FHA Waives 90 Day Rule for Investors Who Renovate and Sell

Properties purchased for renovation or repair by investors for resale were not eligible for FHA loans until 90 days after the purchase. As of February 1, that’s changing. The FHA is waiving the 90 day period for one year, starting February 1st, to allow investors to renovate or repair REO (real estate owned) and foreclosed properties and quickly resell them using FHA financing.

With FHA financing making up about 30% of all mortgage written today, we believe it’s important to keep you informed of changes as they occur. FHA loans are very attractive to both buyers because of lower down payment, credit requirements and closing costs, and to lenders because of government guarantees.

The FHA has been very active lately with rule changes and we’ve had a lot to report. Just a few days ago we reported on FHA Loan Changes that will make loans more expensive, especially for those with a FICO score under 580. Now, we see the FHA making more properties eligible for FHA financing.

There are also separate FHA Condo Financing Rules that restrict sales in many condo buildings, and new FHA Short Sale Polcies.

The bottom line to this change is that if you are an investor who is buying property for resale, the FHA has made it easier for you to sell the property by allowing buyers to use FHA financing without a waiting period. There are of course restrictions:

1. Only Arms length transactions are eligible. There can be no interest between buyers, sellers and others.
2. If the selling price is 20 percent or greater that the seller’s purchase price, documentation will be required by lenders  to justify the price. A new appraisal will probably be required to support the higher price.
3. An independent property inspection will also need to be provided by lenders to buyers before closing.

Will FHA Loan Changes Help Daytona Beach?

Will this change to FHA loan requirements for investors help Daytona Beach homes for sale? It certainly can’t hurt and may help move some of the REO and forclosed properties that have been damaged and need extensive repairs to sell. Investors can get a quicker turn-around, saving them money and making it more attractive to purchase and renovate or repair.

Borrowers to Pay More for FHA Loans

With rule changes that will be coming in the summer, an FHA loan could cost you 10% more to close. That $20,000 on a $200,000 loan.

3.5% Down Payments and seller concessions of up to 6% will soon be a thing of the past for many. Mortgage insurance premiums will also increase by 1/2 point.

The FHA is writing about 30% of all current mortgages – Meaning BIG exposure. Now, the agency is acting to limit the risk of future exposure. That’s probably a good thing for most Americans, but if you are planning to use an FHA for you Daytona Beach Homes purchase, it may cost you more if you wait until summer.

FHA Loan Change Prosposals

The FHA is making proposals to change mortgage insurance premiums, FICO (credit score) and down payment combinations and seller concessions.  The changes will be posted in the Federal Register next month and after a comment period would become effective early summer.

Here is a quick summary of the changes:

• Increase upfront Mortgage Insurance Premium (MIP) to 2.25% – up 0.5%
• Decrease seller concessions from a maximum of 6% to a maximum of 3%
• Change FICO score/down payment combinations to as low as a 3.5% for a FICO Score above 580 and up to 10% for a FICO Score below 580.

So, with a FICO score below 580, the amount of out-of-pocket money to close an FHA loan would increase by about $20,000 on a $200,000 mortgage ($1,000 MIP, $6,000 increase in seller’s concession, $13,000 increase in down payment). This would be added to the current total cost, an increase of 10%. A FICO score above 580 could still add about $7,000 or 3.5%.

The FHA is taking these actions to reduce troubled mortgages in the future. They will also be making changes to reduce fraud. See FHA Loan Sharks Creating More Real Estate Foreclosures for more information on that problem.

These actions will allow them to add to their reserves against bad loans. Whether it’s a good thing depends on your point of view. As a taxpayer, this should reduce the cost of running the agency to you. As a home buyer, it will increase your overall costs to borrow.

US Treasury Removes Limits on Public Money for Freddie Mac and Fannie Mae

There is little doubt that the Daytona Beach homes market has been boosted by US government actions. The home buyers tax credit,  FHA,  Freddie Mac and Fannie Mae backing mortgages supports the market. I seen estimates of FHA, Fannie Mae and Freddie Mac involved in 90% of all current mortgages.

