Tight markets = Tight underwriting, simple as that.  Let's touch on one thing that comes up time and time again on FHA purchases: Funds to close.

In working with almost solely FHA loans on a daily basis, it has become clear to me that my next installment here must cover the documentation of assets.  A failed attempt at asset documentation can send that red flag up the pole real quick if not careful.  When I step into a "conventional fallout" situation this is one of the biggest obstacles I have to overcome in many cases. With these declining market restrictions, documenting 3.5% down payment is certainly a whole lot easier than 10%+ for many homebuyers.

Cash in the bank

Sounds simple enough right? Well...how it got there, when it got there, amounts added or subtracted along the way or transferred from one account to another are all very important items to examine.  FHA Underwriters are trained to not only make sure $x are there but to adequately source $x in all circumstances.  Why does it matter so much you may ask?  With a tough housing market, underwriters now more than ever want to make certain that none of the funds are from ineligible parties like that seller who really needs to sell his house!  When HUD eliminated seller-funded down payment assistance last fall, they became more diligent than ever to make sure that buyers and sellers are in no way trying to circumvent this.  All the sourcing difficulties I've encountered have been purely innocent but when I had to prove a deposit was a Christmas gift from a borrower's grandmother, it became clear to me that the simplest things you would never think twice about certainly makes you think!  

Let's start with the bank statements---Make sure you provide all pages of the bank statements.  I know the banks do not always make this convenient with double-sided statements and some pages may seem to provide nothing of documentable value but if they just see page 1 of 6, 3 of 6, 5 of 6 they automatically will ask for 2, 4, and 6 before they review them.  (Don't worry:  they won't care if you've eaten at the same restaurant 15 times or you've been to the liquor store a few times!)

Now that we have all the pages, let's examine the deposits.  If you have nothing but your periodic payroll direct deposits there and adequate funds to close it's pretty simple.  But as experience dictates, it's not always that simple. 

If, for example, you have widely varying income/deposits like monthly commissions that are not direct deposited for the underwriter to clearly see they are from employment, save your paystubs beyond just your last two to document source.

 If you have transfers back and forth to another account, provide those bank statements as well even if you do not intend to use funds from that account.  If you have other miscellaneous deposits of any size, be prepared to document the source, even if you have the FHA required 3.5% down payment without counting those miscellaneous deposits...I will address gifts here shortly.

Earnest Money Deposit

If you put down a deposit with your contract as most buyers do, you obviously intend to have it credited toward your amount due at closing.  For the underwriter to grant that credit, this money must be verified as your funds or gift funds documented accordingly.  If the seller does not accept personal checks go with a cashier's check and avoid money orders.  Document the withdrawal of funds for the cashier's check and make a copy of it before submitting the check.  For a personal check the underwriter must see a copy of the check AND either an image of the cancelled check evidencing withdrawal from your account or your bank statement showing that check being withdrawn where they can match up the check number with the copy of the check.  Money orders make it very difficult to prove where the money came from and depending on the money order vendor may or may not show who they were paid to. 

Gifts

Gift funds from an immediate family member are a perfectly acceptable source of down payment funds for an FHA loan.  The gift does not have to be entirely from 1 family member.  I am currently working on a loan where a brother, sister, and mother are each providing 1/3 share of the total 3.5% down payment requirement.  The key is having a gift letter properly completed, (don't worry we have a standard form to make it easy), and the transfer of funds properly documented. 

We need to:

•1)      prove the donor has the funds to give (bank statement)

•2)      evidence the withdrawal from the donor's account

•3)      evidence the receipt of the matching amount

401K Funds

You can use 401K funds in the form of a loan or a withdrawal for required funds to close.  We also use them quite often to simply document reserves with no intent to withdraw the funds.  It can sometimes make a difference if your debt-to-income ratio is a little higher than the guidelines.  If we use 401K funds for either source of funds to close or for reserves we still need to obtain proof of the terms under which funds may be withdrawn.  Like the bank statements, provide all pages of the most recent statement that clearly shows your name, employer, statement period, any outstanding loans you have, vested balance, and the specific type of assets held in the account.  I know this may sound like common sense but you would not believe how many people have sent me just a screen print snapshot from accessing their account online that has nothing on it to clearly identify who it belongs to. 

