• A “Perfect Storm” of low purchase prices and historic low interest rates
• Compare this example:
  $250,000 purchase price at 4.5% (which recently closed)
  Versus
  $250,000 purchase price with a 6% rate (possible interest rate in 2011)
• The projected payment would jump from $1,267 to $1,499! (an increase of over 18% )
• If you believe house values will fall further, consider this: if you were to purchase this exact home for $225,000 at 5.5% (assuming taxes, insurance, and HOA were the same), your projected monthly payment would still be higher at $1,278!
• Therefore, from a payment perspective, IF the market dropped an additional 10%, it would still be a lesser monthly payment to pay the higher sales price at the lower interest rate.

I like playing with numbers, so I thought Mike’s scenario was a perfect way to lay out the situation in today’s real estate market.  If you want to talk through your scenario to see if now might be a good time for you to finance a home, call Mike directly.

Top 10 Credit Don’ts During the Loan Process

Many are taking advantage of interest rates at historic lows, either by re-structuring debt with a refinance or purchasing a new home. However, the recent economic crisis has created even tougher guidelines and credit requirements and there are some things that consumers must be aware of when applying for a loan.

Leading nationwide credit expert and President of Credit Resource Corporation, Linda Ferrari, developed the top 10 credit don’ts during the loan process, to help you get your arms around those things that can unknowingly wreak havoc on your loan transaction.

1. Don’t do anything that will cause a red flag to be raised by the scoring system
2. Don’t apply for new credit of any kind
3. Don’t pay off collections or charge offs
4. Don’t max out or over charge on your credit card accounts
5. Don’t consolidate your debt onto 1 or 2 credit cards
6. Don’t close credit card accounts
7. Don’t pay late
8. Don’t allow any accounts to run past due-even one day!
9. Don’t dispute anything on your credit report
10. Don’t lose contact with your mortgage and real estate professionals

This is excellent advice for any buyer, and even more important for home buyers involved in a short sale transaction.  It does take some additional attention to keep your finances in perfect order for the 6-8 months it may take to close on a short sale.  The last thing you want to happen is fail to qualify for a loan because of a delayed payment or  large purchase made during the extend wait. Keep in touch with your loan officer, and be sure to ask questions about any type of financial transaction that you think might impact your ability to buy a home.

The Federal Tax Credit for First time Home Buyers is still available to US Military Service Men and Women until June 30, 2011.

Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit. Thus, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract is entered into by that date, the taxpayer has until June 30, 2011, to close on the purchase. Members of the uniformed services, members of the Foreign Service and employees of the intelligence community are eligible for this special rule. It applies to any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010

Source: IRS.gov

He recently emailed me this video, where he explains how mortgage lenders get paid.  It’s just 5 minutes long and will explain a bit about the fees, as well as the front-end vs. the back-end of the mortgage compensation structure.  If you are shopping for a loan, you need to know these kind of details, so you really are making accurate comparisons.

The lending environment has changed dramatically! Bruce shared that in 2002, his company offered 70 kinds of loans, and this year they offer just four:

• Government (FHA & VA)
• Conventional
• Jumbo (privately funded)

I learned that the FHA loan program was created by the National Housing Act of 1934 to help lower income families to purchase homes.  It virtually disappeared in the white hot market several years ago, but it appears to me that it is now the most commonly seen loan for properties priced under the Maricopa County loan limit of $346,250. (effective 1/1/2010).

Correction: The Maricopa County loan limit remains at $346,250 for 2010.

Bruce shared some of FHA Myths (and then proceeded to debunk them):

1. Too complicated
2. Too much paperwork
3. Too expensive for seller
4. Higher rates
5. Mortgage insurance cannot be removed
6. Takes too long to close
7. Doesn’t benefit the buyer
8. Doesn’t benefit the seller
9. Conventional is a better loan
10. You have to have more money to close
11. Conventional is a better loan
12. Buyer can’t understand the loan

And then, he explained many of the benefits of FHA financing:

• No reserves are required, versus 2 months for conventional.
• 3.5% minimum down payment, versus 10% for conventional.
• Gift funds are allowed
• Non-occupant co-borrowers allowed (kiddie condo)
• Pricing same regardless of FICO score
• Up to $5,000 medical collections can be unpaid
• No credit history required — alternate credit such as car insurance, utility bills, or cell phones can be used.
• Minimum time after Chapter 7 is 2 years.
• Can be approved after one year of on-time payments after Chapter 13
• Minimum time period after a foreclosure is 3 years, unless there are extenuating circumstances, such death or serious illness

Gift funds are allowed for down payment and closing costs, and can be used can come from:

• Relative (some fairly specific requirements here)
• Borrower’s employer or labor union
• Charitable or non-profit organization
• Government agency
• Public entity with home ownership assistance
• First-time buyer program

First-time home owners can also use money from their 401K/ IRA’s as down payment.  I’ve been told that in this situation, the buyer does not have to pay the 10% early withdrawal in this case.

Bruce said that qualifying for an FHA loan is based on the four C’s:

• Character (credit)
• Capacity (income)
• Capital (reserves)
• Collateral (value)

And, the buyer will need to have documentable income:

• Two years of employment / self-employment history
• Income must be stable
• Must continue for at least 3 years

Once the buyer has a loan approval and an accepted offer on a property, the FHA appraisal will be ordered.  In addition to valuing the property, the appraiser will be evaluating the property looking for health and safety issues that must be addressed before the loan is approved.

