Bank of America Loan Forgiveness Could Shrink Mortgages for Thousands

Austin, TX – U.S. Housing News — Bank of America has announced a loan forgiveness program that could shrink the mortgages of 45,000 homeowners.

The goal of the program is to motivate struggling homeowners to stay in their homes, avoiding the foreclosure process entirely. By forgiving a portion of the principal amount owed, the Bank of America program would also make it financially easier for homeowners to stay afloat.

How Principal Forgiveness Works

Up until now, most of the loan modification programs used by banks have focused on the interest rate and term of the loan. But the banks were reluctant to reduce the actual amount borrowed (the principal). That is what this new program is designed to do — it forgives part of the loan principal to help struggling homeowners avoid foreclosure. Bank of America said that it is willing to forgive up to 30% of the principal for qualifying borrowers.

In a press release issued on Wednesday, BOA president Barbara Desoer cited the lack of motivation among homeowners with underwater mortgage loans. She said the company “has found that many homeowners who owe considerably more on their mortgages than their homes are worth [i.e., underwater] are reluctant to accept a solution … without an accompanying reduction in the balance due on the loan.”

Desoer’s comments allude to the fact that many underwater homeowners choose to walk away from their mortgages, choosing foreclosure as their only palatable option. The loan forgiveness program gives these people some added incentive to stay in the home, and to keep making payments. Thus, it’s a favorable option for bank and borrower alike.

Who is Eligible for the Program?

According to information released by BOA, the loan forgiveness program focuses on people who used subprime mortgages and option ARMs through Countrywide Home Loans. If you recall, Bank of America acquired Countrywide back in 2008. BOA estimates that they may be reducing principal for up to 45,000 customers who meet these criteria, and that it could eventually forgive more than $3 billion worth of debt.

Additionally, the mortgage must be at least 60 days delinquent with a loan-to-value (LTV) ratio of 120 percent or higher. In other words, the amount owed on the loan must be at least 120 percent of the home’s current value. So it would seem that a property appraisal would be required, in order to determine the home’s current value (though there is no mention of this in the Bank of America news release).

We suspect that other lenders are watching this program closely, and that they may offer a similar option for their customers in the future. But as of right now, only Bank of America has a loan forgiveness program that deals with the principal amount owed.

Fed’s Actions Could Influence Lending Rates in 2012

Editor’s note: This story contains outdated information about interest rates and mortgage trends. For more current information, please visit our rate forecast page.

In December 2011, the Federal Reserve stated that it plans to keep its benchmark lending rate near zero at least through 2013. While mortgage rates aren’t tied directly to the Fed’s actions, they are certainly influenced by them. As a result of this announcement, most analysts are predicting that mortgage rates will remain low throughout all of 2012. How low? Well, they’ve been hovering around 4% for months (in the 30-year fixed category). At present, we have every reason to believe that this trend will continue for much, if not all, of 2012.

You’ll find more housing market predictions on this page.

The rest of this story is presented in its original form, first published in 2010. If you would like to access the most recent information on this website, please use the search tool provided at the top of the page.

Mortgage rate predictions are never written in stone, because nobody can truly predict the future (no matter how many titles or degrees they might have). But there are certain factors that may affect mortgage rates through the rest of 2010 and beyond. For instance, the federal reserve will stop buying so many mortgage-backed securities in March 2010. Many financial analysts agree that this move could contribute to rising interest rates.