When withdrawing funds to close, the proceeds check must evidence sufficient net proceeds (after penalty for early withdrawal and federal taxation) to close the loan when combined with other verified liquid assets.

When borrowing against an employment savings plan, a copy of the loan agreement and proceeds check are required.  Also, it is important to note that loans against 401k or similar employment savings plans are not counted as an obligation in calculating debt ratio for an FHA loan

What can I NOT use?

 

It is also important to point out what has been defined as unacceptable sources of cash to close:

None of the following is considered to be cash:

• Proceeds of a personal or unsecured loan.

• A gift that must be repaid in full or in part.

• A cash advance on a revolving charge account or unsecured line of credit.

• Cash for which the source cannot be verified (cash on hand).

However, it IS perfectly acceptable to pay for your appraisal with a credit card

In conclusion, there are a number of other miscellaneous sources of down payment that can be used that we see on a case-by-case basis with less frequency.  If you have any questions about whether the source in your case is acceptable just ask.  Knowing what you need up front is much easier than scrambling at the last minute to overcome an underwriter's apprehensions!

Happy house hunting to all! 

 

With the terms "credit crunch" ,"recession", and "economic crisis" flying around us at every turn, one may ponder exactly what it takes to qualify for a mortgage right now.  With the growing list of designated declining markets around the country, qualifying for an FHA-insured mortgage may now be more important than ever. 

Before we get into the specifics of FHA qualification, let's take a look at what the declining market designation can mean to you for a Conventional loan if your area were declared declining by the private mortgage insurance companies.

**A 5% down payment requirement would instantly become 10%. 

**A mere rate adjustment for credit score would become an outright denial if your score happens to be less than 700. And if your credit score is less than 720 you would need an extra 2 months total housing payment (P-I-T-I) in reserves on top of the additional down payment required.

**Your debt ratio could not exceed 43% regardless of your credit score

Keep in mind this already affects the entire state of California!

Being prepared is really the 1^st step.  If you have 5% of the purchase price or less for a down payment FHA will now be a superior choice for many homebuyers with all of the additional adjustments to rate for score and Loan-to-value.  Many of the FHA purchases I close in areas across the country are what I call "Conventional Fallout" from these exact conditions.  Buyers unaware of the market restrictions have written a contract to purchase and must suddenly "change gears" so to speak, when they realize Conventional loan terms are unavailable to them.  Once they are referred to me, I often must educate them that FHA is not some sort of subprime program.  It's often a superior program-offering MI rates cheaper than the Conventional PMI rates, lower fixed interest rates for maximum financing, and the ability to streamline refinance without an appraisal in the future.

Down Payment Requirement for FHA

With the changes outlined below, FHA now requires a 3.50% down payment-declining market conditions do not apply

Effective January 1, 2009, all FHA purchase transactions now require 3.50% down payment from the buyer. The old guideline was just a 3% "investment requirement" but the loan-to-value was allowed to be 97.75% in some states (if the seller were not paying all of the buyer's closing costs)where 2.25% could be applied toward down payment and .75% of the purchase price could be applied toward closing costs.  The new maximum loan-to-value is now 96.50%. The seller can pay all closing costs without affecting this.   This new policy is designed to not only mitigate risk but also provide simplification and standardization for all markets nationwide.  

Now that you know you need that 0.5% of the purchase price, keep in mind the seller can still pay up to 6% of the purchase price in closing costs and pre-paids.  If property taxes or insurance costs are fairly high in your area, keep in mind that your pre-paids may well exceed your closing costs. With a buyer's market advantage in place foreseeable for the coming year, offsetting the down payment requirement with a little extra seller contribution can often be negotiated. 

