Tag Archives for " FHA "

Student Loans Matter

The Wall Street Journal recently reported that 43% of the 22 million people with federal and private student debt are notstudent loan debt making their monthly loan payments.  This includes those who are in default (more than twelve months late), delinquent (more than one month late), or received permission to postpone their payment due to economic hardship.  It’s no wonder lenders have tightened their related underwriting requirements!

Some say the consequences of simply assessing a higher default rate of interest is not harsh enough.  Others say student borrowers are more apathetic now because they are in the same boat with 10 million others – and the problem is just too large to penalize everyone.

A lender cannot generally repossess a borrower’s car or other assets in the event of a student loan default.  But to recoup losses, the government is now garnishing wages and withholding tax refunds once students commence a job after graduation.

When seeking mortgage pre-qualification, applicants have not been required to include deferred student loan payments in their debt-to-income ratio calculation – provided the deferral was for more than 12 months beyond the proposed mortgage closing date.  Now, FHA lenders will generally use the known monthly payment or 2% of the student loan balance – versus conventional lenders using the greater of the actual monthly payment or 1%.  Assuming a $37,000 deferred loan (the average U.S. student loan balance today), suddenly having to include a 1% or $370 monthly projected payment would certainly have an adverse effect on a mortgage qualification ratio.

Here’s the Point: Even when your student loan is deferred, lenders are now likely to take the projected monthly payments into consideration when qualifying you for a mortgage.

 

Foreclosure? No Problem

Image result for foreclosureIt is surprising how many people have zero remorse after a foreclosure. There are those who think nothing of going through the process again to advance their self-interest, with little regard for either their ability to repay or their reputation with a lender. For this reason, lenders do not zealously arrange mortgages for post-foreclosure loan applicants without a thorough screening process.

It doesn’t take long to deduce moral character and integrity. If it is evident the “incident” will never happen again, there are reputable private lenders who are willing to provide a new mortgage – even one day after the foreclosure is finalized (at interest rates that are reasonable under the circumstances).

The Federal National Mortgage Association (FNMA), the ultimate buyer of a conventional loan advanced by a mortgage lender, requires borrowers to wait seven years after title has transferred in a foreclosure proceeding. However, the Federal Housing Administration (FHA) requires that just 3 years elapse before they insure the mortgage advanced by an FHA lender – whereas the Department of Veterans Affairs (VA) needs only 2 years to elapse before guaranteeing the mortgage of a VA lender.

As long as the Certificate of Title is produced evidencing that the 3-year anniversary requirement has been met, a post-foreclosure borrower may obtain an FHA mortgage. And the loan application can be made in advance so that borrowers are ready and able to close on a timely basis, regardless of how the foreclosure is reported on a credit report by the credit bureaus.

 

Here’s the Point: After a foreclosure, an FHA mortgage is the most common type of conventional financing used because only 3 years need to elapse from the Certificate of Title transfer date.

 

Saved by… the Appraiser?

I think it’s time we cut them some slack. No doubt there are instances where the appraiser completely missed the boat – when values were quickly overturned either after correcting errors or reflecting missed facts. I hear countless stories where the FHA appraiser was “too picky” regarding some of the reported observations on the condition of the property.

Lately, I have had several borrower prospects complain about their realtor or mortgage broker not recommending a property inspection. “I bought the house and had no idea there was a roof leak.” “You should have seen the termites in the attic right after we closed the deal.”

Let me tell you something: Engaging a property inspector is entirely up to the borrower/buyer – caveat emptor. Sure, there are times when it is obvious – and therefore when it is incumbent upon the industry professionals to strongly suggest an inspection by a licensed contractor. But if you purchase a property, it is your fault if you elect to forego the inspection and later find serious problems.

One appraiser recently conditioned his report on the receipt of an inspection report – to address what appeared to be some insignificant siding damage. The lender refused to close and fund the loan until a professional contractor confirmed in writing that the damage was cosmetic. It was a great call by the appraiser, because it turned out there was over $15,000 of structural damage from dry rot. That “picky” appraiser saved my clients from committing to a serious money pit.

Here’s the Point: If you decide not to have a licensed contractor perform a property inspection, then you are to blame for problems uncovered after your purchase.

