By understanding these hurdles and the financial tools available, potential homeowners can navigate the process more confidently and make informed decisions. One of the most significant barriers to homeownership is accumulating the initial downpayment.

For many aspiring homeowners, especially first-timers, saving this sum can feel like an impossible challenge. As property prices continue to soar, accumulating the funds for a downpayment or securing a mortgage with a less-than-stellar credit history can take time and effort.

Financial lifeline

Downpayment assistance programs represent a lifeline for those looking to bridge the gap between their savings and the required downpayment. These programs are financial aid initiatives designed to help potential homeowners cover the upfront purchasing cost. They aim to reduce the barrier of hefty downpayments while making homeownership more accessible.

There are a number of different types of downpayment assistance programs. Grants offer funds that a borrower doesn’t need to repay. It’s free money offered to qualified buyers to assist with their downpayment.

Low- or zero-interest loans are another form of downpayment assistance with minimal to no borrowing costs. Some of these loans might be forgivable after the borrower resides in the home for a specific duration. Deferred-payment loans allow for the repayment to be postponed for a set period, or until the property is sold or refinanced. Other programs might match the buyer’s contribution to the downpayment up to a certain amount, doubling their financial capacity.

There are hundreds of these downpayment assistance programs throughout the country. Federal, state and local governments often have initiatives to encourage homeownership, especially in certain neighborhoods, or for specific groups like veterans or first-time buyers. An example at the federal level are the homeownership vouchers through the U.S. Department of Housing and Urban Development.

Many nonprofit organizations, driven by a mission to promote community development and homeownership, offer downpayment assistance. Organizations like the National Homebuyers Fund or NeighborWorks America are notable examples. These bodies, which often work at the city or county level, have programs tailored to residents’ needs. They may focus on revitalizing certain neighborhoods or cater to local populations, such as teachers or public service workers.

Game-changing assist

While criteria can vary based on the source and type of downpayment assistance program, some common eligibility requirements include income restrictions or first-time homebuyer status. Others require homebuyer education or residence requirements.

Since many downpayment assistance programs are designed for low- to moderate-income buyers, applicants must fall below certain income thresholds to qualify. Some programs are exclusively for first-time homebuyers. It’s worth noting that “first time” often includes someone who hasn’t owned a home in the past three years.

To ensure informed homeownership, some programs require applicants to complete a homebuyer education course. Most of these programs require the purchased property to be the buyer’s primary residence, meaning that investment properties typically don’t qualify. There might be limits on the property’s purchase price to ensure the program caters to those who need it most.

Downpayment assistance programs can be a game changer for aspiring homeowners, turning their dream into tangible reality. By understanding the nuances of these programs, mortgage originators can help potential homeowners navigate options more confidently and take a significant step closer to holding the keys to their new home.

Dynamic combination

When you mix downpayment assistance with an FHA loan, you create a synergy that can turn homeownership dreams into reality. These financing tools forge a dynamic combination that can have a transformative impact on the lives of new homeowners.

The primary advantage of an FHA loan is lenient criteria. With lower downpayments and flexible credit requirements, these products already pave a smoother path to homeownership. Add to that the benefit of downpayment assistance and you have a solution that significantly reduces the upfront costs of buying a home.

FHA loans have democratized the homeownership process, ensuring it’s not just a privilege for those with hefty savings or impeccable credit scores.By combining an FHA loan with downpayment assistance, the initial financial strain is reduced, allowing a buyer to focus on their monthly mortgage payment and other homeownership expenses.

Rewarding journey

While the path to homeownership — especially with tools like FHA loans and downpayment assistance — can seem labyrinthine, the proper knowledge and approach can make it a rewarding journey. Equip your clients with the right insights, remain diligent, and you’ll soon find them holding the keys to their dream abode. Remember, every homeowner was once a first-time applicant.

Even the reduced downpayment of an FHA loan can be daunting for many. But downpayment assistance paired with an FHA loan can bridge the financial gap. Together, these tools weave a narrative of empowerment, inclusivity and hope.

They symbolize a nation’s commitment to ensuring that every individual, irrespective of their financial standing or past credit mistakes, has a shot at the American dream of owning a home. From young couples stepping into their first homes, to single parents providing stable environments for their children, to retirees finding comfort in their golden years, FHA loans and downpayment assistance programs resonate in every corner.