Rate Predictions from Around the Web

Here are some other mortgage predictions for 2010 and beyond:

  • In an interview with MarketWatch, Greg McBride predicted that interest rates would rise by about half a point (from the current level of 5%, and after the Fed stops buying up securities).
  • “Still, all of the experts agree that mortgage rates will climb. Their projections are for a gradual run up to between 5.5% and 6% by December. Brinkman’s projection is a rise to 5.8%; Cutt’s is to 5.75%.” –CNN Money
  • “The consensus of almost all the analysts [in a CNBC forum] is that mortgage rates will rise next year … The forecast for next year’s mortgage rates is that by the end of the second quarter, 30 year fixed rate loans will average between 5.37% to 5.5%.  It is expected that by year end 2010, rates will be more in the 5.5% to 6% range.” –Shelby Bateson, loan officer
  • “If you told me by the end of 2010 a 30-year rate was at 6 percent, that sounds about right. I don’t think there’s any question rates are headed up.” –Mark Zandi from Moody’s
  • In December of 2010, the Mortgage Banker’s Association released its outlook for 2010. They predicted a continued rise in rates over the coming months, perhaps up to 5.7% by year’s end. –U.S. Housing News
  • An advisory committee for the American Bankers Association believes that rates will hit 5.5 percent by the second quarter of 2010. Of course, this prediction was from June 2009, so much has changed since then.
  • “We expect interest rates to be lowest in the early part of the year … with 30-year fixed-rate mortgages hanging around the 5% mark … rates will nudge closer to 6% than 5% for the final two quarters of 2010. –HSH.com
  • “The average rate on a 30-year, fixed-rate mortgage … could climb to 6 percent by the end of 2010, if not sooner, according to giant mortgage financier Freddie Mac.” –Washington Post

Taking an average of the predictions listed above (and others we found during our research), we come up with the following consensus: Mortgage rates will likely climb to around 5.75% by the end of 2010.

Putting Mortgage Predictions in Perspective

From a home-buying perspective, mortgage rates are only piece of the puzzle. Home prices are another major factor that should influence your decision making. In some cases, these two things can offset each other. For example, for the second and third quarter of 2010, home prices are expected to dip in many cities across the U.S. This is a direct result of housing inventories in general, and foreclosures in particular. When prices drop at the same time that mortgage rates are rising, a home buyer could still come out ahead in the long run.

The bottom line — you must factors in all of the variables when planning your purchase. Keep this in mind when reading about mortgage rate predictions for 2010 – 2011.

As a home buyer, you should also realize that you may or may not qualify for the best interest rates a lender has to offer. In order to get the lowest rates, you will probably need the following things in your favor:

  • A credit score of 750 or above (some say 740, others say 760)
  • A loan-to-value ratio of 80% or lower (making a down payment for the rest)
  • You might even have to pay a point at closing, to secure the best rate

We will bring you additional mortgage rate predictions for 2010 as they become available.

HUD Publishes New Booklet on Real Estate Settlement Costs

As of January 2010, mortgage lenders are required to use a new form when providing Good Faith Estimates. The new standardized form is designed to give home buyers a clearer picture of their real estate settlement costs, also known as closing costs.

To go along with these new rules, the Department of Housing and Urban Development (HUD) has updated its consumer guide to mortgage settlement costs. The booklet can be downloaded in PDF format from the HUD website.

As a first-time home buyer, it’s crucial that you understand (A) what a Good Faith Estimate is and (B) how it relates to the costs of your loan. So let’s start with some key definitions:
New GFE form
Good Faith Estimate — Also referred to as a GFE, this is a document that mortgage lenders give to borrowers to help explain the full costs of a loan. You would receive this document during the loan application process. You can see an example of a Good Faith Estimate form to the right.

Real Estate Settlement Costs — Also referred to as closing costs, these are the various fees and charges a home buyer pays to a lender. They include mortgage application fees, origination fees, charges for credit checks, and more. These costs can add up to $2,500 or more, and most of them are due on closing / settlement day.

Here’s what the aforementioned HUD booklet says about the new GFE form:

“The GFE is a three page form designed to encourage you to shop for a mortgage loan and settlement services so you can determine which mortgage is best for you. It shows the loan terms and the settlement charges you will pay if you decide to go forward with the loan process and are approved for the loan … The GFE may be provided by a mortgage broker or the lender. Until they give you a GFE loan originators are only permitted to charge you for the cost of a credit report.”

