Archive for FHA Lending

Mar
01

HUD Increases Costs in April

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by Dean Hartman on March 1, 2012

In a move to increase their financial standing (and to get the FHA back into required capital requirements), on Monday, HUD announced their anticipated increases in the premiums they charge borrowers. Simply stated, the cost of borrowing is going up.

FHA loans, by design, are more liberal in their underwriting guidelines than most conventional loan products (in terms of credit, income ratios, required investment from the borrower, and maximum loan amount). HUD is not a lender. Rather, it is a federally-insured insurance company. They insure lenders against default on loans underwritten in compliance with their published guidelines. It is because of this insurance that lenders approve and close loans with more liberal guidelines.

As an insurance company, HUD charges two types of premiums on the FHA mortgages:

The UFMIP (Up Front Mortgage Insurance Premium) will be raised effective April 1, 2012 from its current 1% to 1.75%. One advantage to the UFMIP is the fact that it is typically built into the loan amount and does not require additional cash outlay at closing. However, the increase in loan amount does impact monthly payment and cash flow.
The MMIP (Monthly Mortgage Insurance Premium) will be raised 10 basis points on April 1, 2012 to cover the requirements of the payroll tax extension approved last year. This is a direct increase of 10 basis points in the borrower’s mortgage payment, and has the effect of a 10 basis point increase in interest rates. As a kicker, loans over $625,000 will be bumped 35 basis points from today’s levels effective June 1, 2012. This bump is substantial, as you can see in the chart below.

On a loan amount of $300,000, we are seeing an increased payment of $36.41, which doesn’t sound too bad. However, we know that home buyers buy homes comparing what their monthly payment will be after they close. This hike in payment is equivalent to borrowing an additional $7000. Starting next month, it’s as if the home became $7000 more expensive. What is the result? Buyers are going to have to pay more OR they’re going to have to offer less to the seller (to maintain the same mortgage payment they were comfortable with today). A $7000 lower offer is like another 2.5% decline of home prices. Not good for anyone.

Advice:

Sellers, price correctly and get into contract in March.

Buyers, today is the cheapest mortgage you are likely to see in your lifetime (all things considered)! Get off the fence and buy NOW!

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P.S. – Rumors are strong that FHA is looking to reduce the allowable sellers’ concession from 6% to 3% in April as well. This move will have a huge impact on how much cash will be needed to buy (especially in places like NY with the NYS Mortgage Tax). Hurry—get in the game!

WASHINGTON – Is a little-publicized switch in federal mortgage policy causing huge problems for condominium sellers, buyers and homeowner association boards across the country – even depressing prices and blocking refinancings?

“Yes,” says condo industry leaders, from the 30,000-member Community Associations Institute to individual unit owners and realty agents.

They say rule revisions by the Federal Housing Administration have caused thousands of condo projects to become ineligible for FHA mortgages. This, in turn, has abruptly shut off loan money for would-be condo buyers and refinancers, forcing them to pursue conventional bank loans requiring much higher down payments – sometimes 20 percent and higher, versus the FHA’s 3.5 percent minimum.

For its part, the FHA says the rule changes it has adopted, which focus on project budgets, insurance and financial reserves, are designed to avert losses from delinquencies and foreclosures.

But the agency confirms that thousands of condo projects have failed to obtain or apply for required recertifications under the new rules. Out of approximately 25,000 condo projects nationwide with expiration dates for FHA eligibility between last December and Sept. 30 of this year, only 2,100 – just 8.4 percent – have been approved or recertified by the agency, according to Lemar Wooley, an agency spokesman.

Critics say that FHA did not consult adequately with the condo industry before changing its rules – a charge FHA denies – and contend that the agency did not think through some of its policies. Andrew Fortin, government affairs director of the Community Associations Institute, says one rule – that no more than 15 percent of the unit owners in a project be 30 days or more delinquent on their association dues – is often impossible for volunteer boards of directors in large projects to keep track of, much less to certify to FHA.

Even worse, according to other critics, the new rules put board members into legal jeopardy by requiring them to sign certifications attesting that the condo documents comply with all local statutes and that they have no knowledge of situations that could cause any unit owner to become delinquent at some later date. The mandatory certification carries a maximum penalty of $1 million in fines and 30 years imprisonment if found to be incorrect. Large numbers of condo boards have balked at this requirement, critics say, leading to the drastic drop in certification requests and condo eligibility.

Bottom line for unit owners, sellers and buyers: If an FHA loan figures in your plans, first check with the association board. If the project isn’t certified, you are cut off – at least for now – from some of the most favorable mortgage terms in the marketplace.