●●●

At the crossroads of dreams and reality, it’s heartening to know that tools like FHA loans and downpayment assistance programs are ready to guide, support and unlock doors. They are more than just financial instruments; they are enablers of dreams, testaments to resilience and pillars of communities. With these tools in hand, the path ahead is promising and achievable. ●

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There are limits to how much mortgage lenders can do to change this picture. But they owe it to their clients to leave no stone unturned when it comes to conquering today’s affordability challenges. And one of the biggest stones to look under is the U.S. Department of Agriculture’s single-family home loan program, one of the few agency options for 100% financed home purchases.

“Rural housing markets have not been immune to the challenges of today’s difficult climate. In fact, the challenges have been more severe in some ways.”

For many potential homeowners who have been pushed to the periphery of urban and suburban areas, the USDA program serves as a critical lifeline for achieving homeownership. And for lenders, USDA loans represent an opportunity that can catalyze growth in a difficult market. But because they were often overlooked when interest rates were low, many lenders may not appreciate just how valuable USDA loans are right now. The program can be leveraged to successfully expand business in rural areas while helping more borrowers bridge the affordability gap.

Eroded confidence

The dual sting of escalating mortgage rates and a scarcity of inventory are two of the biggest reasons why housing affordability is so low. Despite some promising signs in the homebuilder market, new homes aren’t coming to market fast enough to ease a U.S. housing shortage that’s at its highest level since World War II.

Meanwhile, interest rates remain higher than they’ve been in two decades. New homebuyers have found themselves committing hundreds of dollars more per month to their mortgage payments — and tens of thousands of dollars more over the life of their loan — compared to those who entered the market only a year prior.

While the overall U.S. economy remains healthy, these factors are severely undermining confidence in the housing market. For example, a recent Gallup poll revealed that a mere 21% of U.S. adults believe now is the best time to purchase a home — the lowest share since Gallup began tracking this data in 1978.

Rural housing markets have not been immune to the challenges of today’s difficult climate. In fact, the challenges have been more severe in some ways. Over the past few years, the COVID-19 pandemic and the resulting increase in remote work pushed many urban and suburban families to rural communities, causing home prices to rise. In January 2021, Redfin reported that housing inventory in rural areas fell by a record 44% year over year while the median sales price in these areas rose by 16% to reach more than $290,000.

In such an environment, it’s critical for mortgage lenders to harness every potential sales opportunity. This means using new tools to engage with a broader demographic of borrowers and more effectively serving the needs of low- and moderate-income homebuyers. And there are few tools that are better to use than USDA loans.

Extensive eligibility

By providing 100% financing, USDA loans have been used since 1991 to open the doors to homeownership for rural Americans who might otherwise be deterred by the higher costs and downpayment requirements of traditional mortgages. Still, many people believe USDA loans are primarily aimed at farmers, when the reality is that they’re most often used for single-family homes in smaller towns and communities that aren’t within immediate reach of larger metropolitan areas.

Even more attractive is the USDA’s generous definition of “moderate income” as qualifying criteria. Under the agency’s guidelines, a borrower can earn up to 115% of their area’s median income and still qualify for a loan. This is great news for borrowers who live in smaller communities and have found their wages have not kept pace with housing prices.

USDA loans aren’t for everybody. The idea behind the loan program is to encourage the development of rural and semirural communities that are typically underserved by traditional financing options. To be eligible for financing, a borrower must buy a home within a USDA-designated area. These areas are located outside major cities and have 35,000 residents or less. But collectively, this is a huge area.

The USDA also requires all first mortgages to meet specific standards of quality, and the home being purchased must be used as a primary residence. There’s no property size limit. The home must be structurally sound, fully functional and meet specific safety requirements, such as a strong foundation, adequate roofing, and working systems like heating, cooling, plumbing and electricity.

“The goal is not just to ensure that loans are originated and underwritten to meet USDA standards but also to create a path to homeownership that’s specifically tailored to a rural borrower’s unique needs.”

The agency also offers a renovation loan option, which allows consumers to borrow 100% of the purchase price plus an additional 2% of the home’s value for repairs. This option is specifically for low-income families, or people who earn less than 50% of the area’s median income.

Assuming that a lender can meet these requirements, USDA loans are a prime opportunity for originators to broaden their borrower base and serve a more diverse range of clients who are struggling with today’s affordability challenges. But for lenders and originators to build a successful USDA loan program, they need the right resources and partnerships.

Valuable partnerships

Like any other government lending program, the USDA requires lenders to adhere to specific guidelines, ensuring that every loan is originated and underwritten responsibly. Lenders must be approved to originate USDA loans but may choose to collaborate with a secondary market partner to broaden their reach. Partnering with community housing organizations is also ideal.