If you click the GFE image to the right, you’ll see another important aspect of it. In the loan summary section, the document tells you if your interest rate will rise in the future. This has to do with adjustable-rate mortgage (ARM) loans. If you’re using an ARM loan, this document will tell you (A) how much the rate may increase and (B) when the first adjustment will occur. These are very important details, because they affect the size of your monthly mortgage payment.

We highly recommend that you download the new HUD booklet on real estate settlement costs, and that you read it until you understand it. It gives you the information you need to make smart mortgage choices. Here is the HUD download page again.

Changes to Down Payment Rules on FHA Home Loans

As the Federal Housing Administration continues to struggle with funding issues, additional changes to the FHA home loan program are being instituted.

Last month, we wrote about some proposed changes to the FHA home loan guidelines that would require larger down payments across the board. That particular proposal is still with the House Committee on Financial Services. So there’s nothing new to report on that front. Earlier this week, however, the Department of Housing and Urban Development (HUD) announced some other changes to FHA loan guidelines.

Significant Changes Include the Following:

The FHA will increase the mortgage insurance premium (MIP) required on all home loans issued through this program. This premium is one of the components that are collectively referred to as closing costs. Starting this spring, the MIP will increase from 1.75% to 2.25%. This will increase the total amount of closing costs for home buyers who use FHA loans to finance their home purchase.

Other FHA changes relate to the borrower’s FICO credit score. In short, if a borrower has a FICO score below 580, they will be required to make a larger down payment on the loan — a down payment of 10%. Buyers with scores above 580 can put as little as 3.5% down. The FHA has made this change to protect themselves from the higher lending risks that are associated with subprime (bad credit) borrowers.

They have also reduced the amount of seller concessions from 6% to 3%. This means sellers will not be allowed to contribute as much money toward the buyer’s closing costs (when the FHA loan is being used).

HUD Secretary Shaun Donovan said that additional details would be released before the end of January. We will update this story as soon as these details are available.

What It Means to Home Buyers

The most significant change is the new down-payment requirement for borrowers with less-than-ideal credit. But this is also something that home buyers can control, by taking proactive steps to improve their credit scores. The difference between a 3.5% and 10% down payment is significant, especially for a first-time buyer who doesn’t have a lot of cash to put down.

On a $200,000 mortgage loan, the difference stacks up this way:

  • 10% down payment = $20,000 (due at closing)
  • 3.5% down payment = $7,000

If this home buyer had a FICO score below the new 580 cutoff, he or she would have to bring an extra $13,000 to the table on closing day. If that doesn’t motivate you to improve your credit, then nothing will.

Summary of Mortgage Changes for 2010

This page provides a summary of mortgage industry changes that are relevant to home buyers. We will update this page throughout 2010, in order to keep it current. Last update: 12/28/09

There have been more mortgage-related changes in the last six months than in the previous six years. The housing crisis and economic recession are the main reasons for this. What does this mean for first-time home buyers? It means they will face a different real estate market in 2010 than what we’ve seen before.

Here’s what home buyers should know about mortgages changes in 2010:

Higher Credit Scores Across the Board

In 2010, home buyers will need higher credit scores than they would’ve needed a few years ago. There are two qualification “tiers” when applying for a mortgage loan. You need a certain score just to be approved for the loan, and you need a certain score to qualify for the lowest rates available. (Sometimes you’ll reach the first mark, but not the second.) Both of these cutoff points have gone up over the last year or two.

The exact score required will vary from one lender to the next, so we can only generalize things here. But it’s safe to say you’ll need to be above the 620 range to be approved for a mortgage, and above the 760 – 780 range to qualify for the best rates available.

There are several reasons for this change within the mortgage industry. For one thing, lenders are less willing to take risks on borrowers with bad credit. That’s partly the reason we had a mortgage crisis to begin with. Secondly, Fannie Mae (a company that buys loans from direct lenders) recently increased its minimum-credit-score requirement from 580 – 620. This means that lenders who want to sell their mortgages to Fannie Mae must enforce that same requirement when approving loans.

