Why millennials are flocking to FHA mortgages

KENNETH R. HARNEY on Mar 17, 2017

WASHINGTON – The Trump administration may not be fond of FHA-insured mortgages – the president canceled a cut in fees for new loan applicants as one of his first official actions – but millennial home buyers apparently are big fans.

A new analysis of loans closed during January found that 35 percent of millennials – those born between 1980 and 1999 – opted for Federal Housing Administration mortgages to finance their purchases, well above FHA’s overall market share of 21 percent.

The analysis was conducted by mortgage technology company Ellie Mae, tapping into its massive database of lenders’ transactions across the country. Meanwhile FHA itself found that 82 percent of its home-purchase borrowers recently have been first timers.

Why the strong attraction for FHA, especially at a time when competitors Fannie Mae and Freddie Mac have introduced new programs offering low down payments? Turns out it’s all about the total package of features for young buyers – not just the small cash outlays required up front.

Twenty-eight year-old Bradley Barron and Amy Gina Kim, who is 30, both work for tech-related companies in the Los Angeles area. They are new home buyers and they’ve chosen FHA financing over conventional bank or Fannie-Freddie alternatives. Like many young couples, they’re carrying a lot of student debt – both have master’s degrees – and both now have well-paying jobs.

“We entered the working world with major student debt and no assets to our name,” Bradley told me last week. Their jobs are “great,” he said, but “we don’t have 10 percent to 20 percent” to put down. Both he and Amy are frustrated that they pay a substantial amount every month in rent that does not contribute toward building equity or an investment nest egg. So “the faster we get into a home, the less money we throw away on rent.”

They consulted with Steven R. Maizes, a vice president of mortgage lending for Guaranteed Rate, a large national retail mortgage banker, who walked them through the pros and cons of their alternatives. FHA turned out to be the answer.

“The vast majority of these [millennial] buyers, in the absence of getting a gift from a family member, simply don’t have” enough down payment cash, plus money to cover closing costs and post-closing money left over in the bank as reserves, said Maizes. FHA’s total package – which has some downsides as well as upsides – clinches the deal for many young first-timers.

So what’s FHA’s total package? Start with down payment. FHA’s minimum of 3.5 percent is low, but it’s not best in class. Fannie Mae and Freddie Mac have programs requiring just 3 percent down, but they come with a variety of eligibility requirements, such as income cut-offs in some cases. VA (Veterans) and USDA (rural loans from the US. Department of Agriculture) allow for zero down payments, but also have major restrictions – veterans status or geographic limitations.

What about credit? Here’s where the differences get really important for millennials, many of whom have middling scores compared with other generational groups. FHA accepts much lower scores than Fannie and Freddie – even below 600 FICOs. The average millennial first-time purchaser closing Fannie or Freddie loans in January had a FICO score of 748; the average for millennial purchasers using FHA was 690. Paul Skeens, president of Colonial Mortgage in Waldorf, Maryland, says that as a rule, whenever low down payment borrowers have FICO scores below 720, “FHA is going to give (them) the lowest payment.”

Now for debt-to-income ratios, which are often a weak point with young, debt-burdened borrowers. Fannie and Freddie typically won’t go higher than a 45 percent DTI (monthly gross income compared with total recurring monthly debt), while FHA can stretch well over 50 percent – even to 56 percent, according to Skeens – provided there are “compensating” positive factors in the application, such as extra-strong income or multiple months of reserves. This flexibility on DTI to the high side is especially helpful for millennials with student-loan debts because FHA includes monthly payments on student loans as part of its debt calculation, even if payments are in deferred status.

One glaring drawback to FHA for some applicants- Unlike the private mortgage insurance that comes with low down payment Fannie and Freddie loans, FHA premiums are non-cancellable for the life of the loan. But most first time buyers don’t remain in those starter houses for long periods of time, so it’s not likely to be a deal-killer.

Many mortgage applicants will get a surprise boost in their credit scores

By Kenneth R. Harney

March 8, 2017

It could be a boon for some home buyers — their credit scores will get a surprise boost — but worrisome for mortgage lenders, landlords and others who depend on credit reports to evaluate their potential customers.

In a little-known policy shift, the three national credit bureaus — Equifax, Experian and TransUnion — plan to stop collecting and reporting substantial amounts of civil judgment and tax lien information on public records affecting millions of American consumers starting July 1.

