As discussed in earlier blogs, FHA loans are becoming more prominent with regards to home financing. The newest figures have around 20% of all closed loans in the 3rd quarter of 2008 being government loans; FHA, VA, USDA. That number figures to rise to 25% or 1 in 4 loans closing by the beginning of 2009 being a government loan.
One of the true benefits of a government type loan is the no to low down payment; VA - no down payment required, USDA - no down payment required and FHA - 3% down payment required (3.5% as of January 1, 2009).
In keeping with this theme, there is another low down payment program offered through FHA in purchasing a HUD home. A HUD home is a 1 to 4 unit residential property that HUD has acquired after an FHA mortgage is foreclosed on. HUD now owns the home and in turn offers it for sale to recover any losses after paying off the bank/lender.
Any buyer purchasing a HUD home with FHA financing is eligible for the $100 down program.
Typical FHA guidelines are in play, the property must be their primary residence, they must be able to prove income, employment and assets, have sufficient credit, etc. HUD does not require the borrower to use FHA financing to purchase a HUD home BUT one way to capitalize on the $100 down program is through FHA financing.
Please make sure you familiarize yourself with a particular bank/lender that not only specializes in FHA financing but one that also utilizes this specific program.
In continuing our review of various FHA loan programs, we shift our focus on to the FHA 203h. The 203h provides 100% financing to individuals or families whose homes, rented or owned, were located in a presidentially declared disaster area and damaged OR damaged to such an extent that reconstruction or repair is necessary. One key point is their new home purchase does NOT have to be in same area where previous home was located.
In review of some of the guidelines of this 203h, the purchase has to be a primary residence. Single family home, condos and townhomes are the only types of properties allowed under this program. As we have discussed in previous blogs, if the buyer is looking to purchase a condo-please make sure it is a HUD approved condo. See the link below:
https://entp.hud.gov/idapp/html/condlook.cfm
The buyer has one year from the date the President declared the area a natural disaster to apply for the 203h loan.
You can go to fema.gov to find out which areas have been declared disaster areas by the President.
Kotar Associates, a Florida based education and consulting firm for the Real Estate and Homebuilding industries, has launched their website outlining their many service offerings.
The Company's focus has been to identify, research, educate and publish on current issues that affect the financing of purchasing a home in today's market.
Our BLOG, KotarNews.com, updated weekly, provides timely, topical information and insights on market activities.
Our ARTICLES, published by RISMedia, are intended to provide in depth coverage on topics affecting Real Estate professionals.
Our COURSES provide detail on each topic as well as information on how to effectively apply what has been learned to increase sales potential.
Our CONSULTING services will provide our clients the specific information and tools to optimize sales opportunities.
Kotar Associates is also developing a series of online training programs for Real Estate professionals. You will be reading more about this opportunity in the coming months.
Over the last number of months, FHA began implementing some changes to their programs. In addition, the Housing and Economic Recovery Act placed additional changes in FHA practices, some of which modified FHA proposed changes. I have listed some of those changes below.
Converting Existing Homes to Rentals
The FHA changed their underwriting rules to limit the ability of a homeowner to use rental income from a previous residence that it converted to a rental property, when applying for a new mortgage on a second property. Under the new rule, the homeowner must prove sufficient income to make both mortgage payments without the rental income or has an equity position in the rental property that it will not likely result in defaulting on that mortgage. There can be an exception to this rule for employment relocations.
This change mirrors the announcement by Fannie in August. Apparently, homeowners, in increasing numbers, are choosing to vacate their existing principal residence and purchase a new residence. They are then providing misleading information on the rental income of the property being vacated to justify the new mortgage. These changes effectively end "bail and buy" loans.
Moratorium on Risk Based Premiums
The Housing and Economic Recovery Act provided for a one-year moratorium on the implementation of the FHA's risk based premiums beginning October 1, 2008. The effect of the risk based premium was to increase the premium based on the amount of the down payment.
This will not delay the implementation of an upfront premium as well as well as monthly premiums on all loans.
Seller concessions of 6% are still allowed; however, down payment assistance programs have been eliminated effective October 1, 2008.
Down Payment Requirements
The Housing and Economic Recovery Act also called for an increase in down payment required to 3.5%. That change will not go into effect until January 1, 2009.
