102 days.

That's all the time that is left to take advantage of the unprecendented opportunity the first-time homebuyer tax credit represents. With that in mind, it's more important than ever to understand the expectations one should have going into the home buying process, especially when using government financing programs, such as the USDA Guaranteed Rural Housing program. This program is perfect for home buyers whose income has prevented them from saving for a big down payment, however, if you aren't adequately prepared starting the process, you may be unable to close on time. The program provides 100% financing for homes priced up to $280,600. Here's where to start.

Your Income

The USDA mortgage program is income restricted. This means that if you earn too much money, you may not be eligible for the program. The idea behind this restriction is that families earning more should be able to save for a down payment on a conventional or FHA mortgage, and do no require the extra assistance available with the USDA program. In New London county, family income is limited to $95,450 for families with 1-4 household members, and to $126,000 for families with 5-8 members, however, there is more to these figures than you might think.

First, the USDA program looks at the income of all household members, not just those who will be borrowers on the loan. I recently looked at a sceario where a husband and wife wished to purchase a home together, but the wife was ineligible to be a borrower due to a recent chapter 7 bankruptcy. For other mortgage programs, I wouldn't even ask for her income documentation, but because we were considering a USDA mortgage, I had to. The guaranteed rural housing program uses the income of all household members to determine program eligibility, but looks only at the borrower's income for mortgage qualification and for debt-to-income ratios. One of my colleagues recently had to change a loan from USDA to FHA when the borrower got married (surprise!) during the process, thereby increasing her household income beyond the area limit.

There is a brighter side to this income limit, too. USDA does offer several exemptions to this limit, meaning that borrowers can reduce their income for qualifying purposes in some instances. Borrowers with children, and specifically, with childcare expenses, can deduct those expenses from income when calculating qualifying income.

Your Savings

USDA mortgages offer 0% down payment financing because they are specifically designed with low-income buyers in mind. This means that they look very closely at availability of funds in savings, and they expect a full disclosure of those amounts. It also means that those buyers who have accumulated money in savings may not be allowed to use the USDA program. For this purpose, money in checking, savings, CDs and money market accounts is considered available for down payment. Money in IRAs, 401(k)s and other retirement accounts is usually not considered. If you have more than 5% of the purchase price of the home in savings, you may be asked to make a down payment or forced to use a different loan program, like FHA.

That said, just because this is a 100% financing program reserved for buyers with little savings doesn't mean you can buy a home with NO money whatsoever. Even if you get a seller concession for closing costs, or if the home appraises higher than the purchase price and you roll closing costs into the loan, you will still need money for a home inspection, appraisal, and your first year's homeowner's insurance. Also, bear in mind that few sellers will take their homes off of the market for you without a deposit, so you will need money in that regard, too. At a minimum, you should have at least $2-3000 set aside before starting the process.

The Home You Buy

Beyond your qualifications, the property you purchase must also be qualified. USDA financing limits properties based on their location, their condition, and their type. One relief with USDA mortgages is that they are exempt from the Home Valuation Code of Conduct (HVCC) that is causing so many challenges for other mortgage types.

In New London County, much of the county is eligible for USDA financing, however several are not. The USDA Guaranteed Rural Housing program is intended to support ownership of properties in more rural areas, hence its name. With this intent in mind, USDA restricts the program from use in Norwich, Taftville, New London, Groton, Stonington, and a few other communities in New London County. Unfortunately, if you're hoping to purchase in one of these communities, you will have to select another loan option.

Properties purchased with USDA guaranteed funds, must also provide a safe housing option for their purchasers. Properties in disrepair are generally ineligible for funancing with USDA guaranteed funds, as are properties with external environmental concerns, such as proximity to a gas station, a chemical plant, or high tension wires, for example. Help is available for some properties needing repairs, though, as it is possible to borrow extra money to repair concerns, so long as the property is worth at least the amount of money borrowed. Properties with peeling paint, plumbing or heating repairs, or other updates needed may still qualify if a plan is presented to address the problems.