 

Too Much Rehab Brain Damage – I’ll Pass

How many times have you walked out of a property viewing promptly after seeing how much work was needed on the floors, kitchen, bathrooms or some other deferred maintenance? There is a good chance the Seller has way less interest in renovating than you do – especially because they are about to move out.

But Sellers know how much work is required. They probably already had quotes and were sick about what it would take to upgrade before listing their property. Therein lies the opportunity! Make an offer subject to obtaining two things:

  1. An acceptable quote from a contractor to complete the work, and
  2. A pre-qualification letter from a lender who has extensive FHA 203(k) loan experience.

FHA 203(k) Rehab Program

As a home-buyer or a real estate agent, you could save the deal and put money in your pocket by knowing the 203(k) rules. Buyers can acquire and renovate their new home without dipping into personal savings – because the costs for the purchase plus the required capital expenditures (to fully renovate the property) can be combined into one 30-year fixed rate mortgage. After purchasing the property using the loan, you simply tap into a loan reserve that is set aside by the lender at closing.

The mortgage amount is based on 96.5% of the lesser of: (i) the combined “as-is” value and cost of improvements, or (ii) 110% of the “after improved” market value. And, the 3.5% down payment can even be borrowed from a family member.

 

Here’s the Point: Think twice about passing on a home purchase because of too much renovation work. FHA’s 203(k) program can help you negotiate a better price, quickly build equity, and tailor custom improvements to your liking.

 

Really Bob? Are You Sure About That?!

Oh, really?I’m buying another property, but I plan to call it a second home so that I can get a better interest rate.

No You’re Not: Unless it has vacation/resort amenities and is 50+ miles away from your primary residence, it will be treated as an investment property and carry a higher interest rate].

  • WHY? Because it’s not your vacation home

Oh, really?I have an FHA loan on my home, and I’m going to use FHA again to minimize the down payment on my second property.

No Sir: You can only have one FHA loan at a time and it must be on your primary residence (and besides, there are conventional financing programs that offer loans as high as 97% of value).

  • WHY? Because FHA financing is meant to help consumers purchase their home

Oh, really?Unless I’ve had 24 months of self-employed earnings, I’ll never get a residential loan.

Not True: Depending on your ability-to-repay, Freddie Mac may only require one year of tax returns from your new business.

  • WHY? Because Freddie takes compensating factors into consideration

Oh, really?I’ll still profit by selling one of my properties to my son – and he can get maximum FHA financing because I will co-sign and it will be his primary residence.

Incorrect Again: A parent/child profit-sharing relationship is deemed an “identity of interest” transaction, and the buyer is restricted to 75% loan-to-value when there is a non-occupying co-borrower.

  • WHY? Because the borrower should solely benefit from primary home ownership

 

Here’s the Point: The number of rules imposed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) can be daunting – but most of the time they actually make sense.

 

Tip the Scales in Your Favor: To Ensure Loan Approval

Your lender will eventually sell the loan they advance to you – it’s pretty much a given. They will do everything they can to “check the boxes” prior to approving your loan in order to make sure that either Fannie Mae will buy your loan, or that FHA will insure against the loss of principal.

Let’s say you just squeaked by with a Debt-To-Income Ratio of 43% (maximum percentage allowed under a Qualified Mortgage). Or, maybe your credit score just barely meets the lender’s minimum 620 requirement. Perhaps your income reduced over last year, and you know that the average earnings to support your loan will be tight.

Tip the ScalesIf the decision is too close to call, your loan will be declined – that’s just the way it is today. So here are some discretionary “Compensating Factors” that can help to persuade the underwriter to stamp “approved” on your loan application:

  • Avoid “payment shock” – i.e., when your proposed monthly mortgage payments are more than the current rent you pay (make sure you can verify the last 12 cancelled rent checks)
  • Maintain 2-3 credit cards paid “as agreed”, at balances that are well below your total authorized amount (and don’t cancel your unused credit cards – the older they are the better)
  • Come up with more than the minimum down payment (and demonstrate how you have been able to comfortably save your money – evidencing that you are prudent with your finances)
  • Don’t change jobs too much – unless your income improves (especially with commission earnings)
Here’s the Point: Sometimes only one “Compensating Factor” will persuade the underwriter that you are a good credit risk – thereby improving your chances of getting loan approval.