The best partner is one that provides the necessary expertise, support and understanding of USDA loans to help lenders navigate the process effectively on behalf of their clients. The goal is not just to ensure that loans are originated and underwritten to meet USDA standards but also to create a path to homeownership that’s specifically tailored to a rural borrower’s unique needs and circumstances.

When it comes to working with underserved borrowers in rural areas, it’s important to build relationships with correspondent lenders. This will ultimately enable clients to create generational wealth through home equity while driving sustainable economic growth in rural communities.

To be sure, housing affordability is not likely to get easier in the months and years ahead. This is why it’s critical for correspondent lenders to find more creative ways to help consumers overcome homeownership hurdles. The USDA loan program presents a significant, untapped market that many lenders can leverage to offset some of the market instability while delivering a meaningful and positive impact on rural communities across the country.

In short, USDA loans represent a golden opportunity for lenders to make a difference during today’s housing affordability crisis. And there’s no better time to start than now. ●

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That’s up from $472,030 in 2023, an increase of more than $26,000 that is driven by persistently strong home price growth nationwide over the course of the past year.

“The statutory loan limit increases announced today reflect the continued rise in home prices seen throughout most of the nation in 2023,” Federal Housing Commissioner Julia Gordon said. “The increases to FHA’s loan limits will enable homebuyers to use FHA’s low-downpayment financing to access homeownership at a time when a lack of affordability threatens to shut well-qualified borrowers out of the market.”

The FHA is mandated to set loan size limits each year by the National Housing Act (NHA), as amended by the Housing and Economic Recovery Act of 2008 (HERA). The NHA requires the FHA to set its limits based on the national conforming loan limit set by the Federal Housing Finance Agency (FHFA) for mortgages guaranteed by Fannie Mae and Freddie Mac. In 2024, the national conforming loan limit for a one-unit property is $766,550, and the FHA loan floor is set at 65% of the conforming loan limit.

The floor applies to so-called “low-cost” areas — counties where 115% of the median home price is less than the floor limit. Any area where that threshold is surpassed is deemed a “high-cost” area, meaning that varying loan limits above the floor for these areas are set by the FHA based on local median home prices.

The NHA also requires the FHA to set a maximum loan amount, or ceiling, of 150% of the national conforming loan limit for these high-cost areas. In 2024, the ceiling for a one-unit property is set at $1,149,825. Additionally, there are some areas where loan limits are determined differently due to factors such as construction costs. These include Alaska, Hawaii, the U.S. Virgin Islands and Guam; in these areas, the 2024 loan limit for a one-unit property is $1,724,725.

Maximum loan limits are set to rise in 3,138 counties nationwide, while another 96 counties will see no change. The new loan limits are effective for FHA case numbers assigned on or after Jan. 1, 2024.

The FHA has different limits for properties with two units or more. To find a complete list of FHA loan limits, visit FHA’s Loan Limits Page.

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“This accelerated process enables mortgage brokers to cater to clients with urgent financing needs, ensuring a competitive edge in the market.”

The changes, coupled with improved turn times for loan approvals and an attractive, long-term fixed interest rate, make the CDC/504 program a game changer for commercial mortgage brokers and borrowers. For those not familiar with the SBA system, the CDC/504 loan program provides long-term financing to small businesses for the purchase, improvement or refinance of land, buildings and equipment. These commercial mortgages are administered by certified development companies (CDCs), which are nonprofit entities that are endorsed and regulated by the SBA.

Streamlined process

Beginning in May 2023, the CDC/504 program introduced streamlined and simplified affiliate rules while improving the calculation of the program’s $5 million cap. Under these new rules, ownership-based affiliation takes precedence, allowing businesses greater flexibility in access to SBA financing. Previously, the affiliation determination was based on control and identity of interest, which was sometimes challenging to determine.

Identity of interest is when relatives outside of the immediate family unit can have their ownership of similar businesses considered as affiliates. The new guideline is based solely on ownership percentage and industry, making more businesses eligible for the program and excluding some entities that previously would have counted against an applicant’s $5 million income cap.

“Brokers can now assist business owners who were previously excluded from the CDC/504 program, helping them to secure the funding they need for growth and expansion.”

This change in the affiliate rules opens new avenues for mortgage brokers to provide financing solutions to a wider range of businesses. As trusted advisers, brokers can now assist business owners who were previously excluded from the CDC/504 program, helping them to secure the funding they need for growth and expansion. The streamlined affiliate rules not only simplify the loan process but also enhance the accessibility and inclusivity of the SBA program.