USDA financing is also limited based on property type. The Guaranteed Rural Housing program may only be used to purchase single family homes and condominiums. USDA does offer financing for 2-, 3- and 4-family homes through its Direct financing program administrered by its Norwich office.

Finding the Right Loan

Ultimately, the USDA mortgage program is a very safe program with provides excellent opportunities for many buyers, but it isn't for everyone. It's credit history requirements are comparable to FHA requirements, meaning that buyers unqualified for FHA financing due to poor credit history will also be unable to get USDA financing. For the right buyer, though, it presents a great oportunity to get a home now and take advantage of the unprecedented opportunity represented by the $8000 tax credit.

It is important to remember that the clock is ticking. Bearing in mind that it takes between 30-45 days to close a mortgage, and an additional 30-45 days or more to find the right house, there is no time like NOW to get the process started by setting an appointment with your mortgage advisor. If you haven't started already, you have very little time left!

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and can be reached by commenting on this post, or by phone at (401) 263-8655. Dan also serves as an Adjunct Professor of Finance at Roger Williams University and the University of New Haven.

Washington's buzzword last month was "green shoots" to suggest tiny indications of improvements to the economy and financial markets. After 2 years of lender closures and program cuts, this fall we may just start seeing some green shoots in mortgages, as well.

Mortgage financing on condominium properties has been a sore point for mortgage and real estate professionals this year due to the intensified scrutiny these properties receive from underwriting, and the often-frustrating guideline variations from one lender to the next. Perhaps most challenging for the mortgage professional is that we are unable to provide our clients with assurance that the condo has been accepted, as most underwriters wait to evaluate the condominium information until all other aspects of the loan have been approved. Much of this difficulty comes from significant variances in guideline application from one lender to another and from one underwriter to another. While, the changes to follow relate to FHA mortgages, conventional loans haven't been easy either.

On one loan I closed recently, we initially locked the loan with one lender, but never submitted it to them when it became apparent the property would fail condo approval there due to one other unit owner's delinquent dues. It was submitted to a second lender, but rejected there due to the seller's profit - he had acquired it a little under a year earlier, and, after a total rehab of the property, was projected to make $20,000 or about 15% which the underwriter thought was too much. The most aggravating part of that rejection was that the same lender had just closed a nearly identical transaction for a different seller represented by our seller's agent, but we couldn't use that transaction for leverage because adding ours would have put the lender over the maximum 10% concentration in the condo complex that FHA allows. A third lender finally approved and closed it, but not before a 2nd appraisal was done on which the appraiser, who is registered with FHA, stated that he was unable to judge whether or not the property met FHA approval guidelines.

Obviously, if anything could have gone wrong, it did on that transaction, but many of the problems stem from uneven application of FHA guidelines. Well, FHA will be changing those guidelines this fall, and it appears that the changes are largely positive, and include relaxation of requirements on commercial space in the complex, minimum number of units, percentage insured by FHA, and more. The existing processes for approval will be eliminated, and replaced by two simpler processes, one through HUD, and another at the Direct Endorsement Lender level. Here are a few of the highlights:

• Minimum units in complex reduced to 2
• Up to 25% of space in complex may have commercial use
• No more than 15% of unit owners may be in arrears on association fees
• Phasing is permitted
• 30% of properties in complex may be financed by FHA-insured loans

Several of these changes will be game changing. Providence experienced a large wave of condo conversions in the first half of this decade, as owners turned 2-4 unit properties into 2 or 3 condominium units. Previously, these properties were downright unfinanceable for buyers needing FHA financing. Not any more. The adjustment to a straight 30% limit on FHA-insured properties is also quite significant, as it will allow larger complexes more financing flexibility.

