According to various news sources, it is no longer a rumor that the Federal Housing Administration (FHA) will increase down-payments on loans to 5 percent.

The agency’s share of home loans has surged from 3% in 2006 to nearly 30% this year as credit has tightened and borrowers’ bank accounts have been depleted. But that increased exposure has led to more defaults, driving the FHA’s reserves below their mandated levels. The changes will go into effect in the first half of the year.

What’s Happening in the Mortgage Industry?

The Housing and Economic Recovery Act of 2009 (HERA) is a wide-ranging piece of legislation that strengthens and modernizes the regulation of government-sponsored enterprises Fannie Mae and Freddie Mac, along with the Federal Home Loan Banks.

Part of HERA imposes sweeping changes in the lending industry, placing greater focus on consumer protection. HERA aims to assure borrowers are better informed about the loan process and better protected against deceptive lending practices.

These changes, effective July 30, 2009, will have a direct impact on how Realtors® structure their transactions and how lenders keep the consumer informed of loan charges through stricter disclosure requirements.

Four Key Elements

1. If the home buyer is financing the property, the new regulatory and investor guidelines will impact and perhaps even dictate the closing date. In the past, the parties to the transaction agreed upon a closing date and all service providers, including the lender, worked to meet that date.

After July 30, a closing date may still be written into the contract, but the earliest any home purchase transaction can close is 7 days after the homebuyer receives the initial mortgage disclosures from the lender.

2. With the exception of the credit report fee, the lender cannot collect upfront fees until the initial disclosures have been received. Disclosures that are overnighted are considered “received” the next business day (except Saturdays), allowing fees to be collected the following business day.

Historically, lenders could collect upfront fees immediately at the time of application for both telephone and in-person applications. Now, the buyer must receive initial disclosures before any fees can exchange hands. The single exception is the credit report fee, which can be collected at the time of application.

If a lender takes an application in person and delivers the disclosures at that time, the fee can be accepted at that time as well.

3. The homebuyer must receive a copy of his appraisal a minimum of 3 business days prior to closing. A homebuyer who believes the required 3-business-day review period is not necessary may waive that requirement in writing.

4. Any increase of more than .125% in the Annual Percentage Rate (APR) from the initial Truth in Lending Disclosure (TIL) requires that the TIL Disclosure be revised and reissued to the homeowner. The homebuyer must receive the revised TIL Disclosure at least 3 business days before the closing. If the TIL is mailed, it is considered “received” 3 business days after the mailing. It is typical for many details to change during the course of the transaction, including the APR, which can delay the closing.

The APR can be impacted by many details of the market and the transaction, including an unlocked rate, a change in the loan amount, a change to a different loan product, a rate re-lock because of market improvement, a change in closing date, and changes to fees associated with the transaction. If the closing date is critical, it is imperative that the lender ensure that the estimated fees are as accurate as possible.

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The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax adviser or legal professional about your unique situation.

Frequently Asked Questions About the Home Buyer Tax Credit

When the White House first introduced the Making Home Affordable program in February, it was positioned as a mortgage program with two goals:

1. To help financially-needy homeowners get mortgage relief.
2. To help homeowners who’ve lose equity qualify for today’s low rates.

Wednesday, in a much-anticipated announcement, the U.S. Treasury introduced new details about Making Home Affordable. It also created an “Am I Eligible For Making Home Affordable” form on its website.
In the press release, the Treasury detailed the President’s original blueprint.

Namely, it provided explicit loan modification instructions that will assist up to 4 million delinquent homeowners and their respective mortgage servicers. The modification guidelines are a thorough 17 pages long and leave little question about the loan modification process, and how it must be carried out.

But for as much ink committed to helping delinquent homeowners, the Treasury gave surprisingly little guidance to the estimated 5 million homeowners for whom deteriorating home equity has rendered refinancing impossible.

For these Americans, the Treasury instead offers a basic Q&A and directs homeowners to call Fannie Mae and/or Freddie Mac to confirm their eligibility. The “refinance plan”, in summary, says that a homeowner who has paid his mortgage as agreed and whose home value is “about the same or less” as the amount owed on his first mortgage may be eligible.

That’s about as much as the Treasury could say.

As part of the American Recovery and Reinvestment Act of 2009, the IRS has officially released Form 5405 — better known as the First-Time Homebuyer Credit Form.

True to tax code standards, the 10-field form is accompanied by 3 pages of instructions.

Form 5405 is a helpful, go-to resource for home buyers with questions about the tax credit.

For example, the form distinguishes tax consequences for homes bought in 2008 versus 2009, and clearly defines the term “first-time home buyer”.

In addition, Form 5405 highlights the math behind the tax credit. In general, the First-Time Homebuyer Credit is equal to the lesser of:

• $8,000 for homes bought in 2009
• 10 percent of the home’s purchase price

Married couples filing separately are entitled to half of the expected credit, and homes sold within 3 years are subject to a credit repayment in the year the home ceases to be the “main home”.

Form 5405 is a comprehensive reference. However, be sure to check with your accountant for specific questions about your personal returns and how the First-Time Homebuyer Credit may impact your finances. There is no substitute for professional, paid advice.