Expanded eligibility

Another significant change to the CDC/504 program is the removal of SBA review requirements for franchises and management agreements. Previously, obtaining agency approval for these arrangements added complexity and delays to the loan process. Franchises and businesses with management agreements often faced additional scrutiny, making it more challenging for them to secure SBA financing.

With the removal of the review requirements, mortgage brokers can now expedite the financing process for clients involved in franchises or management agreements. This change significantly reduces the time and administrative burden associated with the SBA review, allowing for quicker turnaround times and enhanced client satisfaction. CDCs, however, still need to collect franchise and management agreements to confirm they are in effect, since they can impact cash flow.

Mortgage brokers can leverage this change to their advantage by providing swift and efficient financing solutions to clients in the franchise industry or those with management agreements. By simplifying the loan process, brokers can help these clients to promptly seize opportunities, fueling business growth and success.

More leniency

More changes to the CDC/504 program were put in place in August 2023. They refer to the elimination of character clearances and added flexibility around personal liquidity.

• Character clearances. The SBA will run a background check to determine if a borrower is currently on probation, on parole, incarcerated or under indictment. Previously, past felony convictions required applicants to pass a fingerprint check and supply past court documents.

• Personal liquidity. In the past, the SBA sometimes declined projects when there was an abundance of personal liquidity. For example, if the total project cost was $1 million and the owner had $3 million in personal liquidity, the SBA might have declined the loan request with the reasoning that the borrower could obtain conventional financing. With the changes implemented in August, there will be more leniency in these situations, assuming the project meets another “no credit elsewhere” reason such as loan-to-value ratio, property type, new business, etc.

Speedy response

In an industry where time is of the essence, the CDC/504 program has made substantial strides in reducing turn times for loan approvals. Commercial mortgage brokers can now leverage the program’s efficiency, with most approvals being finalized within two to five business days, once the complete application is sent to the SBA.

This accelerated process enables mortgage brokers to cater to clients with urgent financing needs, ensuring a competitive edge in the market. With quicker loan approvals, brokers can facilitate timely transactions, seize time-sensitive opportunities and build stronger relationships with their clients. The improved turn times contribute to increased client satisfaction while positioning brokers as reliable and efficient partners in the financing process.

Additionally, the CDC/504 program offers the ALP Express loan, which provides an expedited loan process for smaller projects. Only select CDCs in good standing are designated to participate in the Accredited Lenders Program (ALP). The ALP Express program is designed for projects of up to $1.25 million, if arranged in the typical 50% first mortgage, 40% 504 loan and 10% borrower contribution structure.

With the ALP Express loan program, the SBA only reviews loan eligibility, leaving the analysis of creditworthiness to the CDC. This streamlined approach greatly speeds up the approval and closing process, allowing mortgage brokers to provide rapid financing solutions to their clients.

Despite the recent upward trend in interest rates, the CDC/504 program stands out by offering significantly lower rates than the prevailing market. This advantageous feature gives mortgage brokers a persuasive selling point. By securing a CDC/504 loan, borrowers can benefit from long-term stability and shield themselves from potential interest rate fluctuations. Mortgage brokers can capitalize on this distinct advantage by positioning the CDC/504 loan as a financially prudent choice, attracting borrowers who seek affordable and predictable financing solutions.

● ● ●

With the recent changes to the CDC/504 loan program, commercial mortgage brokers should take note of the enhanced features, improved turn times for loan approvals and highly competitive interest rates. The streamlined affiliate rules, the removal of SBA review requirements for franchises and management agreements, and faster loan approvals pave the way for brokers to expand their client base through swift, reliable financing solutions. By leveraging the CDC/504 program, mortgage brokers can strengthen their position in the market, enhance client satisfaction, and unlock new opportunities for growth and success. ●

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Just like any other commercial real estate asset class, however, the heightened inflationary and interest rate environments are impacting the senior housing sector and its financing prospects. For mortgage brokers working with clients in this space, there is much to be aware of when structuring and closing deals.

Positives and negatives

According to Green Street’s recent U.S. Senior Housing Outlook report, senior housing occupancy levels at the national level have recouped slightly more than half of the decline experienced early in the pandemic. At the end of last year, national occupancy was in the high-80% range, about four percentage points below the pre-pandemic level.

The near-term risk of oversupply in certain markets is low as it will reportedly take several years for supply growth to catch up with demand. Rent and occupancy growth is anticipated to average 6.5% per year through 2027. There’s a strong likelihood that the national occupancy rate will reach a new record high, with a forecast average of 92% in 2027. Additionally, net operating income (NOI) forecasts call for sectorwide growth of 20% in both 2023 and 2024.