According to information from HUD, these guidelines will go into place October 1st of this year, however, if history is any indicator, adoption and adherence by different banks will be varied. Because the HUD guidelines provide only a minimum property requirement, it is likely that many lenders will apply their own "underwriting overlays" which will allow them to be more restrictive than the rules would otherwise allow. This is one of the areas I am happiest about being a broker; while we do have a lot more work to do to understand differences in underwriting requirements from one lender to the next, this knowledge helps us close loans that no one else can.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance for Roger Williams University and the University of New Haven. He can be reached by phone at (401) 263-8655, or by commenting on this article.

Good evening! I wanted to post a quick note tonight to let you all know what I’ve been working on for most of this working week so far. The Mortgage Disclosure Improvement Act, or MDIA, was enacted as a rider to one of the many stimulus-related bills that have cleared congress this year, and will be implemented on July 30th. The act brings with it significant changes to disclosure paperwork that are intended to make consumer choice among mortgage sources more competitive, and, for the most part it should succeed there. It also contains certain procedural changes that will have a significant effect on timing of most future transactions.

Specifically, MDIA requires that borrowers not be charged any loan-related fees other than a credit report fee until they have received truth-in-lending disclosures for the mortgage. This is a positive change, as I know I have lost loans in the past to other lenders who were charging more, but not disclosing it, because those borrowers felt obligated by rate lock or appraisal fees they had paid in advance. That won’t be happening any more.

Under MDIA, it is unlikely that any lender will order an appraisal service until this disclosure requirement has been met. At present, infrastructure exists to allow that obligation to be met in 3-4 business days, but this will add more time to each homebuyer’s commitment process. Because of this, I am recommending that offers subject to financing be written with a minimum of 30 days to commitment and 45 days to closing. It is my hope that this will allow us to continue to deliver on-time commitments and closings whenever possible.

MDIA also contains provisions for re-disclosure in the event of a change in loan terms outside tolerances. This could affect closing scheduling, but I anticipate this component of the change to be of significantly smaller impact to day-to-day operations than the appraisal component.

Thus, I have been quite busy this week assuring my clients their loans will be safe through this transition. I thank you for your patience through this, and for your continued support. Please don’t hesitate to contact me should you have any questions about this, or anything else going on in mortgage land.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor of Finance with the University of New Haven and Roger Williams University. He can be reached by commenting on this article, or by cell at (401) 263-8655.

I have to admit I've been a little too busy lately to blog about everything, or do everything that I wanted to do, from a marketing perspective. I finally had a chance to catch up on a recent post about our services from a user on Angie's List. I'm pleased to say he was very happy with the service received on his FHA 203k rehab loan, and said, "We closed on time and under budget, We couldn't be happier with Dan Hartman."

Because we now had a review on Angie's List, I was able to set up a company account and provide some basic details about Province Mortgage Associates. I like the idea of a review system where consumers get final, public say about their experiences. It keeps everyone on their toes to deliver the best experience possible.

After setting up our basic account there, I looked at the consumer side of things, and found that we are actually the top listed mortgage company in Rhode Island. Hopefully the positive feedback will continue to flow!

This Saturday, after spending most of my day in New Hampshire at a school board meeting (I serve on the board of a private school there - more on that at another time, perhaps), I zipped back to Providence to volunteer again, this time at a Providence institution, WaterFire. I'm the co-chair of the Greater Providence Chamber of Commerce's Ambassadors, and for our spring / summer service event, we assembled a crew of over 20 ambassadors and friends to serve as ambassadors to WaterFire, staffing Ribbons of Light booths. 

WaterFire is a Providence institution, was first lit for First Night 1994, and was so wildly popular that supporters rallied to make it an ongoing event. Since then, creator Barnaby Evans and his team of staff and volunteers have labored tirelessly to keep the organization running, gathering donations of time and efforts from individuals, business, and the city. It seemed appropriate to give one evening to assist in the same work.