Kenneth Harney

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by Dean Hartman

Whether you’re looking at a foreclosed home, bank REO, a Short Sale or really any home, you need to be aware of the FHA 203K Program. The general condition of real estate has taken a dip over the past few years, as homeowners are not sprucing up their home as they have in the past.

(Pssst…there’s a recession going on…people are afraid of losing jobs…and they believe they won’t “get back” the money they spend by renovating upon sale).

The 203K loan can be used for small repairs (with a minimum of $5000 of work) such as a new roof or replacing the boiler. It can go all the way up to practically rebuilding the home and anything in between.  Maybe you love a home, the neighborhood, etc., but you hate the kitchen cabinets. The 203K may be for you. As long as the existing foundation stays intact, we can talk about any type of repair, upgrade, modernization or expansion.

With one closing, we will give borrowers money to satisfy their contract with the seller AND establish a Rehab Escrow Account to fund the agreed renovations. The Rehab Escrow Account is managed like a Construction Loan. Money is released after work is completed, the property is inspected by the lender and the title is updated.

Like all FHA loans, the property must be owner occupied and loan approval requires full documentation of income, assets and credit worthiness. At the same time, underwriting guidelines have some flexibility built in. (In theory, we can lend up to 110% of the After-Improved Value of the home for example.)

Loans are processed in the same fashion as any other loan (in terms of income, asset and credit) with the exception of the appraisal. Appraisers work in conjunction with the home improvement contractor and a HUD Approved Pre-Planner to determine: “As-Is” Value, “After-Improved” Value, costs of construction and the draw schedule of the renovation portion of the loan. This work typically adds about a week to the approval process, largely because it should be done BEFORE contracts are signed.

SOME UNIQUE FEATURES OF THE 203K

  • Mixed-Use Properties may be eligible!As long as the commercial space is no more than the allowable square footage based on the number of floors in the building and none of the renovation monies are used for a commercial renovation, the 203K gives tremendous interest rates for Mixed-Use Properties.
  • The loan can be used  to change property usage(when appropriate municipality approval)…..converting a 1 Family Home to a 2 Family or a 4 Family to a 3 Family or any variation that stays within the 1-4 Family boundaries works.
  • On major renovations we will finance up to six months payments into the loan.In these cases,the house will not be habitable until after the work is completed.
  • There is a Streamline 203K for projects that require less than $35,000 of repairs. Typically, we like to see only one or two items of work that can be done quickly (with one inspection).

It is recommended that you work with an experienced loan officer when exploring the 203K Program, as there are many details that need to be considered (from selecting a qualified contractor to the inner workings of the draw schedule and preparing for different contingencies). While the program is more intricate, with the right education ahead of time, it is extremely manageable.

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Most home buyers’ biggest hurdle is coming up with the cash for a sensible down payment. Gone are the days of zero-down loans, so if that was your plan, you’re going to need a new one! Coming up with a down payment for a home is a challenge because it’s not chump change we’re talking about, here. The down payment on a $200,000 house, for example, will run you anywhere from $7,000 (on an FHA loan) to $40,000!

That might seem like an insurmountable amount of coin to come up with, but it’s actually more doable than you might think. Some buyers will simply save up their own cash, even if it takes many, many moons. The good news is that if you still need some help to boost your down-payment savings, there are resources you can harness to power your home-buying pursuit:

  1. The FHA Bridal Registry.  Yes – you read that right! The FHA Bridal Registry Program enables wanna-be home buyers to apply their families’ wedding gifts toward their down payments. And although it’s named a “bridal registry” program, you don’t have to be a prenuptial couple to use it. You could also use this program to collect gifts for graduation, the arrival of a baby or some other major life event in which people want to give you gifts.

    The FHA Bridal Registry works like a traditional registry, but is more flexible. The registrants visit their choice of FHA mortgage lenders and set up what essentially is a custodial savings account for the sole purpose of funding their down payment. The couple’s (or individual’s) family and friends can either deposit funds directly into the account or give the cash or check to the couple or individual, who then deposits it into the account. The account’s flexibility also goes beyond that of traditional down payment gift rules that are applicable to FHA loans, which are detailed below in insider secret #2. With the FHA Bridal Registry Program, the only gift documentation required is “lender and borrower certification of the funds.”

  1. Family gifts.  Most lenders will allow home buyers to apply gift money from family members toward their down payment – within guidelines, that is. First, the lender will require a letter from the giver verifying that it in fact is a gift and not a loan. (They generally frown upon it being a loan because it would add to the buyer’s debt and change their debt-to-income ratio.) And second, the person giving you the money must be a relative. The reasoning here is that a friend will most likely expect you to repay the money, whereas a relative won’t.