While occupancy and NOI expectations showcase the post-pandemic resilience and ability of the senior housing sector to rebound, owners and operators are still experiencing significant challenges. Interest rates are an obvious pressure. According to a March 2023 survey of industry executives conducted by the National Investment Center (NIC), 51% of respondents indicated that rising rates are impacting their ability to recapitalize assets. And 36% of respondents cited elevated interest rates as a challenge when purchasing new properties.

As the NIC survey showed, however, interest rates aren’t the foremost challenge faced today by senior housing owners and operators. Rising operational expenses topped this list, cited by a whopping 92% of respondents. Notably, the proportion of organizations that reported rising operator expenses as a significant challenge increased by 15 percentage points from the month prior.

Staff turnover was the second-largest concern, mentioned by 88% of executives. Being able to recruit and hire community and caregiver staff was the third-greatest challenge, with 82% of respondents currently impacted.

Financing outlook

Senior housing certainly isn’t immune from the impacts of the Federal Reserve’s efforts to quell record-level inflation. Although the most recent quarter-point increase this past May (the Fed’s 10th consecutive hike since March 2022) might be one of the last, it took the fed funds rate to a target range of 5% to 5.25%, its highest level since August 2007.

Unsurprisingly, the cost of mortgage debt for senior living facilities has grown in line with interest rate increases over the past year, heavily impacting owners and their assets. In some cases, the cost of debt coupled with the rising cost of construction has delayed timelines for new projects, while in other cases, it has rendered them completely unfeasible.

Additionally, while debt remains available, it is more limited. This has led to a decrease in sales transaction volume, with the exception of distressed assets.

Amid these capital-market dynamics, lenders are now likely to place greater emphasis on the quality of sponsors. Because senior housing is an incredibly specialized field within commercial real estate, ensuring the success of assets typically requires deep market expertise.

Thus, lenders that remain active in financing these projects today are looking to work with owners and operators with experience in the field. They are likely to prioritize opportunities to finance well-maintained and well-managed properties over alternatives, and mortgage brokers can expect more rigid loan qualification parameters, including in facility acuity levels.

Possible path

While many lenders have slowed their activities in this sector, there are financing options available today for numerous types of senior living centers. These include nursing homes, board and care homes, intermediate care facilities and assisted living facilities.

Given an environment in which lenders have either expanded their underwriting guidelines or pulled back on dealmaking, the U.S. Department of Housing and Urban Development (HUD) can be an ideal alternative for owners and operators. While other capital sources adjust and tighten their underwriting metrics in times of economic decline or volatility, HUD financing is countercyclical and its underwriting guidelines do not change.

HUD’s 232 loan program is government-insured financing that offers a fixed rate and full amortization, with the rate determined by market conditions at the time of the rate lock. These loans are nonrecourse and long term in nature — up to 40 years for new or substantially rehabilitated properties, or 35 years for non-rehab acquisitions that can be funded by Ginnie Mae mortgage-backed securities.

The loan review period typically spans 60 days, once the application has been picked up by the HUD underwriter, and the queue is markedly shorter than in prior years. Current interest rates range from 5% to 6%. A mortgage insurance premium is required, equating to 1% of the loan amount at closing and between 0.45% to 0.65% annually.

HUD-approved lending partners will continue to be active at this time, even as others slow or curtail their activities. These capital sources will be an important lifeline for the senior housing industry during this period of economic uncertainty. ●

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Lenders will be required to use the Fannie Mae/Freddie Mac Supplementary Consumer Information Form (SCIF) to collect a borrower’s language of choice for loan applications dated on or after Aug. 28, 2023. The SCIF is an industry-recognized form that allows borrowers to identify their language preferences, and to specify any homeownership counseling or education they may have received.

Borrowers may choose to provide all, some or none of the data requested on the form, which will be used to make mortgage information available in the languages that borrowers best understand. The requirement is another step in a recent FHA initiative to better inform borrowers with limited English proficiency (LEP). Earlier this month, the agency also launched a new language access webpage, which provides translations of key FHA documents in the five languages most commonly spoken by LEP households: Chinese, Korean, Spanish, Tagalog and Vietnamese.

The FHA’s new mandate follows the Federal Housing Finance Agency’s language preference collection requirement for lenders that sell loans to Fannie Mae and Freddie Mac, which was enacted in March and proposed to codify as regulation in April.

