Mortgage applications are dropping, that is slowing down, thanks to several factors that are making borrowing for a home less attractive. First, mortgage interest rates moved up a bit in the past week, causing some to think that perhaps the great deals are over. Even refinancing demand dropped as people began re-evaluating their situations and the interest rates became less attractive.

Second, especially for purchases, the first time home buyer tax credit still has not been extended. Though there are rumors that a deal may get struck in congress we all just have to play the wait and see game. It’s fairly obvious that if you haven’t already started the paperwork by now, you probably won’t close in time for the deadline based on lender turn times and the various appraisals and inspections. Even just changing things so that paperwork initiated by the November 30 deadline would probably help home sales. If it does not get extended I would expect further slowdown for a period of time as inventory still need to get worked off.



Third, credit requirements continue to tighten as Banks try and shore up their balance sheets and have little appetite for risk. As credit tightens, fewer and fewer borrowers will be in a position to qualify. Less buyers = less sales or Lower demand = lower prices

While the 203k and the FHA 203k Streamline are great programs, you hear horror stories about them all too frequently. Many people get frustrated. However, if you look behind the scenes there are only a couple of major reasons why they don’t close.

1) Under Estimating the REAL cost to repair the property. This is probably the biggest reason why these loans don’t close. The buyer likes the house and thinks they are getting a good deal. They estimate that it will take a certain amount of money to fix it up. When the real cost comes in the deal no longer makes sense.

Example: Mr. First Time Buyer finds a house that is currently for sale for $50,000. It needs paint, carpet, appliances, minor plumbing and electric work. He thinks he can get the repairs for $10,000. Fixed up home are selling for $75,000 in the area. He signs a purchase contract for $50,000. Now he start to get the real prices in and it is more like $18,000. The lender requires an additional 10% holdback on the repairs for cost overruns. Factor in the closing cost, inspection fees, appraisal and other cost and soon the deal is just not making any sense anymore.

You should try and get your estimates in line prior to making the offer to purchase. These deals are made or lost at the time of writing the offer. If the repairs cost more then you have to offer less for the house.

2) Being the guinea pig for the Loan Officer. This is not a common product. It takes a higher level of experience. Don’t just shop for a lender on these based on who offers you the lowest rate. Chances are if you shop that way it will never close and certainly not at the rate you are quoted.

You should interview loan officers for this product. How many have they done? When was the last one? Can they provide you a list of reference for the people that you have done these loans for? Can you talk to Realtors that they have works with on this type of loan?

While all mortgage loans have bumps, you are looking to see that they solved them. If they won’t provide the references then they probably have never done this loan product. They may say they can not give you the information on past clients due to privacy reasons. That’s fine, why don’t they call their client and ask if they could release the information to you so you could contact them. The Realtor should not be a problem as Realtors love phone calls from potential clients.

Some other great tips can be found on the Mortgage Loan Place Blog -- Tips for buying a fixer-upper home

The FHA streamline loan program has been popular with borrowers and lenders because it allows them to refinance a FHA loan without having to completely re-qualify for a new loan. For Lender's this meant a quick, easy and profitable transaction. For borrowers, this was a low documentation, no fuss, easy process. For example, it used to not require income verification, asset verification or credit scores.

Well that is about ready to change!! Recently, FHA announced that they were changing the guidelines for the FHA streamline program. While the official date of change is November 17th, expect Lenders to start modifying their program guidelines much sooner.

Highlights of the changes to the FHA streamline program include:

At the time of mortgage application, the person wanting to refinance with the FHA streamline program must have made at least 6 payments since they got their loan.
For people who have had their loan longer than 6 months but less than 12, they cannot have even one 30 day late payment in the preceding 12 months.
For people who have had their loan longer than 12 months, they can have a maximum of one 30 day late payment in the last 12 months and NONE in the last 3 months.
In order to see if the loan makes sense, a calculation called the Net Tangible Benefit calculation will be done by the Underwriter. The streamline must lower the TOTAL PITI ( Principal, Interest,Taxes,and Insurance) by at least 5% when going from a fixed rate to a fixed rate mortgage. If going from an ARM to a Fixed rate, then the interest rate cannot go up by more than 2%. When going from a Fixed rate to an ARM but the new ARM must be at least 2% less than the current rate. if reducing the Term of the mortgage then it must be fully qualified.
In order to be eligible, the property must be occupied by the borrower: investment properties are not eligible and second homes are not eligible.
All employment, income , and necessary assets now must be certified by the lender — or in other words, expect to provide proof of income and the ability to make the payments.

So once again we see lending getting tighter. Obviously the benefit here is better qualified borrowers but it is not going to help those that need the help the most.