CBS Money Watch reports:

More than 90 percent of all loans are bought by either Fannie Mae, Freddie Mac, FHA, Ginnie Mae, or USDA (rural development loans). That means Uncle Sam is taking on virtually the entire risk of the housing market. (Fannie Mae and Freddie Mac: Happy Anniversary)

The following blurb was published in the January 2nd edition of the Economist:

The share prices of Fannie Mae and Freddie Mac soared in response to the Treasury’s recent decision to remove limits on the amount of federal aid to the companies. America’s biggest “government sponsored enterprises”, were bailed out in 2008 amid huge public mortgages losses. The amount of public money each could obtain was capped at $200 billion (neither has received that amount), but the Treasury now wants to “leave no uncertainty” about its commitment to the firms.

What Does Uncapping Fannie Mae and Freddie Mac Public Money Mean?

In a word, the Treasury action means one thing – unlimited support with public money. These government agencies, and others, will continue to purchase and guarantee mortgages for the banks. The support was limited. Those limits have been removed freeing mortgage lending expansion now and in the years to come.

I’m not going to argue the wisdom of the action by the Treasury. I’m pointing out that real estate prices will gain some measure of support. Coupled with the current home buyers tax credit, they are stimulating home buying. We don’t know whether the tax credit will be extended. I’m doubting it at this time, but if the federal government continues to guarantee mortgages, that will allow more mortgage money into the market.

On the other side of the pricing equation, foreclosures and short sales continue to dictate pricing. We don’t see this ending until 2011 to 2012. That doesn’t mean that price will keep falling until then. We have seen more buyers move into the market at different price drop points. If there are more buyers than foreclosure and short sale properties, then prices will stabilize or rise.

Keep your eye on the market if you’re planning to buy anytime soon. If you are, talk to me to see if you qualify for the tax credit. It could mean $6,500 to $8,000 in your pocket that may not be there after April 30th.

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.

New Rules for FHA Condo Loans

The FHA has published some new rules for condo loans. These rules are more stringent and are designed to protect the agency from defaults and fraud.

The New Rules

1. 30% of the units must have already been sold
2. A big problem for Florida loans – no more than 15% of the units can be more than 30 days past due on the monthly condo association dues
3. A minimum of 50% of the condo units must be owner-occupied – this pretty much leaves condotels and condo conversion out
4. Residential square footage in the project must more than 75%. This means condos with lots of commercial space may not qualify
5. No single individual owner or investor can hold title to greater than 10% of the units in the project
6. The FHA will not insure more than 50% of the units in the project

You will have trouble with FHA condo loans if the developer is leasing units that haven’t sold. This falls under the 10% title holder rule from above. The developer is now considered to hold title as an investor since they are leasing the units.

Why Would You Want an FHA Loan for Condos

FHA loans are attractive for several reasons:

1. Low down payments – as low at 3.5%
2. Looser qualifying requirements – you don’t need perfect credit
3. Seller’s contributions – sellers can contribute to closing cost
4. Banks low them – they are guaranteed by the the US government

Daytona Beach Condos and the New Rules

I don’t think many Daytona Beach condos are going to qualify under the new rules. The problems with rule number 2 above, no more than 15% of the units can be more than 30 days past due on the monthly condo association dues is going to be a problem with many of the local condos. There are too many distressed units in those buildings. However, we can always check it out.

FHA loans are great for a home you plan to occupy and if you are interested in Daytona Beach homes and will be financing. you may want to check out FHA loans.

FHA 203k Loan Lets You Put Home Repair and Remodeling Money in Your FHA Loan

What if you could buy a home with 3.5% down and include the necessary repairs and remodeling in the mortgage – even if your credit is not the best?

One of the problems with many Daytona Beach homes in foreclosure or available for short sale is that need work to make them livable. With conventional financing, you will probably need to 20% down and then mortgage 80%. Then you still need to pay for the repairs.

The FHA has a loan program call the SF Rehabilitation Loan Program (203k) that they call Funds for Handyman-Specials and Fixer Uppers. On the FHA website they state the purpose of the program:

The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.