“We applaud FHA’s leadership for recognizing how crucial language access is to reducing barriers to homeownership for millions of hardworking families in populations that have been underserved by FHA financing,” said Alys Cohen, senior attorney at the National Consumer Law Center. “FHA is a crucial source of mortgage credit in underserved communities, and collecting language preference will expand FHA’s reach and help borrowers gain access to essential information in their preferred language.” 

“Identifying language preference is an important first step toward serving borrowers with limited English proficiency,” said Nicole Cabañez, Skadden Fellow at the National Consumer Law Center. “We celebrate this tool for allowing borrowers to express their language needs in an efficient, systematic way, while also recognizing that lenders and servicers also must be required, not merely encouraged, to respond to the needs of LEP consumers with concrete steps to increase access to written and oral assistance. We urge FHA to continue reducing barriers to the mortgage market for LEP homeowners.”

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Borrowers of approximately 155,297 FHA loans did not get the correct assistance from servicers after the expiration of their forbearances, HUD estimated. The department’s projection is based on a statistical sample of 85 loans audited by its Office of Inspector General (OIG). Of these 85 loans, 48 received “incorrect” loss mitigation in which the borrower either received an improper loss-mitigation option or a proper but erroneously calculated mitigation option. Thirty-one loans received flawed assistance because servicers did not properly follow HUD guidance, including significant delays, late mailings of loan modification documents or other such errors.

Overall, 67 of the 85 loans had issues identified by the audit. Based on these results, the audit’s statistical projection indicates that roughly 100,910 loans had incorrect loss mitigation, while 65,580 received mitigation in which servicers didn’t follow HUD’s guidance. (The two figures do not add up to 155,297 because some sampled loans had issues that fell under both categories.)

“The COVID-19 pandemic created a unique environment for mortgage servicing, which required FHA to make rapid changes to its requirements, and many servicers were challenged in adapting their servicing operations and processes to keep pace with these changes,” the audit report stated. “This environment placed significant stress on servicers’ loss-mitigation activities, and servicers struggled to ensure compliance with HUD’s new requirements. As a result, some delinquent borrowers previously on COVID-19 forbearance faced an additional hardship from improper loss mitigation.”

Twenty-two servicers were contacted to get information for the review. Based on responses from the servicers, the OIG came to the conclusion that the swell in loss-mitigation activity caused by the pandemic exposed servicers’ operational weaknesses. The audit cited one example of a servicer that automated its processes due to a 600% surge in loss-mitigation activity since 2019. But the company had “system issues” that wrongly applied partial-claim funds to borrower accounts.

Notably, the OIG also ran an audit on Mr. Cooper to complement the large-scale audit. According to the audit report, Mr. Cooper was selected after a risk assessment in 2021 that found a “significant volume” of delinquent loans with prior pandemic-related forbearances in the company’s portfolio. Furthermore, the company was chosen “based on our awareness of complaints made about [Mr. Cooper] to the Consumer Financial Protection Bureau and the HUD OIG hotline,” the report stated.

This audit was also scathing and found that Mr. Cooper did not provide proper loss-mitigation assistance to more than 80% of borrowers with delinquent FHA loans.

HUD itself wasn’t spared from criticism, with the audit also concluding that HUD didn’t ensure that servicers sufficiently informed borrowers of their COVID-related loss-mitigation options. While the department issued substantial guidance to servicers on administering these options, it didn’t develop standardized communications for servicers to pass along to borrowers.

Because of the errors, the audit stated that the FHA insurance fund could face heightened risk. Specifically, borrowers of the 100,910 loans that received inappropriate or miscalculated mitigation may now face higher chances of default, ultimately raising the risk of loss to HUD from potential insurance claims.

A memo from Julie Shaffer, deputy assistant secretary for single-family housing at HUD, offered a response to the audit’s criticisms.

“While we do not disagree with any specific recommendations, we believe the draft report does not fully capture the unprecedented volume and complexity of the policy and system changes that the FHA implemented to sustain an anomalously high number of borrowers struggling to make their mortgage payments during the COVID-19 national emergency,” Shaffer said.

“Nor does the report capture the broadly successful homeowner outcomes achieved during the COVID-19 emergency. More than 2 million FHA borrowers became delinquent during the national emergency, and more than 1.8 million borrowers took advantage of FHA’s COVID-19 forbearance offering. FHA helped more than 1 million of these borrowers to enter into a loss-mitigation plan to avoid foreclosure and retain their homes. Another 655,000 borrowers cured or paid off their mortgage without the need for a loss-mitigation plan.”

Bob Broeksmit, president and CEO of the Mortgage Bankers Association, was swift to come to the defense of servicers.