Both types of information have negative impacts on credit scores and remain in credit files for extended periods. Tax liens are levied against properties when the owner is delinquent on payment of taxes. Civil judgments — debts owed by the losing party in legal disputes that typically involve monetary damages — are ordered by courts.

With the elimination of this information from vast numbers of consumer credit files, some lenders are concerned that when they order credit reports to evaluate an applicant, they may no longer get the full picture of the risk of nonpayment posed by the consumer.

David H. Stevens, president and chief executive of the Mortgage Bankers Association, told me that if tax lien and civil judgment data is suppressed from credit reports, “it’s unclear whether creditors will be able to make informed decisions” about loan applicants. Stevens said that blocking this information will raise some applicants’ credit scores artificially, creating “false positives” that make individuals appear lower risk than they are.

A study by Vantage Score Solutions, a credit scoring developer created by the three credit bureaus, estimated that 8 percent of consumers would see an average score increase of 10 points on its most widely used scoring model if all civil judgments and tax liens were removed from credit reports. Stevens said 8 percent and 10 points may sound small, but in the mortgage business they equate to significant numbers of applicants.

Terry W. Clemans, executive director of the National Consumer Reporting Association, a group that represents companies that provide credit reports for mortgage lenders, said home buyers “who are on the edge” — they need a score increase to get approved for a loan or obtain a better interest rate — “may be of higher risk than [lenders] are aware after this data is removed.”

Tim Coyle, senior director of real estate and mortgage for LexisNexis Risk Solutions, a large data and technology company that sells creditors data on public records including judgments and tax liens, told me in an interview that an internal study by his firm found that borrowers who have a judgment or a tax lien are 5½ times as likely to end up in serious default or foreclosure as are borrowers who don’t have such items in their files.

The three national credit bureaus have been tight-lipped about the details of their July 1 changes. Mortgage lenders say they have heard nothing from the three bureaus and are in the dark about the possible ramifications. Stevens told me that “nobody” in the mortgage industry “knows about this.”

In response to a request for this column, the bureaus’ national trade organization, the Consumer Data Industry Association, provided a statement indicating that the changes are part of the bureaus’ “National Consumer Assistance Plan” that follows a settlement in 2016 with 31 state attorneys general over alleged problems with credit reporting accuracy and correction of errors on credit reports.

Eric J. Ellman, the group’s interim president, said the bureaus have adopted “enhanced public record data standards for the collection and timely updating of civil judgments and tax liens.” The standards will apply to new and existing data in files and will require that the public records sources include the individual’s name, address and Social Security number or date of birth. Public records sources will also need to be updated on a timely basis to be eligible for inclusion in credit files. Most civil judgment data and up to half of tax lien information cannot currently meet these tests, according to one industry estimate.

Chi Chi Wu, an attorney with the National Consumer Law Center and an expert on credit issues, welcomed the upcoming change. “To the extent that it’s preventing errors” in credit reports, she said — especially situations where a credit file has one consumer confused with another, which Wu says occurs too frequently — “it should be a good thing.”

How much of a good thing it will be for you depends on what’s in your credit files and how lenders adapt to the elimination of what they consider important information — if it’s accurate.

Mountain of mortgage paperwork wears down borrowers

Kenneth R. Harney March 1, 2017

Could getting a home mortgage under today’s post-housing bust regulations and procedures be even remotely comparable to going to the dentist to get drilled? Or anything like having your annual physical, where every body part potentially is subject to inspection and prodding?

Has the process of applying and qualifying at a time of superstrict underwriting standards, record-high credit score requirements and hard-wired debt-to-income cut-offs gone a little over the top?

Many applicants and borrowers who’ve been through it apparently think so. Two new national surveys of consumer perceptions found that significant numbers of borrowers believe the current mortgage process is a major hassle.

The surveys were conducted for two consumer websites – Freeandclear ( http://www.freeandclear.com/ www.freeandclear.com), a mortgage site, and NerdWallet ( http://www.nerdwallet.com/ www.nerdwallet.com), which offers personal finance and mortgage information. NerdWallet polled 2,241 adult borrowers, 1,341 of whom had applied for a mortgage and 1,431 of whom already owned a home. The survey was conducted online in mid-January by the Harris Poll. Of those sampled, 42 percent said they found the mortgage process “stressful,” 32 percent found it “complicated.” Forty-nine percent said they had regrets about how they handled the process. Some applicants, especially millennials and Gen X-ers, felt they hadn’t ended up with as low an interest rate as they expected.