I was proud of the group we brought, and I believe we were quite successful in achieving our goal of helping in fundraising efforts. This weekend's event was especially important because the United States Conference of Mayors was in town. It was quite an experience welcoming such an illustrious group to Providence, along with the 5000-plus other attendees, and I look forward to participating again!

Is there a light at the end of the tunnel? Investors may be suggesting so with the recent surge in the Dow Jones Industrial Average from its March low below 7000 to a recent peak over 8700. Still, some doubt should exist considering the recent economic data hasn't so much indicated the United States economy is getting better, rather that the economy is worsening at a slower pace. Still there is one area, very close to the epicenter of the economy's troubles, that suggests recent changes are achieving their desired results.

In the 18 months leading up to December, 2008, the spread between 30-year mortgage rates and the benchmark 10-year treasury note rose steadily, reaching a peak at over 3%. This was a period of unprecedented worry over asset quality, as years of declining credit standards were exposed in massive defaults, especially among sub-prime adjustable rate mortgages. These loans had been given at lower standards for credit history or income documentation, and often at higher loan-to-value ratios than conventional mortgages.

As this played out, mortgage lenders introduced a seemingly endless series of guideline updates intended to improve the quality of newly originated mortgages, ranging from adding "declining markets" requirements, and increasing required down payments, to outright program elimination. In addition, mortgage vendors, such as mortgage insurance companies, have tightened their requirements, further reducing mortgage availability. While one result of this is that more borrowers are being turned down for mortgages, the market is recognizing these efforts, and the result can be seen in the current Mortgage - Treasury Spread.

As of June 11th, 2009, the Mortgage - Treasury spread stood at 1.73%, meaning investors required a rate 1.73% higher to justify investing in riskier mortgage assets rather than safer US government securities. The 10-week moving average fell to 1.68%, approaching the historical equilibrium around 1.5% that had stood until the watershed revelations of July, 2007.

The spread briefly reached 1.24% at the end of May, as a surge in Treasury rates had not yet caught up to mortgage pricing.

Several factors preclude the spread returning to the 1.5% level permanently, although it is possible it could settle near this level. The 1.5% level came about in part due to a massive increase in the quantity of assets seeking investments; mortgages replaced stock and treasury investments due to stock volatility and low returns on treasuries. The current economic crisis has erased much of the wealth associated with that period, permanently affecting demand. Addtionally, stocks have presented attractive opportunities of late. However, Treasuries are becoming less desirable compared to other assets due to their increased supply.

In coming months, it is important to be mindful of housing statistics, in particular, to gauge the success of the economic turnaround. Existing Home Sales figures will provide insight into the absorbtion of properties, especially foreclosed properties, into the market. Of particular note is data regarding the supply of existing homes. Until this supply subsides, home-price stabilization cannot be expected to occur. Also important is employment data, as another wave of foreclosures could easily follow from the 6 million or more jobs already lost since the beginning of the recession. If this happens, the Mortgage-Treasury Spread could easily widen. While inflation will be a significant focus of the Federal Reserve, it is not expected to meaningfully impact the Mortgage-Treasury Spread, as inflation impacts both types almost equally. Of note, though is one recent article suggesting that the Fed is facilitating Treasury purchases by buying mortgage-backed securities. This could be dangerous if the Fed is unable to continue and other buyers remain unwilling to participate in the market.

One final thought that has seen little press lately, but likely will in the near future, is the question of duration for new mortgage-backed securities. Duration of a financial asset is the average amount of time in which the investor will receive the proceeds of the investment, and provides a measure of the risk faced on that investment as interest rates change. Essentially, the longer the asset's duration, the greater the risk it faces in a rising rate environment. While most mortgages have either a 15- or 30-year term, their duration is much shorter due to the amortized nature of the loans, and due to natural events such as refinancing or home sale which cause loans to be prepaid.