“A number of the technical faults that the report identifies were made by servicers in the spirit of helping COVID-affected borrowers exit forbearance and remain in their homes in the fastest, most efficient way possible,” he said. “Others were the unfortunate outcome of confusing or conflicting program requirements and the inherent difficulties of quickly scaling such a massive borrower assistance effort. But make no mistake, by focusing on delivering positive outcomes for homeowners, servicers’ implementation of COVID-19 relief is a major success story.” 

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Many commercial mortgage brokers have seen their pipelines dry up as borrowers sit on the sidelines, showing apprehension about new financing in an uncertain economic environment. Lenders too are not immune to the consequences of market conditions, as bank and nonbank lenders alike have had to tighten program guidelines and even lay off employees due to capital concerns resulting from a lack of loan demand.

“Since guarantee fees for loans up to $1 million have been drastically reduced, there is more room for a broker to earn a fee.”

Many businesses, however, are faring well despite the economic volatility. Government loans, including the 7(a) program from the U.S. Small Business Administration (SBA), give borrowers access to sensible capital. And recent changes to this program have made SBA 7(a) lending more affordable than ever, creating opportunity for mortgage brokers to build a significant revenue stream.

Nuts and bolts

SBA 7(a) loan proceeds can be used for most business purposes, including the purchase, refinance, renovation or ground-up construction of commercial real estate. The property owner’s business must occupy at least 51% of the space, or 60% for new construction projects. These loans can also be used for non-real estate business needs such as working capital, equipment, inventory, partnership buyouts, debt consolidation, business or franchise purchases, leasehold improvements, expansions and even startup expenses.

Loan sizes for the 7(a) program usually range from $25,000 to $5 million. It is not always a requirement for real estate or hard collateral to be included. These loans are provided by SBA-approved lenders, which include many banks and a select group of nonbank lenders. The smallest SBA 7(a) loan amounts are guaranteed up to 85%, meaning that the lender is reimbursed for a large portion if the borrower defaults — assuming that the lender followed the required standard operating procedures when originating and funding the loan.

To compensate the U.S. government for providing a guarantee on SBA loans, the borrower is charged a fee on the guaranteed portion of their loan at closing. This fee can be significant and equal up to 3.75% of the guaranteed portion of the loan.

The guarantee fees charged to SBA borrowers are reasonable, however, considering the favorable loan terms they can access through the program. Guarantee fees on SBA 7(a) loans are almost always financed into the loan proceeds. The borrower won’t pay out of pocket at closing but over time as part of their ongoing principal and interest payments (which are amortized out as long as 25 years, depending on the loan size and the collateral involved).

Guarantee fee waivers

Interest rates for 7(a) loans are often adjustable to a set margin above the prime rate and adjust on a set schedule. This means that in a rising interest rate environment, a borrower who takes out a new quarterly adjustable 7(a) loan could experience an elevated cost of borrowing when compared to someone who took out a similar loan in prior years.

The combination of a higher adjustable rate and a larger guarantee fee could make a 7(a) loan cost-prohibitive to many borrowers. In October 2022, to help lessen the impact of recent interest rate hikes, the SBA implemented significant reductions to the guarantee fees that are passed on to borrowers of 7(a) loans. The changes are effective through September 2023.

For loans with maturities that exceed 12 months, these changes include:

• For loans of $500,000 or less, the SBA removed the guarantee fee altogether. There was a previous upfront fee waiver on loans of $350,000 or less.
• For loan sizes up to $700,000, the fee was reduced from 2.77% of the guaranteed portion of the loan to 0.55%.
• For loan sizes up to $1 million, the fee was trimmed from 3.27% of the guaranteed portion of the loan to 1.05%.

Prior to these recent changes, a borrower taking out a 7(a) loan for $500,000 would have been charged a guarantee fee of $10,387.50. That same borrower will now be charged nothing. A borrower who previously took out a $1 million loan would have been charged a fee of $24,525. Under the new structure, however, they’ll owe $7,875 — good for savings of $16,650.

Additionally, borrowers who work with a direct SBA lender can now receive financing up to $500,000 without being charged any additional guarantee or origination fees. Direct SBA lenders may charge an origination fee of up to $2,500, but charges above that amount are uncommon.

Brokerage fees

The recent SBA fee waivers have also created a great opportunity for commercial mortgage brokers to earn more significant income on SBA 7(a) loans. Prior to the recent guarantee fee reduction, it was difficult for an SBA loan broker or intermediary to charge additional fees to the borrower. It would often become prohibitive for the borrower to proceed with the financing, given the already sizable SBA guarantee fee.