One of every 6 said their applications had been rejected for one reason or another- 52 percent because their debt-to-income ratios didn’t meet current standards; 39 percent because their credit reports or scores weren’t good enough for the loan program they sought. Thirty-one percent of those turned down said they were “surprised” at the lender’s decision.

Not everybody was bowled over by the process, however. Forty-one percent of those surveyed found it “manageable.”

The Freeandclear survey, which was conducted in February by an independent third party, polled homeowners ages 22 to 49 who currently have a mortgage. Each survey question received a minimum of 421 responses. In one question, which received 431 responses, borrowers were asked to choose among a set of alternatives that would most closely describe the mortgage process. Forty-one percent said it was most similar to an annual physical. Thirty-four percent said it was like going to the dentist. Twenty-two percent characterized it more favorably, as akin to doing “business with a friend.”

In an analysis accompanying the survey, Freeandclear said that with 75 percent of borrowers comparing the process to either a physical or a dental visit, it’s evident that most people put getting a mortgage in the “unpleasant but necessary” category.

In another question – which also received 431 responses – on the most challenging part of the mortgage process, 56 percent of respondents found excessive paperwork to be the most overwhelming aspect. “Although all the mortgage documents are intended to serve a specific purpose, usually legal or regulatory, the sheer amount of paperwork creates significant difficulties” for many consumers, said Freeandclear in its analysis of the survey results. The second most troubling issue for consumers- current strict qualification requirements for loans, which “have definitely tightened since the mortgage crisis and the tougher guidelines appear to pose a challenge for many borrowers,” according to Freeandclear.

What to make of consumer sentiments like these? There’s no question that in the wake of the financial crisis, federal and state regulations, mandatory disclosures and penalties governing mortgage lending have become far more stringent – and for good reasons. Between roughly 2004 and 2006, at the height of the boom, getting a mortgage too often wasn’t much of a hassle at all. As the saying went, all you needed was to be able to fog a mirror- No down payment necessary. No minimum credit requirements. No verification of income, taxes, assets.

But no-hassle mortgage lending in the U.S. produced hundreds of billions of dollars in losses for lenders and millions of Americans lost their homes to foreclosure. Many families still have not recovered, more than a decade later.

Lenders generally agree that tougher standards and procedures are needed to avoid a repeat.

“I get it,” said Steve Stamets, a loan officer with Mortgage Link, a Maryland-based lender. The process “is a pain. But is it the right thing to do? Yes. If you were lending me $300,000, wouldn’t you want to know as much as possible about me?”

David Stevens, president and CEO of the Mortgage Bankers Association, told me the biggest problem with the system today is that some of the regulations for lenders amount to an overcorrection and are far too inflexible, especially for highly qualified applicants with large down payments and stellar credit scores.

“You can create rules that eliminate risk entirely,” he said, “but nobody’s going to get a loan either.”

Lenders now must report more information about your mortgage to the IRS

By https://www.washingtonpost.com/people/kenneth-r-harney/ Kenneth R. Harney February 14

If you’re like millions of homeowners, you recently received a familiar, innocuous-looking document from your lender. Called Form 1098, it totes up how much interest you paid on your mortgage last year. Your lender is required by law to fill it out and send it to the IRS.

But there are key differences in this year’s form that are easy to miss yet potentially important to you – differences that could trigger an audit by the IRS.

Under an obscure statutory change buried in a federal highway bill that passed Congress in the summer of 2015, your lender must now disclose more information to the IRS about your loan, including the amount of the outstanding principal balance at the beginning of the year, the origination date of your mortgage and the address of the home securing the loan.

What’s up with these changes? Although the IRS had no immediate comment when I asked whether it is ratcheting up its scrutiny of home-mortgage interest deductions, that appears to be the case. As one of the largest write-offs in the tax code – with a projected revenue cost of $357 billion between fiscal years 2016 and 2020 – the mortgage deduction is a fat target. In addition, the rules governing eligibility for taking deductions are complex, and government watchdog agencies have been critical of the IRS’s oversight of this area in years past.

The lack of crucial data points in the previous version of the 1098 form made it challenging for the IRS to determine whether some properties qualified for interest deductions and whether the claimed amounts were in sync with reported incomes or were based on mortgage amounts that exceeded the tax code’s limits of $1 million in “home acquisition debt” and $100,000 of “home equity debt.”

Acquisition debt, according to IRS Publication 936, is the mortgage amount you use to “buy, build or substantially improve” your principal residence or second home. Home equity debt is mortgage money secured by your residence that you can use “for reasons other than” buying, building or improving your primary or second home. If your acquisition debt exceeds the $1 million limit, you can use up to $100,000 of home equity debt to extend the total deductible limit to $1.1 million.