Several factors in the current environment are likely to cause a shift in expected mortgage duration. Specifically, recent home-price depreciation will extend duration, as homeowners will be less likely to sell or refinance should they have insufficient equity. Second, newly written mortgages at historically low interest rates are less likely to be refinanced in the future, which had been a significant historical factor in shorter mortgage duration. Offsetting these is a possible cultural shift towards debt aversion which may lead homeowners to pay down existing debt more rapidly.

Mortgage risk relative to Treasury risk has decreased significantly in the last 6 months, however, the outlook for the market is still not as clear as investors would like it to be. The continued recovery could be threatened, should market factors impact demand for home purchases. Perhaps the most important news will come shortly, with the Federal Reserve's June meeting. For now, while it is clear that mortgage risk has normalized, whether it will stabilize at this level is anyone's guess.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance at the University of New Haven and Roger Williams University. Dan can be reached by commenting on this article, or by phone at (401) 263-8655.

I got this message from a reader here on Activerain, and thought I'd share the answer.

Subject: FHA Gift Money (Sent via Activerain)

Dan, My wife and I are in the process of buying a house. During the FHA preapproval process we noticed that we possibly were going to need a little help monitarily. Mywife's parents were more than happy to help us out. The only catch and this is my problem, is that the money that they gave us was cash and is considered "matress money," as it was never in the bank. We have filled out a gift letter, but our lender is stating that we are going to need more proof of the origionation of the funds. It is only $2400. Is there anything that you can suggest that may help us?

Thank you, 

A reader

Here is my response:

Hi, reader,

Thanks for your email.

There are 3 basic requirements of gifts for FHA loans:

1. Giver must verify ability to give funds (bank statement, etc.)
2. Gift letter must show money is given as gift
3. Receiver must verify receipt of funds (bank statement)

It sounds like you’re getting tripped up on #1, but the rest are ok. It’s not necessary that the actual money given be money in a bank, if the givers have other funds in the bank they’d be able to show as available to give. For example, if her parents have $2400 in the bank and $2400 in mattress money, they could show the bank money as proof of the source of funds. Whether they give you the money from the bank, or the money from the mattress makes no difference. Is that a possibility?

Alternately, you might look to have someone else act as the giver if they are able to show those funds available, and are willing to sign the gift form. Take a moment to consider if you have other relatives or friends who may be able to act in that capacity.

If you have questions for Dan Hartman, please contact me through my profile page, or leave a comment here. Thanks again for reading!

I know that FHA, and other government products, have been all the rage lately due to difficulty in getting conventional loans and conventional mortgage insurance, but I think that a lot of mortgage originators have forgotten that there are still good conventional loans available without the high down payments frequently associated with them. For cost conscious borrowers, this can be especially important, as conventional loans do not require the high upfront mortgage insurance or guarantee premiums associated with government programs.

In  most areas, well qualified first time homeowners can get financing at as high as 97% of the purchase price of their new home. While monthly mortgage insurance with this option is a little bit more expensive than FHA monthly mortgage insurance, the savings of 1.75% of the loan amount in upfront mortgage insurance premium is significant. For areas that don’t allow 97% financing, 95% financing is still available with conventional loans.

Interest rates for conventional loans like this are comparable to FHA for most situations, especially when making a down payment of 5% or more. The big difference is credit requirements. FHA requires only a 620 credit score, while getting the best rate on a conventional loan requires a score of 740 or higher. There are some differences in appraisal and income requirements, so make sure you know your score and that you’re getting all the options available.

If you would like a second opinion on your financing, you can reach me any time at (401) 263-8655.