By pre-paids I am referring to:

1) The odd days interest collected from day of close to the 1^st of the following month

2) Your 1^st year homeowner's insurance premium

3) Your escrow reserves for property taxes and future insurance payments.

 Escrowing your taxes and insurance is a requirement on an FHA loan.  Even if you have to offer a little extra on your price, with the low fixed interest rates available you are only looking at a difference in payment of less than $6.00 per $1000 borrowed to save yourself from an extra $1000-$3000 out-of-pocket at closing.  More money to use for improvements, decorating, appliances, etc!!

Remember also that the 3.50% down payment requirement can also be met with a gift from family member(s).  My next post will cover these gift requirements as well as other asset documentation.

 

NEXT POST: FHA Qualification---Documentation Requirements

I still consider myself a newbie here relative to many very creative & seasoned bloggers that make ActiveRain such a great community.  Every time I log in I learn something new.  The-ever growing membership here is a definite sign that more and more people in the real estate industry agree.  When I joined I made the commitment that I am not going to just create a profile and do nothing--too many people do that.  Even if I haven't racked up 100,000 points  :) (someday I will though) I'm going to make this useful and I'm going to share it with others.  I guessed I haven't blogged everyday due to my perfectionistic tendencies to craft those ideas I get whenever it strikes me into words and topics I find useful. 

Using myself as an example, I think of ActiveRain as an opportunity.  Opportunity to shape and mold however I'd like.  Converted from my start as a local loan officer into one with the ability to market nationally if I so choose, creates a tremendous opportunity.

I've realized that when opportunity knocks...some people open the door and welcome it.

Some people however,  do not even take a quick glance through the peephole before they deadbolt and chain the door shut!

 

With ActiveRain invitation, not necessarily through the site to get points, I've started seeking out others who I feel could really benefit by joining the ActiveRain community.

My idea is fairly simple, just takes a little homework on my part:

To contact a select group of agents in small market communities where ActiveRain and Localism are severly underutilized and invite them to discover all there is to offer here.  I figure if you are in a community of 20,000-30,000 residents  with a small university or college, a few employers of some scale and there is only 1 ActiveRain member there who is not even active there's a whole bunch of good 'ol Search Engine Optimization going to waste now isnt it.

I've only just started but I decided this is worth the time because frankly, I'm really not big on "spam-blasting" and I know most agents really are not either!  How many of you get numerous spam blast e-mails from brokers or lenders claiming they have the best rates or the best programs or the best service?  Shouldn't I really be marketing myself not just marketing loan products?  If you want to do business with me that's oustanding of course :) but why in the world would a spam-blast e-mail to 500+agents make you want to do business with me.  Wouldnt you like at least something in return?  (I sense that you're nodding your heads yes here!)

If you were going to refer a client to me and I'm 3 states away from you shouldn't there be something about me & and my ability that makes me worthwhile.  I feel that a personal invitation and a genuine interest in mutual success is defintiely worth investing in.

For those who simply do not respond to my e-mail or a phone call invitation, I guess I'll have to assume they've got more business than you can handle already or that you're not "Built to Blog"  With more and more homebuyes especialy relocating homebuyers doing their research online, you simply cannot afford not to at least take a sip of the Google Juice right?  Especially if you realize your competition is not doing so.

For those of you reading my blog for the first time, please check out my other posts on web-marketing, etc....I always love to get new ideas and opinions and your ideas for future blog topics relevant and useful here.  My readership has increased but I dont expect to get 100 comments or anything--Feel free to prove me wrong is you find my commentary useful!

Thank you for very much for reading!

~Kevin

One of my favorite places to visit in Lexington, KY sustained some significant straight-line wind damage yesterday as severe storms raked the area. Impressively enough though, they expect the field to be playable tonight....Quite an impressive clean-up effort I must say! Kudos to all those who are putting Lexington's beautiful stadium, the home of the Class A South Atlantic League Lexington Legends, back together again. The weather's been a tad rough for many this week! Prayers go out to all those who've lost so much due to Mother Nature's wrath here lately...