Note: This, along with the down-payment factor below, will be one of the most common reasons for mortgage rejection in 2010. So before you start applying for loans or talking to lenders, you should find out what your credit score is — and work on fixing it, if necessary. On the main Home Buying Institute website, you’ll find a library of more than 100 articles on credit score improvement.

Stricter Requirements for Down Payments

The days of zero-down mortgages are over. See the “extinction” notices further down the page. In the past, mortgage lenders were willing to finance 100% of the purchase price, giving home buyers who could not afford a down payment a path to homeownership. Those days are over — for 2010 at least. Depending on the type of loan you obtain, you’ll need a down payment of 3.5% to 20%.

This is actually a good thing, though many first-time buyers don’t realize it. The more money you put down on the purchase, the more equity you have from day one. People who make larger down payments are also statistically less likely to default on the mortgage later on.

Changes to FHA Loans in 2010

Mortgage loans insured by the Federal Housing Administration (a.k.a. FHA loans) are very popular with first-time home buyers. You can put less money down with one of these loans, and the qualification process is generally easier than with a conventional loan. But the FHA’s monetary reserves have dwindles over the last couple of years, so there have been some key changes to this loan program. Here’s what home buyers should know about FHA loans in 2010 …

For one thing, you’ll have to make a larger down payment. The previous requirement was 3% of the purchase price. It was recently increased to 3.5%. If certain members of Congress get their way, the down payment requirement could increase to 5% (though the “jury” is still out on that).

Other Changes in the Mortgage Industry

Here are some other mortgage changes that will affect borrowers / buyers in the 2010 economy:

  • There have been quite a few bank failures and mergers over the last few years, especially at the national level. So home buyers will find fewer options when shopping for a loan at that level. In addition to the “big banks,” home buyers should look into local banks and credit unions. In some cases, you can get a lower rate and better service at the local level.
  • Most of the so-called “exotic” mortgages have become extinct. This includes a wide variety of creative financing tools, most of which were designed to put unqualified borrowers into home loans. Zero-down mortgages and interest-only home loans fall into this category. (Editor’s note: These dangerous mortgage strategies should be illegal in the first place, but we will settle for having them disappear.)
  • The Federal Reserve has stated that it will keep interest rates at their current level for the foreseeable future. As a result, mortgage rates could remain low for most of 2010. They are currently hovering in the 5% range and might stay there for the next few months.

We will update this page as other changes occur within the mortgage industry.

New Rules for Good Faith Estimates – Effective January 2010

Starting in January 2010, mortgage lenders will face some new rules regarding the “good faith estimates” they give out to borrowers. The goal is to give home buyers a more accurate picture of the costs they will incur.

Editor’s Note: This is an update to an older news story, which will come to fruition in the next month. These changes were actually put in motion at the end of 2008. The changes take effect at the beginning of 2010, two weeks from now.

Before we go any further, a definition is in order:

New GFE formGood Faith Estimate (GFE) — An estimate, provided by a mortgage lender, detailing the full costs of a loan. Among other things, it must include the interest rate and all other costs and fees associated with the loan (i.e., closing costs).

In accordance with the Real Estate Settlement Procedures Act (RESPA), the good faith estimate must be given to you within three business days of your loan application. This helps borrowers comparison-shop between different lenders.

There are two key parts to this statement — “estimate” and “good faith.” Because it’s an estimate, it may be slightly different than the amount you end up paying at closing. But it’s also supposed to be made in “good faith,” which means the lender has tried their hardest to be accurate and forthcoming. But this is not always the case.

In the past, these estimates have been, shall we say, less than faithful. Mortgage lenders have been known to downplay various fees, in order to make the loan seem more affordable up front.

