The Definitive Guide to Mortgage Loans in 2011, Revisited

2011 Mortgage UpdateCertain mortgage products have disappeared. New regulations have been imposed. Government-backed mortgage loans have become more expensive. Loan requirements are tougher.

Over the last few years, a lot has happened in the world of mortgage loans and lending. It can be hard to keep it all straight — especially if you’re new to the home buying process.

That’s why we’ve created this, the Definitive Guide to Mortgage Loans in 2011. This article will be updated as needed throughout the year, to ensure it remains relevant and useful.

Summary of Mortgage Changes for 2011

Here’s a summary of the mortgage changes discussed below:

  • Fannie Mae and Freddie Mac are requiring higher fees on the mortgages they buy, and this cost may be passed along to borrowers. More
  • Certain mortgage products are no longer available in 2011. More
  • Wells Fargo recently lowered their credit-score requirements for FHA home loans. More
  • The FHA has altered their down-payment requirements, tying them to the borrower’s credit score. More
  • Starting in April, the FHA is charging higher insurance premiums on FHA loans. More
  • A 10-percent down payment could be the new standard in the near future. More
  • The government is planning to “wind down” Fannie Mae and Freddie Mac, which could alter the mortgage market in several ways. More
  • The cost and availability of 30-year fixed mortgage loans could change, as a result of changes in the secondary mortgage market. More

Higher Risk-Based Fees from Fannie Mae & Freddie Mac

Fannie Mae and Freddie Mac operate in the secondary mortgage market. They purchase mortgage loans made by lenders in the primary market, and then sell them off to investors worldwide. Fannie and Freddie establish guidelines regarding the loans they are willing to buy. If a loan fails to meet those guidelines in some way, then the lender cannot sell it to Fannie and Freddie.

That’s how these criteria travel from the secondary mortgage market (that most consumers don’t even know about) to the primary market (where consumers apply for loans).

Fannie Mae and Freddie Mac

Why am I telling you all of this? Because Fannie and Freddie are going to increase certain risk-based fees they assign to mortgage loans, starting in 2011. Freddie Mac’s higher fees went into effect in March 2011. Fannie’s changes will take effect in April of this year. Before this change, Freddie’s risk-based fees ranged from 0.25% to 3% of the loan amount. The exact amount depends on the loan-to-value (LTV) ratio and the borrower’s FICO credit score. In March 2011, they increased the fees  by a quarter to half a percentage point.

The lender must pay this risk-based fee when they sell their mortgage loans to Freddie or Fannie. But borrowers can probably expect some or all of that cost to be passed along to them. It might come in the form of a higher interest rate or additional points due at closing.

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Certain Types of Mortgage Loans No Longer Available

Most people already know that subprime mortgage loans went extinct during the housing bust. But other mortgage products have disappeared as well, or have at least become very rare. Stated-income loans are a thing of the past. This is when the borrower states their income level but does not support it with documentation. They are also referred to as no-doc loans.

The similarly titled low-doc (low documentation) mortgage loans are also in the rear-view mirror. Mortgage lenders today will require a full range of documents from all borrowers. This includes W-2 statements for the last couple of years, most recent pay stubs, recent bank statements and more.

Depending on where you live, certain types of piggyback loans may no longer be available. This is a strategy where the borrower uses two mortgage loans to minimize down-payment costs while avoiding mortgage insurance. The 80-15-5 is a good example. The first loan accounts for 80% of the purchase price, the second loan covers 15%, and the buyers pays the remaining 5% in the form of a down payment. In the past, you could get these loans anywhere in the U.S. In 2011, they are harder to come by. They can still be found in some areas. But in places like California (Ground Zero for the foreclosure crisis), the 80-15-5 is rarely used today.

Most mortgage loans today are either “standard” conventional mortgages, VA and FHA loans. USDA loans are still in use as well, though they account for a small percentage of mortgage activity.

Home buyers should research their mortgage options before making any assumptions. If you’re not ready to talk to a mortgage lender just yet, there are other ways to get answers to your questions. For example, you could visit the Q&A section of and post a question under your city and state. You’ll get answers from local mortgage brokers and real estate agents. Just be sure to consider the source.

Wells Fargo Lowers Credit Requirements on FHA Loans

Wells Fargo is the largest mortgage lender in the United States. So when they make changes to their mortgage loan criteria, it becomes newsworthy. In February 2011, the New York Times reported that Wells Fargo was lowering their credit-score requirements for some FHA loans. In the past, they required a credit score of at least 600. They have lowered the requirement to 500.

This means a home buyer with a FICO credit score of 500 or higher might qualify for an FHA loan through Wells Fargo. We have not yet been able to confirm this through Wells Fargo. But the New York Times can generally be viewed as a reliable source.