HUD’s 203(k) program can help you overcome this obstacle by enabling you to purchase or refinance a property plus the cost of making the repairs and improvements in one mortgage. The FHA-insured 203(k) loan is provided through approved
lenders nationwide and is available to persons wanting to occupy the home.

The beauty of the FHA program is that, as long as the appraisal, after the repairs, does not exceed the loan value, all other FHA loans features, like low down payments (about 3.5%) and availability to less than prime credit buyers is available.

The FHA outlines the program on their website:

• A potential home buyer locates a fixer-upper and executes a sales contract after doing a feasibility analysis of the property with his/her real estate professional. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.
• The homebuyer then selects an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project.
• The appraisal is performed to determine the value of the property after renovation.
• If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal.
• At losing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.
• The mortgage payments and remodeling begin after the loan closes. The borrower can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab.
• Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of thejob, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.

Yes, you can still get the Home Buyers Tax Credit with FHA loans. So you can buy a home that needs work, include that work in the mortgage, your contractor does the work, and then you move in. Plus you can get a tax credit for up to $8,000 if you go to contract before April 30, 2001. Plus, you may be able to apply the credit to the purchase costs of the home. Wow!

Congress Tinkering with FHA Loan Guidelines – A Mess in the Making?

50% or so of all mortgage loans currently being made are FHA loans. Why? Because the terms and down payment requirements are less stringent and cumbersome than other types of loans.

Here are the current guidelines for FHA Loans:

• As little 3.5% down payment
• Borrowers can get up to a 6% credit from sellers against closing costs
• Borrowers can have substandard credit and still qualify

Here are proposals being floated in Congress for changes:

• Change the down payment to 5%
• Reduce seller closing cost credit to 3%
• Credit worthiness requirements will need to be increased

Now the reason for the changes makes some sense. The US Government guarantees the loans against default. So lenders get their money back in case of default. The attempts by congress are to reduce defaults. However, this actions seems counter to the give away of $8,000 in tax credits for first time home buyers and others who qualify.

On one hand money is being given away, while on the other hand a major source of financing for the first time home buyers will be harder to get. One hand wants to stimulate, the other hand wants to slow things down.

I really don’t know what’s right in the long-term. It’s probably better to reduce defaults, but the law of unintended consequences will probably rear its ugly head. Congress never seems to learn the lesson of keeping their hands off what is working.

If we are in a recovery, and some signs are pointing that way, why mess with it now. Wait until the economy is strong and then tinker with a few things. Right now, it’s probably better just to leave it alone.

Sales of Daytona Beach condos and Daytona Beach homes have rebounded significantly this year. Sales in Florida and around the country are doing the same in most places. Slowing down any part of the economy that is improving makes no sense to me at this time.

It’s Not Over – Sharks and Wolves Find New Ways to Game the System

The front cover of the current issue of Business Week (December 1) states “The Subprime Wolves are Back and They’re Feeding Off the Bailout.”

This article will really get your blood boiling. What’s happening is that many of the same mortgage brokers whose aggressive, sometimes illegal, and pure greed lead to the real estate run-up and crash are at it again. But this time, they are jumping on FHA loans.

Here’s an example that pretty well sums it up:

A condo developer in South Florida sets up a mortgage company to finance loans for buyers of his condo units through FHA loans. His mortgage company made 1855 FHA loans since November 2006. 923 of those loans are in default proceedings as of October 31.

More Foreclosures Ahead

The Business Week article describes other abuses and how the FHA is overwhelmed and has difficulty properly reviewing applications. BW exposes mortgage brokers who were put out of business in several states setting up shop with new companies to push FHA loans. They are using the same tactics they did in pushing subprime loans. The result – a new wave of foreclosures. With FHA loans numbering 1 in 4 of new loans issued, this will lead to more foreclosures. Not what we need at all. These loans are guaranteed by the US Government, so yes, you and me will be paying.

There is a lot of really good information in this article. You still may be able to get a copy of the magazine or check it out at your local library. A podcast version is available at the Business Week webiste.

The Daytona Beach real estate market is rocked with short sales and foreclosures. We don’t need anymore. I’m sending a note to my congressman to ask him to read the article and take action. The sharks and wolves need to be stopped.