Now, since guarantee fees for loans up to $1 million have been drastically reduced, there is more room for a broker to earn a fee. Many SBA lenders will pay the referring or originating broker a fee that is priced into the loan’s interest rate. This fee (depending on the lender you work with) can range from 0.5% all the way up to 3% for experienced and high-volume SBA intermediaries. Any broker looking to earn a fee from the borrower — in addition to the fee they’re earning from the lender — should first confirm whether this is acceptable to the lender.

Any fees charged are legally required to be disclosed to the borrower on SBA Form 159. The lender will require this document to be completed and signed by the broker and borrower prior to closing, and it will be submitted to the SBA after closing. Charging a fee to an SBA borrower without reporting it can result in financial penalties and, in some cases, criminal prosecution.

Changes on horizon

Since last year’s policy change, the SBA has been working to update its standard operating procedures. This is designed to make its financing accessible and affordable to even more borrowers.

Some of the changes being considered include allowing more nonbank lenders to participate in the SBA lending program. This number is currently capped at 14. Additionally, the agency is looking at updates to business affiliation rules that would make it easier for larger and/or more complexly structured companies to qualify.

Earlier this year, potential revisions to standard operating procedures were being reviewed by the federal government, and all of the proposed rule changes have not yet been finalized. Nonetheless, borrowers can still take advantage of the guarantee fee waivers currently in place to better access growth capital and offset rising interest rates. And mortgage brokers can leverage the recent changes to earn sizable fees while still giving their clients access to affordable and flexible small-business financing. ●

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The national emergency was first declared by then-President Donald Trump, who established provisions in March 2020. Loans backed by the U.S. Department of Agriculture (USDA) and Federal Housing Administration (FHA) had been eligible for COVID-specific forbearances since the spring of that year. In April 2020, the U.S. Department of Housing and Urban Development (HUD) published a letter outlining the terms of forbearance, as well as an extension period for holders of home equity conversion mortgages (HECMs) backed by the FHA.

Thus far, deadlines on such forbearances have been extended by both HUD and the USDA, with the most recent extension specifically tying the final dates to request forbearances and HECM extensions to the end of the presidentially declared national emergency. With the emergency set to end, the government agencies are winding down the program, with the deadline to request a forbearance now set at May 31.

HUD actually set the deadline for COVID-19 forbearance of FHA loans (or HECM extensions) last week. The USDA followed suit via email announcement on Monday, reasoning that extending the deadline to the end of May would provide a sufficient window past the end of the national emergency.

“As the national emergency may end earlier than originally expected, USDA has determined that a short period beyond the expiration of the COVID-19 national emergency would be beneficial to both USDA borrowers and servicers,” the USDA’s email read. “The USDA is extending the date by which a servicer may approve a borrower’s request for an initial COVID-19 forbearance.”

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FHA loan count is among the data points reported by HUD and FHA to Congress following every quarter of the fiscal year. In the fourth quarter of last year (which is concurrent to the first quarter of federal fiscal year 2023), the FHA backed 179,152 mortgages, down from 216,036 in the prior quarter. It was the sixth straight quarterly decrease in FHA loan endorsements since the current cycle peak was reached in Q2 2021.

In terms of dollar volume, FHA loans in Q4 2022 totaled $49.1 billion, down 17.5% quarter over quarter.

The FHA attributed the most recent decrease to the continued rise of interest rates, with the average 30-year fixed mortgage rate climbing above 7% in late October and early November. Notably, according to the Mortgage Bankers Association (MBA), mortgage credit availability also fell during the fourth quarter to its lowest level since March 2013. In December 2022, the FHA and U.S. Department of Veterans Affairs saw a 23% year-over-year decline in credit availability, per the MBA’s Mortgage Credit Availability Index.

Both purchase and refinance loan count fell during the last three months of 2022. Purchase activity was down 16.3% quarter over quarter, while FHA-to-FHA refinance endorsements were down 28% and conventional-to-FHA refinances fell 10.6%.

With interest rates high and minimal incentives to refinance, purchase loans continued to dominate total lending activity. Purchase loans comprised a 78.6% share of all FHA mortgages during the fourth quarter, up from 77.9% in Q3 2022 and well above the 65.9% share in Q4 2022. The purchase share of all FHA loans is now at its highest level since mid-2018, when it briefly climbed above 80%.

Reverse mortgage activity at the FHA is down as well, with the count of HECM endorsements during Q4 2022 at 9,555. That’s down 31.1% quarter over quarter, with HECM endorsement dollar volume shrinking by 34%.

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