprime loans, local lenders have cut back on the origination of such financing. The result is that it's difficult to get a subprime loan today.

However, at the same time the subprime marketplace has been contracting a new and parallel market has begun to open. The old reliable FHA program has been changed to accommodate more buyers than ever before.

How has the FHA program changed? In 2005 the FHA quietly revised its qualification standards. Under the new guidelines you can qualify for an FHA loan if as much as 31% of your gross monthly income is used for housing expenses, meaning mortgage principal, mortgage interest, property insurance and property taxes ("PITI" to lenders). This is an increase from the old standard of 29%.

In 2005 the FHA also increased another ratio. Now the debt-to-income ratio is 43% -- up from 41%. This means that combined monthly costs for housing as well as auto loans, credit card bills, student loans and similar recurring bills can be as much as 43% of your income.

It might seem as though these 2% increases in the allowable standards are not a big deal, but if you look at the numbers you can see that they're very important. For example, imagine that you have a gross household income of $5,000 per month before taxes. Under the old standard only $1,450 could be used for housing costs. The new and higher standard allows you to spend $1,550 a month on housing.

A similar increase can also be seen in the debt-to-income ratio. For someone with $5,000 in monthly income you can now devote as much as $2,150 to recurring monthly bills, up from $2,050 under the old standard.

In contrast many loan programs have far-lower ratios of just 29/36 -- meaning that 29 percent of your gross income can be used for housing costs and 36 percent can be used for all ongoing bills. With tighter ratios your ability to borrow is greatly limited.

If you combine more liberal qualification standards with FHA's traditional underwriting guidelines the result is financing for large numbers borrowers who otherwise would either need subprime loans or who simply could not get a mortgage.

As an example of just how liberal the FHA standards are, imagine that you had either a foreclosure or a bankruptcy. In today's world a lot of lenders have little if any interest in borrowers with such a shaky history. The FHA program is different, it's fairly open to borrowers who have had problems in the past.

Under FHA rules, you can apply for financing if you wait three years. Bankruptcies? They can be acceptable if you wait two years for a Chapter 7 bankruptcy and just one year for a Chapter 13.

To make matters more interesting the FHA has just announced its FHASecure program. The FHASecure mortgage is designed specifically for borrowers who have recent loans were monthly costs skyrocketed. Under FHASecure even if you have a string of late payments or no payments you can still qualify for the federal program. In fact, a senior HUD official told reporters that borrowers could qualify for the program even if they had missed six or more monthly payments -- something few if any private-sector lenders would accept.

Take Action Now

If you have a subprime or Alt-A mortgage you should seriously consider switching to an FHA product. Why? Several reasons stand out:

First, interest rates for FHA loans are likely to be lower than the rates paid for subprime or Alt-A products.

Second, there are no prepayment penalties with FHA mortgages.

Third, the FHA has both adjustable and fixed-rate loans. If you now have an adjustable-rate mortgage and would prefer fixed-rate financing than the FHA program may well be the best way to switch to a loan with predictable monthly costs.

Is there a downside to the FHA loan program? Not really, but the game is played differently then under the old rules. For instance, if you're a buyer you'll need 3% down. There are up-front and monthly mortgage insurance premiums. Also, with the FHA you can forget about stated-income loan applications, the applications where you guess your income and lenders don't check. With the FHA you have to be able to show what you earn and the lender must verify the income that you claim.

The bottom line is that in a changing mortgage environment -- one where a lot of borrowers are being forced out -- the FHA program remains in place and is actually better than it's been in the past. If you find that you want to finance or refinance in today's marketplace take a look at what the FHA has to offer. With so many other loan options now missing from the marketplace, not only is the FHA a good choice for many borrowers, it may well be the only realistic option available.