As with any loan program, there are a number of stipulations that need to be met to gain approval. That is why it is important to choose the right FHA approved lender. Not all FHA approved lenders service all FHA loan programs.
Recently, while teaching a class on VA loans to Realtors, I asked a question. "How many of you have ever asked your client if they were eligible for a Veteran's loan?" Of the 35 attendees, not one person raised their hand.
Similarly, while doing research on USDA Rural Development Loan programs, I was told by A USDA employee that Realtors were not generally aware of Rural Development loan programs. Obviously, there are exceptions to these two cases dependent upon the part of the country that you live.
As we have written previously, your best bet for loan programs are VA, USDA Rural Development, FHA or loans that lenders will portfolio. Conventional loan programs in most parts of the country generally require 620 credit score and a 5-10% down payment and mortgage insurance. Below is a quick reference guide comparing the following loan programs:
USDA
FHA
VA
Fannie Mae
Front Ratio*
29%
29%
none
28%
Back Ratio*
41%
41-43%
41%
36%
Down Payment
0%
3.5%
0%
5-10%
Loan terms
30 years
15-30
15-30
15-30
Interest Rates
Market
Market
Market
Market
Mtg Insurance
None
Yes
None
Yes
Funding Fee/Mtg Ins. Premium
2% of loan
1.5%
2.15-3.3%
N/A
Reserves
None
None
None
Yes
Source of closing costs
No limit
6% seller
4% seller
3-6% seller
Credit scoring is another issue with USDA, FHA and VA starting to use 580 as their base while Fannie Mae uses risk based pricing starting at 620.
Changes to FHA and Fannie Mae programs will continue to occur. Fannie Mae programs will tighten up with more restrictions as it continues risk mitigation efforts. FHA, on the other hand, will have its hands full trying to handle the unprecedented loan volumes of (pre-foreclosed) loans being forced on it by Congress.
* Front and back ratios are used in determining debt to income ratios used by lenders to determine the maximum mortgage allowed. The front ratio looks at how much of your monthly gross income will be used to support housing costs. The back end ratio adds monthly consumer debt to the housing costs.
Effective August 1, 2008, Fannie Mae issued some new rules affecting the conversion of a principal residence to a second home or investment property.
For a second home, both mortgages will be used to qualify for the new transaction (as occurs today.) The difference is that the borrower must prove 30% equity in the existing property or be required to escrow 6 months of principal, interest, taxes and insurance (PITI) for BOTH properties. With 30% equity, the lender may allow 2 months escrow on both properties.
On investment properties, Fannie now will require 30% equity on the existing property for the investor to claim up to 75% of the rental income as an offset to the mortgage payment in qualifying for a loan. Without the 30% equity, the rental income cannot be used as an offset AND the current and proposed mortgage payments must be used to qualify for the new loan. In addition, 6 months PITI for both properties must be escrowed.
With declining home values in most markets, these changes will make many homeowners ineligible for mortgage loans, when they want to retain ownership of the existing property.
Finally, as additional restrictions / requirements are placed on borrowers by Fannie, Freddie or the mortgage insurance companies, it becomes incumbent on real estate professionals to ask the pertinent questions of their client at the beginning of your relationship. Pre-approving your client is more critical than ever.
A key provision of the Housing legislation just passed by Congress is the elimination of the down payment assistance program. The principal advocate for eliminating the program was the FHA. Their reasoning is that these types of loans have failure rates two to three times the rates of other loans that they insure. That coupled with the fact that down payment assisted loans today account for 1/3 of all loans that FHA insures.
In Congress, members of the Black caucus and Hispanic legislators are already making plans to introduce legislation to once again allow for these seller assisted loans. With the anticipated gains by the Democratic Party in Congressional seats this November, these legislators are confident in reinstating these programs.
Another element of the legislation, effecting primarily lower income buyers, will institute risk based pricing for insurance premiums paid by the borrower. The FHA wanted this pricing action implemented immediately. The version just passed will delay implementation of risk based pricing for one year, until October, 2009.
A real mouthful with the potential of costing taxpayers billions. And, Congress is already considering doing more; more to bailout potential foreclosures as well as another stimulus package. This must be an election year.