To all of you who read and e-mailed me about my marketing do's and don't s post here on 4/29/08 I wanted to thank you for your kind words, additional insights and I also enjoyed the opportunity to look at some of your pages.  Definitely some great stuff out there--happy selling to you! 

I've talked with some agents who are just getting their website started or are just thinking about it...trying to choose a domain name, how to get started.  I did some comparison shopping on just that and you'll notice here I have some links to the right. 

I found that in ease-of-use, and cost/benefit there is a lot of value to Domain-It.  I wouldnt have become an affiliate & posted them here to share with the entire ActiveRain community if I did not believe in them. 

You can also transfer your domain name here and set-up auto renewal which is a great feature to have!  There are actually software programs out there designed to crawl the web in search of domain names getting ready to expire with active traffic on them to buy them up and re-sell them or I guess make you buy them back or lease them.

I'd always wanted KevinWeaver.com but I guess I'll have to wait a while longer until the veteran dirt late model racer retires:)  I've picked up a couple others to use in the future and brainstorm on ways to promote them.

It's kind of fun brainstorming about what names you could use, promote, specific to you, your community,  your business and of course, seeing if your idea is taken.  You can buy multiple names and have all them forward to your main page also. 

Just as an example in a large metro area you could promote different suburbs/neighborhoods with a number of domain names for your marketing materials and have them all tie in your main page for MLS search and to view your listings in each of those areas.  Not sure of all the technical aspects for that depending on your web host but I've seen more and more doing this type of thing.  Being creative could be a rewarding way to find what works for you!

CNN Money featured a great article yesterday about home buying for those who are on the fence out there. I'll post the link at the bottom....

Amanda Gengler hit the nail on the head when she stated that #1: You simply cannot time the bottom.  Fact is even if you could buy the same house a few thousand cheaper in 6 months but rates climb you do not gain anything and likely end up losing.

In fact, talking with some agents in the Cincinnati Ohio market as an example, they are noticing significant improvement in marketing time in several parts of the metro area.  Many more listings are pending in less than 30 days over the last few weeks.  For Cincinnati in general, the bottom may have already been reached.  I'll be curious to see when some new sales figures come out for May there. 

Amanda goes on to point out what many of us have been saying all along "...fixed mortgages don't directly follow the Fed"  (Thank you Amanda)  I get so tired of these idiotic cartoon banner ads all over the web with teasers for 4% loans.  The fact is rates in the low 6's are still near historic lows and many economists voice the opinion this may not continue regardless of what the Fed does going forward.

Here is the link: http://money.cnn.com/2008/05/01/real_estate/new_rules.moneymag/index.htm?postversion=2008051213

 

Thanks for reading

Kevin

 

Time to get back to blogging a bit. Many ideas lately seemingly so little time to address them!

I've been doing some research lately: looking at realtor websites, mortgage company websites both locally and around the nation and talking with my clients, brainstorming on ways I can make my website presence more effective and my realtor friends can do the same. 

I guess I shouldn't be too surprised but there are just so many poorly designed, incomplete websites out there that it's no wonder that homebuyers find it hard to trust the information they are given be it from a real estate agent or a loan officer.  My personal page is by no means perfect, it's a never-ending work in progress :)!

Do's:

1)A home/ main page that really attracts the interest of the reader:  No matter how much text you have built into there to attract those almighty search engines, the fact is, you need "meat" and "potatoes"! If its all obvious text there to lure in search relevance with nothing to offer, it will not take long for that back arrow to get used real quickly creating a high bounce rate.  A high bounce rate drops you way down in search relevance even if your keywords are solid.  Remember, If no one sees your site any longer your efforts will go to waste.

2) Ease of Navigation:  Have friends or family members test drive your page and ask for their honest opinions.  (Make sure they spend some quality time here to help your bounce rate too!)  You'll be amazed at the things they might pick up on.  Little things they can add or suggest to make it user-friendly from the layman's perspective could make a big difference.