    FHA loans will allow the gift to make up any portion or all of the buyer’s down payment, many conventional (non-FHA) loan programs will restrict the proportion of a buyer’s down payment that can come from gift money.  The lender may also have specific ways they want to see the money go into and out of your accounts. Before you accept a gift toward your down payment, be sure to check with your mortgage broker or loan rep to be sure that you’re dotting all the right i’s and crossing all the right t’s.

  1. Your Employer.  Some companies offer assistance programs to employees. Most are government, university, large company and financial industry employers. One example is safety workers: n some areas, safety workers like firefighters and police can have access to down payment grants from their employers if they buy properties in the city where they are on-call as first responders. Also, many large colleges and universities, very large companies and banks and lending institutions offer down payment help and have below-market-rate mortgages set up for faculty members and staffers.  Check with your Human Resources department to see if any such program is available to you.
  2. City/County/State Programs.  Some states, counties and cities still offer programs that lend or give home buyers some assistance for down payments. These programs vary widely in scope – for instance, many target buyers with low and moderate incomes, while some seek to help the buyers of foreclosed or fixer-upper type homes. Some don’t have to repaid – meaning they are given as grants and are forgiven entirely if the buyer lives in the property for 30 years, but must be repaid if the buyer sells or rents the home out before the 30 years elapses. The programs pretty much all have some sort of homeowner education component that requires applicants to take personal finance and homeownership preparedness classes before they can receive funds. To learn more, visit your city, county and state websites to learn about programs that might be able to help you.
  1. Your Retirement Funds.  Many financial advisors would advise against this, but if you have a 401K or Roth IRA account and some years to go before retirement, you might be able to tap into it or even borrow against your own funds for your down payment. Currently, you can take up to $10,000 out of your Traditional IRA with no penalty to put toward the purchase of your first home, but you will be taxed.  You can take as much as you want out of your Roth IRA contributions with no penalty or taxes, though, and as much as $10,000 from your earnings penalty-free for your down payment.  The rules get a little tricky, here, so definitely check in with your tax and financial advisors. 

    And while you can’t similarly draw from your 401K, many retirement and pension plans will allow you to borrow the money against your funds, then repay it to yourself – at interest. So the choice there comes down to paying your lender back with interest or paying yourself with interest. That choice should be you! But first, get some advice from your CPA or financial planner. This option might not make financial sense for your particular situation.

With the likely installation of QRM (Quality Residential Mortgage) looming, it is clear that FHA mortgages will clearly become more popular merely because of the lesser down payment requirements. And as we have all learned, when the demand for something goes up, and the supply remains constant, prices go UP…that is, it becomes more expensive.

Point One
The FHA is permitted each year to insure a specific dollar amount of loans by Congress. I find it unlikely that anyone has factored the increased demand for FHA that QRM will create. Further, getting Congress to allocate more money to HUD in these days of deficits is not a sure thing. I could see a fourth quarter of 2011 with little financing available (or much more expensive financing) to people with less than 20% down.

Point Two
We hear, almost daily, that FHA is only semi-solvent…that they don’t have sufficient reserves. Foolishly, the MIP schedule was altered to give them less cash today (lowering the Up Front MIP) and increasing the longer term collection of monies (the Monthly MIP). To me, that almost insures another MIP change this year…one in which the UFMIP is hiked to get more money in the reserves now, making mortgages more expensive.

Point Three
The FHA is floating rumors about tightening guidelines. Maybe it will be an increase in minimum down payment from 3.5% to 5%. Maybe a cut in seller paid closing costs from 6% to 3%. Maybe both. Regardless, it is going to get harder to qualify. Understand with increased demand and steady supply, lenders will be choosier.

Point Four
Rates are creeping up anyway. With inflation making a strong comeback (fueled by high gas prices), the Fed will look to hike rates to control inflation.

Point Five
The current loan limits are going to be slashed. Presently, FHA will insure loans up to $729,250 in high cost areas. That number is huge when compared to historic loan limits and was instituted when desperate times called for desperate measures. And while we still might be semi-desperate, look for those loan limits to be lowered by at least $100,000 come the end of the year (when Congress sets them for the next year).

For buyers, waiting can be expensive, or worse. You might not even get a loan. For sellers, more expensive loans and less buyers who qualify, will force you to lower your prices even further. ACT NOW!

Categories : FHA Lending
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