It's been about 3 weeks now since Fannie Mae and Freddie Mac rolled out their "streamline" refinance programs they had first discussed at the beginning of February. These programs are intended to make refinancing to today's rates easier for homeowners by lowering documentation and credit requirements, and by allowing refinancing at higher loan-to-value ratios than are permitted under normal guidelines. Some key benefits of this program for current homeowners include:

• Refinance at up to 95% (soon to be 105%) without PMI

            This is big for those who originally had 20% equity as they are practically guaranteed no PMI

• Reduced appraisal requirements

            Drive-by appraisals and Automated Valuations (AVMs) are very common

• Many rates under 5%

            Actual rates depend on exact qualifications, but there are some truly low rates out there

These benefits help open up the possibility of a refinance that makes sense for many borrowers who have been on the sidelines, tantalized by low rates, but frustrated with declining home values. Unfortunately, there are many borrowers who are not yet eligible for this program; fortunately, there are new options being opened up shortly that may increase the usefullness of this program, including:

• Options to port a homeowner's existing (usually lower-cost) PMI certificate to a new loan

            PMI has become very expensive in 2009 due to risks faced by issuers, but keeping old PMI saves big

• 105% options

            For those who can't refinance at 95%, a few banks are already offering 105% and more will follow

This program is limited, though. First, to even qualify for consideration, a borrower's loan has to be securitized or owned by Fannie Mae and Freddie Mac. There are simple websites established by these government-sponsored entities that allow borrowers to look up their loans; alternately this can also be accomplished by their mortgage advisor.

The Office of Federal Housing Entity Oversight (OFHEO) which is operating Fannie and Freddie right now made a significant error in allowing its charges to design their own programs. This has led to significant discrepancies in the two programs, most notably that Fannie loans can close anywhere, while Freddie loans may only close at the existing loan servicer. This can lead to a lot of confusion for borrowers trying to make their situations a little easier in these difficult times.

In spite of the promise of this program, this option does not approach the elegent simplicity of the FHA streamline refinance. Under that program, FHA assumes that since it is already going to be paying out on insurance in the event of default, why not make it easier for borrowers to make their payments by giving them access to lower rates without having to go through an appraisal, or document income. This can even work for borrowers who have lost income and might not otherwise qualify; when income is recduced to an unemployment check, saving a couple hundred dollars per month on the mortgage goes a long way.

From what I've seen in new applications so far, it's looking a little better than the infamous "HOPE for Homeowners" program (which is still working on funding its 2nd loan), but not much. Many borrowers who haven't already refinanced owe significantly more than 95% on their homes due to recent depreciation. Hopefully the upcoming changes will allow this program to truly accomplish its goals, but if not, it may be back to the drawing board at OFHEO.

Dan Hartman is a Senior Mortage Advisor at Province Mortgage Associates, and serves as an Adjunct Professor of Finance at Roger Williams University and the University of New Haven. You can reach Dan by commenting on this article, or by phone at (401) 263-8655.

Yesterday, I took part in Rhode Island Junior Achievement's 25th Annual Achieve-A-Bowl, a fund-raising event that has collected over $80,000 this year to support Junior Achievement's in-school education programs. I think this is a very important charity to support right now due to the obvious deficit of Finance and Economics education in our school systems. Considering that 34% of respondents to a survey conducted by Bankrate.com didn't know what type of mortgage they had, I fell it is very important to support anything that will increase financial literacy.

Participating in the event was a blast. I bowled on a team consisting of several members of my BNI chapter, CitiBiz BNI, along with 9 other members. In spite of the beautiful weather outside, we stayed on for three strings. I was a little disappointed with my results in the first string, as I finished at a very unexciting 93. In the second string, however, I turned up the heat a little

(I know it's a bit tough to read, but that does say 175) and produced my best game ever at 175. In the 3rd game, I proved that it hadn't been a fluke, rolling another 175.

I think I also proved that cell phone pictures, in general, are bad. As if to further highlight that, I also shot some video of the event, yes, also on the cell phone.

In all, it was a great event in support of a fantastic cause. If you haven't already contributed and you're interested, I think my online donation page will be live for a little while longer. Thanks again to all who sponsored me for this event. It was a blast participating, and I look forward to doing it again.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an adjunct Professor of Finance with Roger Williams University and the University of New Haven. He can be reached by commenting on this article, or by phone at (401) 263-8655.