Often, home buyers are surprised to find additional costs and fees on closing day — items or amounts that were not disclosed in the good faith estimate. Sometimes, even the true structure of the loan is not fully disclosed. This is a criminal act, plain and simple.

Changes to Good Faith Estimate Paperwork

In truth, this has been a problem for a long time. So these recent actions to increase the accuracy of GFEs are long overdue. These estimates will never be 100% accurate (they are called “estimates,” after all), but these new changes may at least reduce the willful omission of costs. Time will tell.

The new guidelines are intended to increase the accuracy and completeness of GFEs, partly by mandating the use of standard forms and disclosures.

The Department of Housing and Urban Development (HUD) will require usage of the new standardized form for good faith estimates, starting on January 1, 2010.

The first document above (the GFE) is the one discussed in this article. The second document (the HUD-1 Statement) is one that you’ll get a few days before the actual closing.

What This Means to Home Buyers

As a home buyer, one of the best things you can do is to save as much money as possible. You’ll need money for a down payment, closing costs on the mortgage, moving expenses, and probably a few other things you’re not even thinking about right now.

While the Good Faith Estimate might be more accurate in 2010, it’s still only an estimate. Whatever amount of closing costs your lender discloses, you should prepare yourself for a higher amount on closing day. If their GFE is accurate, great! But if the actual costs are higher (which is so often the case), you will at least be prepared for it.

Down Payment on FHA Loans Could Increase to 5%

The down payment for an FHA home loan could soon increase from 3.5% to 5%. This comes in direct response to the FHA’s dwindling funds.

The Federal Housing Administration needs money. The FHA insures mortgage loans made by direct lenders, such as Wells Fargo and Citi. But with the rash of defaults and foreclosures across the country, the FHA’s financial reserves have taken a serious hit. The House Financial Services Committee has raised the question of making these government-backed loans more expensive to obtain, and a new House bill could raise the down payment requirement from 3.5% (the current level) to 5%.

In addition to raising the minimum required down payment, the FHA Taxpayer Protection Act would also prevent the financing of closing costs. In other words, home buyers would no longer be allowed to roll their closing costs into the loan.

Incidentally, there is a strong correlation between the amount of money home buyers put down, and the likelihood that they will default on their mortgage in the future.

What This Means to Home Buyers

The FHA insures about 30% of all mortgage loans made within the United States. A government-backed loan is generally easier to qualify for, and more affordable on the front end. With a traditional home loan (one that is not insured by the FHA), you may have to put up to 20% down in order to be approved. But with an FHA loan, you can make a down payment as low as 3.5%. If the requirement gets raised from 3.5% to 5%, you’ll have to save more money to put toward your house.

Here’s an example of how this change could affect a first-time home buyer. Let’s say that I want to buy a house that costs $150,000, and I’m using an FHA home loan to pay for it. Here is the amount I would have to pay under the current guidelines, versus the proposed increase.

  • A down payment of 3.5% = $5,250
  • A down payment of 5% = $7,500

Bottom line: If you’re planning to use an FHA loan for your purchase, time may be of the essence. If the House bill is passed, it could go into effect next year, in 2010. This means you’ll have to come up with a larger down payment, when compared to the current guidelines.

2012 Update on This Story

There was continued discussion about this topic, throughout 2011. But as of January 2012, the Department of Housing and Urban Development still has no immediate plans to implement a 5% down-payment requirement on FHA loans. The current minimum is still set at 3.5% for qualified borrowers with credit scores above 580.

There has also been talk of implementing a mandatory 20% down payment for conventional mortgage loans. This discussion has followed along with the development of the so-called Qualified Residential Mortgage (QRM). We did a story on this subject in January 2012. As with the FHA changes, this is still theoretical at best. In 2012, well-qualified home buyers will be able to put as little 5% down when purchasing a home with a conventional loan.