3) Interactive features:  Offer quick contact forms without asking for too much information to make it easier for the shopper who isnt ready to commit to anything at least express their interest.  Hone your skills of converting that casual interest into a sale.  (We're all still working on that right?  There's a whole other blog in and of itself right there!)

Dont's:

1) Outdated information: HUGE turnoff.  You know how many sites I see with stuff like "Date last modified 12/1/06" on the bottom of them?!  This screams: "I dont care".  If you dont think it's worth the time to update your site don't expect it's worth anyone else's time to spend reading it!

2) Dead Links: Make sure the links/pages work and work properly!  I test my application and page-to-page links regularly to make sure they are fully functional.  In my case, with the online application I have it is absolutely essential that 1) it be secure and 2) that it promptly forwards all information accurately and completely.  Make sure those "e-mail me" and "contact me" links are good to go.

3) Information access: Real estate agents: I'm of the mindset that a house shopper should be able to browse listings without having to register to do so.  You want the buyer to use your site to do this so they contact you when they are ready to see something.  And, if they spend all their time browsing your site to do this, this helps you out on that ever-important bounce rate we talked about now doesn't it?!  The fact is if someone doesnt want to register on your site they can just Google "your city here MLS listings" and find a competitor's site where they do not have to.

4) Functionality:  OK, we've established looking at listings now let's make sure that looking at them is as user-friendly as possible.  I've found numerous sites where accessing the list of all listings that meet search parameters is no, problem but when you click on it to view details and see photos it displays all the text in an impossible-to-read color like bright yellow on a white background! That mouse is moving toward that back arrow really fast...If your site makes the listing browsing easy and enjoyable that shopper is likely to bookmark your site and come back there and use it again & again and more likely to contact you when they are ready to move forward.

Please share your experiences and comments here....we can all benefit to become better e-marketers!

Thanks for reading

~Kevin

As we've seen on other cut days,  it didnt take long after the Fed rate cut this afternoon for the bond market to kick in and see a pricing adjustment for the worse.  All of 9 minutes after word of the 3/4% cut was posted on CNN.com my inbox started receiving pricing adjustments.  Some lenders have already made 3 rate sheet changes since 2:30 ET and it's only 4:15 right now.

With the Dow up over 400 points today I wouldnt be at all surprised to see it fall after open tomorrow. Some of those euphoria day-traders might just want to cash in quick with all the gloom and doom still circling.

I'm still not convinced that a 3/4% cut today was what we really need.  Inflation worries, runaway oil prices and the weak dollar hurts us all. The market has continued to fall after the last Fed cuts, of course only after the quick spike.  Can you imagine the market reaction if the Fed had NOT cut today?!  they actually expected more than this...

Ejoy the roller coaster ride!

 

 

You may have read some other posts on ActiveRain about mortgage rates in recent days/weeks wondering exactly what's going on and speculating on where we are headed.  First I will reiterate that what the Fed does will not necessarily translate into what long-term interest rates like mortgages do.  The end of January did offer the best rates we have seen for quite some time but since about 2/10 rates have worsened from one day to the next about 80% of the time.  If you are "floating" right now, you might feel like you're playing a game of "Deal or No Deal" gone wrong and you're opening all the cases with the big amounts in them. 

So what's going on?

First off, the yield on the 10-year bond is having a significant effect.  As I type this post it is sitting at 3.87%.  Generally speaking, as the price drops the yield goes up and so do mortgage rates.  A drop of 11/32+ or more  to the bond is often an omen of a mid-afternoon price/rate change.  If the yield were to spike up to say 3.93 or 3.94 this afternoon we would most likely see a rate hike before the close of business Easten time.  If the yield drops, lenders are a little less quick on the trigger to improve rates (just like gas prices right!?)This leads us to the second part of the equation...

