HUD Tightens Rules on FHA Short Sale Loans

A homeowner short sales their home because the home value is less than the mortgage owed. Then, they spot a great deal on a short sale home in the same neighborhood. Now if they can get FHA financing with its low down payment, they can move in for very little cash out of pocket. Not so fast!

We reported nine days ago in our article New FHA Loan Condo Rules, that the FHA is becoming more concerned with loan quality and protecting their loans from default. With 30% of all recent mortgages being guaranteed by HUD/FHA, massive exposure is being created and they are acting to put in more stringent guidelines.

The New FHA Loan Policy

Kenneth Harney at Reality Times reported in his article earlier this week, Investor Report: HUD Guidance,
that HUD commissioner David Stevens has issued revised policies on short sale loans. He reports that Mr. Stevens said:

“Applicants for new FHA insured mortgages will be turned down – effective immediately – if they participated in a short sale of their principal residence, simply to “take advantage of declining market conditions,” or to “purchase a similar or superior property at a reduced price within a reasonable commuting distance” of the house they disposed of via a short sale.”

In simple words if you sold you home by short sale to get out of an upside down situation, FHA is probably off limits to you.

If you are renting your former home and looking to take advantage of a short sale, the FHA is limiting your rental income so that it is more difficult to qualify. I read that as your liability of the mortgage payment on the rental home will be included, but little to none of the rental income.

Only when relocating because of an employment change with a one year lease agreement will owners be allowed to claim all rental income as part of qualifying income.

Mr Harney sums it up like this:

“In its guidance, FHA says lenders “may consider” rental income, minus an appropriate vacancy factor, when the applicant’s loan to value ratio or LTV on the vacated property is 75 percent or less.

That means that the owners must have at least 25% equity in their rental property for rental income to be allowed.

On the other hand, Mr. Harney finishes the article with the following statement;

“…short sellers who are in default on their mortgage – and used the short sale as an alternative to a foreclosure by their lender – generally will not be eligible for an FHA-insured home purchase loan for three years following the close of the short sale.”

Are Any Short Sale Selers Eligible?

So what short sale seller might be eligible under new new policy.

“Stevens added that people who dispose of their houses though short sales can qualify for FHA financing on another house only if they are current in payments on the mortgage for the previous year as well as on all installment debts.”

As we saw above, you may also be eligible if you have over 25% equity in the home you are using as a rental property.

Few of my customers are using FHA loans. However, if you are eligible for FHA financing, you may be able to take advantage of low down payments and reduced closing cost. You may also be able to take advantage of the current tax credit of up to $8,000. The combination can result in you buying a home with little to no cash out of pocket. Call me to discuss your

Find out more about Daytona Beach short sales.

Mortgage Rates Jump to 5.37%

Yes, mortgage rates are up. Rates have jumped from 4.93% at the beginning of the month to 5.37% today. The question is will they go up further, or stop and reverse like they did over the summer when rates approached 5.6%?

Looking at the chart below from bankrate.com, we see mortgage rates varying over the course of the past 12 months. We can see several periods of ups and downs. Have the underlying conditions in the mortgage markets changed?

2009 Mortgage Rates Chart

The Mortgage Rate Factor

The easiest way to understand mortgage rates is to understand that if it cost lenders more, it will cost you more. Mortgage lenders compete with US Treasury Bonds which are fully guaranteed by the US government. Mortgage lenders will pay more to borrow than the government to compensate for risk.

Look at the chart below that combines mortgage rates and 30 year bond prices. It’s not exact, but the darker line is mortgage rates and the lighter line the 30 year bond rates. It appears to correlate very closely. As bond rates go up and down, so do mortgage rates.

2009 30 Year Bond Rates Against Mortgage Rates

Look across at the horizontal lines and you will see that the lines correlate. Ignore the vertical scale because I didn’t match up the scales. The point is that recent mortgage rates correlate with US Treasury 30 year bonds.

We see continued pressure on Mortgage rates because of continued pressure on 30 year Treasury Bonds. The deficit is at $12 billion and growing. We believe that results in inflation at some point. Inflation means that bond buyers will expect higher rates to compensate; bringing mortgage rates up with them.

What to Do Now

If you are in the market to purchase Daytona Beach or Ormond Beach real estate, and you will be financing your purchase, it will be important for you to track mortgage rates. To fully understand the impact of changes in mortgage rates refer to our article Basic Math for Home Buyers Who Finance.

Make it a point to track 30 year US Treasury bond rates too. You can track these at CNN, Bloomberg, or Yahoo Finance.

If you qualify for the current home buyers tax credit you should take advantage of it before it expires with contracts written after April 30th. We don’t know if the credit will be extended, so why not take advantage of as much as $8,000.

We’ve seen prices stabilize in the past quarter, but that’s no guarantee that they won’t fall again, but whether they fall or not, it is to your advantage to secure the lowest possible mortgage rate and get the tax credit. We can help you find properties that are priced right, but we still advise that you don’t buy in this market unless you are going to hold the property for 5-7 years.

We are available to discuss your options. Give us a call at 386-566-7503 with your questions.