Among the areas of potential exposure with the new Form 1098 for some homeowners, tax professionals say, are certain refinancings. Charles Benway, a CPA and certified financial planner with Main Street Financial in Mount Kisco, N.Y., told me many owners are not aware that when they pay down their original mortgage amount over a period of years, their acquisition debt for federal tax computation purposes declines. When they later refinance into a larger loan and use the proceeds for purposes other than buying, building or improving, a portion of the mortgage interest they pay to the lender may not be deductible.

Benway offered this hypothetical example, which was also included in an article he wrote for Kiplinger.com

Say you buy a house with a $500,000 mortgage and, over time, you pay down the principal to $300,000. Meanwhile, your home increases in value to $700,000 and you refinance into a new loan of $500,000, paying off the $300,000 balance. But you spend the $200,000 remaining proceeds on student loan debt, a new car, new furniture and credit card bills.

In this scenario, your acquisition debt remains at $300,000 and your home equity debt limit is $100,000, giving you $400,000 in mortgage debt that qualifies for interest deduction. But that’s $100,000 short of the $500,000 amount you borrowed in the refinancing. The $400,000 is 80 percent of your $500,000 mortgage balance, and that means “only 80 percent of the interest is deductible” on the tax return you’re filing.

It’s complicated, Benway says, “but I think it’s going to hit people” once the IRS begins feeding this year’s 1098 data into its computers.

Greg Rosica, a tax partner with accounting firm Ernst & Young in Tampa, agrees that some refinancings will attract more attention from the IRS, but he says the most likely targets initially will be taxpayers with large mortgage balances.

Bottom line for you- Be aware of the important changes to Form 1098. Just because your 1098 says you paid a certain amount of interest last year doesn’t automatically mean that’s what you can deduct. Download a copy of the IRS’s Publication 936 at http://irs.gov/ irs.gov to review the mortgage interest deduction rules, and consult a tax professional if you’re not certain how you might be affected.

Lenders now must report more information about your mortgage to the IRS

If you’re like millions of homeowners, you recently received a familiar, innocuous-looking document from your lender. Called Form 1098, it totes up how much interest you paid on your mortgage last year. Your lender is required by law to fill it out and send it to the IRS.

But there are key differences in this year’s form that are easy to miss yet potentially important to you – differences that could trigger an audit by the IRS.

Under an obscure statutory change buried in a federal highway bill that passed Congress in the summer of 2015, your lender must now disclose more information to the IRS about your loan, including the amount of the outstanding principal balance at the beginning of the year, the origination date of your mortgage and the address of the home securing the loan.

What’s up with these changes? Although the IRS had no immediate comment when I asked whether it is ratcheting up its scrutiny of home-mortgage interest deductions, that appears to be the case. As one of the largest write-offs in the tax code – with a projected revenue cost of $357 billion between fiscal years 2016 and 2020 – the mortgage deduction is a fat target. In addition, the rules governing eligibility for taking deductions are complex, and government watchdog agencies have been critical of the IRS’s oversight of this area in years past.

The lack of crucial data points in the previous version of the 1098 form made it challenging for the IRS to determine whether some properties qualified for interest deductions and whether the claimed amounts were in sync with reported incomes or were based on mortgage amounts that exceeded the tax code’s limits of $1 million in “home acquisition debt” and $100,000 of “home equity debt.”

Acquisition debt, according to IRS Publication 936, is the mortgage amount you use to “buy, build or substantially improve” your principal residence or second home. Home equity debt is mortgage money secured by your residence that you can use “for reasons other than” buying, building or improving your primary or second home. If your acquisition debt exceeds the $1 million limit, you can use up to $100,000 of home equity debt to extend the total deductible limit to $1.1 million.

Among the areas of potential exposure with the new Form 1098 for some homeowners, tax professionals say, are certain refinancings. Charles Benway, a CPA and certified financial planner with Main Street Financial in Mount Kisco, N.Y., told me many owners are not aware that when they pay down their original mortgage amount over a period of years, their acquisition debt for federal tax computation purposes declines. When they later refinance into a larger loan and use the proceeds for purposes other than buying, building or improving, a portion of the mortgage interest they pay to the lender may not be deductible.

Benway offered this hypothetical example, which was also included in an article he wrote for Kiplinger.com-

Say you buy a house