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Down Payments for FHA Loans Now Tied to Credit Score

Speaking of FHA loans, there are some specific guidelines borrowers need to know about. Historically, the Federal Housing Administration did not establish minimum credit-score guidelines for FHA loans. They left that up to the lenders, for the most part. But in 2011, the FHA has imposed some concrete guidelines. To qualify for the program, borrowers will need a FICO credit score of at least 500. If you want to qualify for the 3.5% down-payment program (which is the primary appeal of FHA loans), you’ll need a score of 580 or higher.

Of course, some lenders will impose their own guidelines on top of the FHA’s. So a score in the 500 – 600 range does not guarantee you’ll qualify for an FHA loan. These “standards on top of standards” are called overlays.

Higher Mortgage Insurance Fees on FHA Loans

FHA logoOne of the disadvantages of using an FHA mortgage loan is the extra insurance you have to pay. When using an FHA loan, you actually have to pay two types of mortgage insurance premiums (MIP) — an upfront premium, as well as an annual premium.

The upfront premium is currently set at 1% of the loan amount (e.g., $2,000 for a $200,000 mortgage loan). This fee is due at closing, hence the term “upfront” premium.

Currently, there are no plans to increase the upfront MIP. But the annual MIP will go up in April.

The annual premium is broken into monthly amounts and added onto the borrower’s mortgage payments. So it increases the size of the monthly payments. In April 2011, the FHA will increase the annual MIP they charge for FHA loans. Starting this spring, the annual mortgage insurance premium for FHA loans will rise another quarter of a percent (0.25). The revised premium will be 1.1% to 1.15% of the loan amount for 30-year loans, and 0.25% to 0.50% for 15-year and shorter loans.

The Federal Housing Administration is doing this to increase their capital reserves. This is the money they use to cover insurance losses when borrowers default on their loans. The FHA’s capital reserves sank below congressionally mandated levels during the housing bust. This change will make FHA loans more expensive for borrowers.

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10-Percent Down Payment Could be the New Norm

In 2011, there has been a lot of buzz about down payments on mortgage loans. That’s because housing regulators and mortgage lenders are still hashing out their plans for the future of the housing market (in a post-financial-reform world). Many regulators are pushing for higher down-payment requirements, with a 10% down payment being the new norm.

Consumer groups and smaller banks have been lobbying against this change, arguing it will hurt the middle class and housing market alike. Susanna Montezemolo, from the Center for Responsible Lending, pointed out that mortgage loans with low down payments (in the 5% range) have been used successfully for decades. It wasn’t the size of down payments that wrecked the housing market, she says — it was the lax underwriting and risky mortgage products. Such lobbying efforts may be paying off already. The rhetoric about higher down payments seems to be cooling.

Some lawmakers are opposed to the proposal as well. Sen. Kay Hagan (D., N.C.) recently expressed concerns that higher down-payment requirements would make it “so restrictive that we can’t have as many well-qualified loans as possible.”

Treasury Secretary Tim Geithner

This is a dynamic story that has yet to be finalized. You can expect updates to this page in the future. When will it be resolved? Your guess is as good as mine. On March 1, 2011, Treasury Secretary Timothy Geithner said, “I’m not sure how much longer it’s going to take [to make a final decision], but it’s going to take a bit longer than we initially expected.” Government speak for “we are still arguing.”

Obama Administration Winding Down Fannie & Freddie

Fannie Mae and Freddie Mac (the government-run mortgage buyers we discussed earlier) face an uncertain future. The Obama administration has presented Congress with three proposals for “winding down” the two organizations. It’s all part of a plan to reduce the government’s involvement in the housing market. Tax payers are paying billions of dollars to keep Fannie and Freddie afloat.

Of course, it could take years to phase out the mortgage loan giants. But if and when it does happen, it will have a major impact on the housing market. Some of the proposed changes do not require congressional approval, so they could be implemented in 2011. The question most people are asking is: Without Fannie and Freddie, who else would be willing to buy 30-year fixed-rate mortgages? See next item below.

30-Year Fixed Mortgage Loans May Get Costlier

In the absence of Freddie Mac and Fannie Mae (see above), the 30-year fixed-rate mortgage loan could become more expensive and/or harder to find. According to Ellen Seidman of the Office of Thrift Supervision: the “30-year fixed-rate mortgage is a very difficult product from both an interest rate risk and credit risk perspective … It’s not going to happen without some kind of government backing.”

Others argue that there will always be a strong demand for this type of mortgage loan, so the lending industry will find a way to provide it — perhaps with a revised form of government backing.

However it plays out, most experts agree that the 30-year fixed mortgage will become more expensive. According to Barry Zigas, director of housing policy at the Consumer Federation of America: “There’s a lot of uncertainty in the process [of winding down Fannie and Freddie], but you’re probably going to get a better deal on a fixed-rate loan sooner rather than later.”

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We will keep a close eye on these mortgage loan changes and update this page as needed.