Second, underwriting volume and turnaround time on loan packages---particularly FHA and VA loans are stretched right now with many of the nation's largest FHA lenders/servicers.  They see no need to drastically improve pricing for loan applications they can barely accommodate.  Government loan demand is up and the capacity/number of mortgage companies to handle the demand is down.  There are only so many DE certified underwriters to approve these loans and you cannot just add more of those overnight.  If you have a loan in the backlog at Taylor, Bean, and Whitaker right now you know exactly what I mean here!  Wells Fargo has gone from 3 to 5 and now to 7 business days on new submissions in the last 2 weeks.  With clearing conditions for month-end closings this week, it might just get worse before it gets better.   On top of this, these lenders are seeing a lot of loans that simply do not come close to qualifying with poorly-completed submissions just trying to throw something against the wall to see if it sticks. Volume that would have gone, dare I say "Subprime" (beginning to hate that term and its overused generalizations) is being funneled into the FHA pipeline too...the magnitude of processing denials creates an additional burden.

If you are an agent working with a buyer pre-approved for FHA, patience will be a virtue.  Don't steer buyers away from FHA though--For many buyers it is the best option available to them.  (see my previous blog post on FHA vs Conventional pricing).  Do advise them to be watchful of rate locks and aware of when they expire.  If you are writing a contract today a 15-day FHA lock just isnt going to cut it with many FHA lenders right now.  If an FHA loan is the best scenario for my borrower, I will gladly explain to them exactly why it's worth the little bit of extra time in their case.  If more loan officers had done this over the quicky subprime loans a couple years ago, let's face it...we wouldn't have as many problems in the lending industry as we do right now.  The Option ARM's thankfully never got popular around here in Kentucky but there sure were a ton of those 2 and 3 year ARM's with high margins!

Best wishes to all out there---Thanks for reading and I appreciate your feedback.

-Kevin

Buying a house in Kentucky or wanting to buy a house in Kentucky soon?

I am following up to my post yesterday about the credit score adjustments on Conventional loans where I mentioned that for scores under 620,  FHA is most likely the best means to achieve affordable financing.

Even many real estate agents I have spoken with lately still have misconceptions about FHA financing and worry it's going to take too long or they have to jump through too many "hoops". The appraisal/inspection processs is truly simplified in the last couple years.  Working with someone who originates a lot of FHA loans really helps,  We know the common pitfalls and can make suggestions while you are shopping for a home.   Its almost certain that more banks and lenders who havent historically handled FHA loans will & currently are adding this product. 

So let's get back to the 620 score for a moment...Scores under 620 face the highest PMI (Private Mortgage Insurance) costs on Conventional loans and now, the highest cost or fee from Fannie mae or Freddie Mac built into the loan terms as well.

FHA loans presently have a level PMI cost: 1.5% of the base loan amount which is financed and 0.5% monthly.  So how would you calculate this?  Let's use $100,000, nice round number to illustrate this:  $100,000 x 0.5% = $500, then divide that by 12 and you have a $41.67 monthly PMI payment.  Conversely a conventional loan rated as A- can have a PMI rate 3 or 4+ times that amount.  On $100,000 you could end up being charged well over $100 more per month.  I recently witnessed a refinance applicant here with a 7.50% interest rate but a BANK-issued PMI of 4.18%----this made their APR on their existing loan 11.66%!!

FHA Loans are not score-driven as a rule....Yes, some lenders do set their own pricing tiers for certain scores but as a rule, credit score alone does not dictate pricing.  There is an FHA Total Scorecard system used for automated underwriting but manual underwriting is available if not approved this way (yes, a human being actually looks at everything and is expected to use a common sense approach)  There are some guidelines a Direct Endorsement Underwriter cannot bend on but there are many areas within FHA Credit Policy open for interpretation and left to the discretion of the underwriter. "DE" Underwriters are accountable for their actions and defaults are tracked very closely.  Defaults pointing to underwriter oversight are closely monitored and defaults with common loan characteristics are tracked accordingly for potential guideline updates and revisions

I will talk more soon on the potential of FHA for refinance savings