Credit scores are equally important when applying for a mortgage, regardless of the financing program you use. Most lenders today are requiring FICO scores of 600 or higher when qualifying applicants. Of course, this can be offset by the size of a borrower’s down payment. A lender might relax this requirement for a borrower who can afford to put 20% down. This reduces the size of the bank’s investment (i.e., risk) in the deal, which typically makes them more flexible in other areas of qualification.

So, to recap. There has been a lot of talk about HUD raising the required down payment on FHA loans from 3.5% to 5%. But as of January 2012, it has not progressed beyond discussion. For now and the foreseeable future, the minimum remains at 3.5% of the borrowed amount.

You’ll Have to Pay Points to Get the Best Rate in 2012

Note: This story has been updated for 2012. We have adjusted the mortgage rate information and other points within the article to make it more relevant and useful for home buyers in 2012.

At the start of 2012, we are still enjoying some of the best mortgage rates we’ve seen in years. As of January 10, the average rate for a 30-year fixed loan was 3.91% (according to Freddie Mac’s market survey). This is certainly good news for home buyers. But many buyers don’t realize what it takes to qualify for those rates. In fact, many of the people I’ve spoken to by email are surprised to learn that the rates advertised on a lender’s website don’t apply to everyone across the board.

“What do you mean you can only give me a 4.8% interest rate? I saw 3.95% offered on your website.” Answer: Welcome to the world of teaser rates. Lenders will typically advertise their very best offers on their websites, in order to lure in more business. But in reality, only the most well-qualified borrowers will be offered the best mortgage rates in 2012. And believe me, this is a small and “elite” group — probably less than 25% of all borrowers. These are people with excellent credit scores (north of 760), sizable down payments, and minimal debt. Does this describe you? If so, you may very well qualify for the best rates in 2012.  Otherwise, you might have to set your expectations a bit lower.

Essentially, you can forget about the rates advertised on the lender’s website. They are not very useful when it comes to comparison shopping. You need to find out what they are willing to lend you, based on your particular qualifications. And you may have to pay “interest points” at closing, in order to lower the rate over the long term (more to follow on this).

A Crash Course in Mortgage Rates

Here’s what you need to know about qualifying for the best mortgage rates:

  • The average rate on a 30-year fixed rate mortgage has been hovering below 4% since December 2011. By way of comparison, at this time in 2008 the average rate was over 6% for a 30-year loan.
  • Rates are expected to remain low for most of 2012 — but probably not this low. I predict they will remain below 5% for most of the year, and slowly rise thereafter.
  • Not everyone can qualify for the best mortgage rates, though. Some people may get an even lower rate, while others will have to pay more interest on their loan. It depends on (A) how well qualified you are in the eyes of the lender, and (B) how much money you bring to the table at closing.
  • If you want to get the lowest rates available, you’ll probably have to buy points at closing. One point is equal to one percent of the loan amount. When you pay points up front, you can secure a lower interest rate on the loan. Some buyers use this strategy to save money over the life of the loan (by reducing the interest and thus the size of the monthly payment).
  • According to the Wall Street Journal, home buyers who secured the best rates on fixed mortgages had to pay, on average, 1.17 points at closing. On a loan of $250,000, this would mean paying $2,925 in points at closing (250,000 x .0117).
  • To qualify for the best rates, you’ll also need to have an excellent credit score (defined here). You’ll need to meet the lender’s definition of a “well-qualified borrower” in other ways, as well. Generally, this means having a FICO credit score of 760 or higher, a down payment of 10% or more, and a favorable debt-to-income ratio.

Buying a home in 2012 could be a smart move, as far as your interest costs are concerned. If you can meet the lender’s definition of “well qualified,” you could lock down a historically low rate on your loan. But you may have to pay points at closing to get the best mortgage rates available, and you’ll definitely need an excellent credit score.

If you use an FHA home loan, you’ll be required to pay at least 3.5% down. If you get a traditional loan (not backed by the FHA), you’ll probably have to make a down payment of 10% or more to qualify for the best rates.