One key point that you need to understand and get the message out to clients:
Effective October 1, 2008, Down Payment Assistance Programs for FHA will no longer be allowed.
Well, here are the other key points that will be included in the Legislation.
The government will back up to $300 billion in refinanced mortgages.
Gave Fannie and Freddie access to government funds to keep them solvent but the bill also included additional supervision over Fannie and Freddie.
Allow for a permanent increase in the conventional loan limit to $625,000.
Provides approximately $4 billion for local governments to buy and rehab foreclosed properties in principally inner city neighborhoods.
Allows for $15 billion in tax breaks for low income housing and up to $7500 for first time homebuyers.
This bill could be signed by the President as early as tomorrow.
A month ago we advised you that Fannie Mae and Freddie Mac were eliminating their "declining market programs." Well, no sooner than some Banks and other Lenders were announcing programs with 95% Loan to Value's (5% down payment), along come the Mortgage Insurance companies announcing that they will NOT underwrite loans (with few exceptions) at less than 90% Loan to Value in Florida, California, Nevada and Arizona.
The facts are that credit will continue to tighten for the foreseeable future. Lenders and Mortgage Insurance companies are continuing to write down their loan portfolios as foreclosures continue to increase. The $300 billion bill aimed at mitigating the foreclosure problem, which Congress is set to approve and send to the President, is not expected to significantly impact the default rates on loan programs. Representative Frank, one of the authors of the current legislation, is already on the record that more debt relief is likely.
Conventional loan programs (remember those) that are available are generally requiring 680 FICO scores and 10% down. As we have written previously, your best bet for loan programs are FHA, VA, USDA, hard money for investors and loans that Banks / Lenders will portfolio. We have also seen a tightening on Construction loans due to significant losses by Lenders, primarily, local and regional banks.
Not much good news, but there are options available.
During the subprime loan era, a number of government loan programs originally established to help low- to moderate income individuals and families afford home ownership, fell out of favor. We previously discussed how FHA and VA loan programs are now making a resurgence.
Similarly, the US Department of Agriculture Rural Development (RD) programs are making a comeback. These 100% financing loan programs are available for low to moderate income residents in rural areas across the country. The advantages of these programs, in addition to no down payment, are no private mortgage insurance, a 30-year fixed rate, all fees can be rolled into the loan, as well as flexible credit and qualifying guidelines. As with all loan programs, there are certain restrictions that are part of the program. However, these programs are specifically designed to enable individuals or households who cannot get conventional financing, afford a home. Let's review how they work.
There are two types of RD loan programs: "direct" and "guaranteed." Before we discuss the differences, let us review the common elements of the programs. First, you need to determine if the subject property is located in an eligible area. Second, you need to determine if you are income eligible. This information can readily be obtained by logging onto www.rurdev.usda.gov and clicking on "housing and community facilities." Each State, at the County level, has identified areas that qualify for these programs. In addition, qualifying income levels can vary at the County level. Qualifying income is determined by adding all income from those individuals that will be living in the home less certain expenses for children, child care and certain other expenses.
You must meet RD guidelines for housing and debt loads and pay your bills on time. You must also be a citizen or here legally, planning to be a citizen.
The subject property can be for new or existing homes and must meet minimum FHA standards. Construction to permanent loans are also allowed. Other types of properties that also qualify are modular and Condo / Town homes.
Direct Loans are initiated and funded directly by the USDA. These loans are for low income households (under 80% median income for the area.) Applicants for these loans need to prove that they can make payments on the property and have "reasonable' credit histories.
Guaranteed Loans are loans for moderate income families (with an income level of up to 115% of the median income for the area.) Applicants for these loans apply with Lenders approved by the USDA. In these cases, the lenders set the interest rates, which are guaranteed by the government.
As these USDA loan programs are generally not well understood by Realtors or builders, let alone the consumer, the USDA has area offices for all eligible counties throughout the U.S. ready to assist with information on these programs as well as Lenders involved in making these loans. That contact information is also available on the previously mentioned website.
While there are significant differences from traditional loan programs, there are resources readily available to help determine eligibility of potential buyers. Getting these loans approved and closed are comparable to FHA loans. These USDA loans are generally the lowest cost loans available on the market. They should be an obvious choice of a loan product for low and moderate income individuals in rural markets.
Jason Kotar
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