Some of the the home repairs that typically must be completed prior to FHA loan approval are:

• Peeling paint
• Broken windows
• Plumbing leaks
• Exposed wiring
• Pool & pool equipment
• Termite damage
• Exposed exterior surfaces
• Roof issues

For home sellers who are considering accepting FHA financing, it’s really best to have these type of issues corrected prior to the FHA appraisal to streamline the process.

From my perspective, FHA loans have become the loan of choice for most, if not all, of the first-time home buyers I work with.  However, I thought it was worth looking at the Scottsdale real estate market a little bit more closely to see if FHA is as predominant as I believe.

I reviewed single family home sales in Scottsdale for the month of December 2009 (via the Arizona Regional MLS), and found 35 single family homes had sold between $100,000 and $200, 000.

• 16 homes  used FHA financing (45%)

• 8 chose conventional (23%)

• The remainder paid cash (31%)

In the price range between $201,000 and 300,000, the proportions changed somewhat.  (The FHA limit was $346,250 through 12/31/2009.)  A total of 69 homes sold in December.

• 16 homes (23%) used FHA financing

• 29 used conventional (43%)

• 1 utilized VA

• The remainder paid cash (33%)

So, FHA is really funding a significant portion of the entry-level range of the Scottsdale home market, but does taper off as home prices rise. Buyers who are hoping to take advantage of the Home Buyer Tax Credit Extension will definitely increase their possibility of home ownership by taking a more serious look at FHA financing and discussing it with their lender.

I bought my first house, a couple years out of college, with FHA financing.  It’s the only way I could have done it, during a period of double digit interest rates.  I’m glad to know the program is still around, helping home buyers reach their goals.

Kari Monk, over at Wells Fargo, shared a copy of the new HUD-1 Settlement Statement a few weeks ago, and when I looked it over, I was pleased.  Since then, I’ve talked to a number of other real estate agents who heard it was coming, but had no idea of the changes that had been made.

The HUD-1 is a statement drawn up by the title company that provides:

• The type of loan (FHA, VA, or conventional)
• Buyer, seller, property, and settlement agent information
• A summary of both the buyer’s costs , which will include proration of property taxes, down payment, and loan amounts
• Details of  seller’s proceeds, after tax proration and loan payoff (if any)
• Details of the settlement charges, including real estate broker fees, loan costs, lender required reserves for insurance and property taxes, and title charges

The new and revised HUD-1 includes two new sections:

• A comparison of the buyer’s lender’s original Good Faith Estimate with the HUD-1 figures completed for closing. These costs include the loan origination charge, discount points, escrow fee, and title insurance.
• A section for loan terms, which are spelled out in plain English.

I love the Loan Term section!

Look at these straightforward questions where really important questions about the home buyer’s loan are answered.

• Your initial loan amount is ___.
  
• Your loan term is ___ years.
  
• Your initial interest rate is ___%.
  
• Your initial monthly amount owed for principal, interest, and any mortgage insurance is $___. 
  
• Can your interest rate rise?  Yes or no.
  
• Even if you make payments on time, can your loan balance rise?  Yes or no.
  
• Even if you make payment on time, can your monthly amount owed for principal, interest and mortgage insurance rise?  (And if so, how much.)
  
• Does your loan have a prepayment penalty?  Yes or no.
  
• Does your loan have a balloon payment?  Yes or no.
  
• Total amount owed included escrow account payments

 Some have expressed concern about this new form.  I, for one, think it’s a great improvement and can’t wait to see in use.

FHA on track for busiest year as it backs 23% of mortgages

With less than a month to go in the 2009 fiscal year, the FHA is on pace for its busiest year.

From Oct. 1 through mid-August, applications for FHA single-family-home mortgages were up 50%, to 2.52 million, from the same period a year earlier.

 FHA Likely to be the Next Shoe to Drop

The FHA is a big reason that home prices haven’t fallen even further. The FHA’s aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry, with nearly 25% market share, according to HUD.

The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts (click here to read the report), the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 27 days from now.

It’s curious to see that the FHA program may actually have a few issues which need to be addressed. 

Any lenders care to weigh in on what you hearing about FHA loans?

Important changes are occurring in the lending process.  These intent of these changes is to better protect home buyers, by providing specific timelines for lender actions and disclosures.  However, a home buyer does need to know that loan changes during escrow may have an impact on the closing date.

From the National Association of Realtors web site:

Revised Truth in Lending Disclosure Requirements Take Effect on July 30, 2009

Lenders will be subject to new disclosure requirements for mortgage loans under the Federal Reserve Board Truth in Lending Regulation (Reg Z). The new requirements apply to loan applications filed on or after July 30, 2009. The new rules are complex and compliance will be a challenge for lenders. REALTORS® will want to learn the basics so they can advise clients of potential delays and the new procedures.

Here are key highlights of the changes:

• The new requirements apply to all mortgages secured by a borrower’s home, including primary and second homes and refinancings. Investor loans continue to be exempt.
• Lenders must give good faith estimates of mortgage loan costs within 3 business days after the consumer applies for a loan (early disclosure). The lender may not collect any fees before the disclosure is provided, except for a reasonable fee for obtaining a credit report.
• The closing may not take place until expiration of a 7-day waiting period after the consumer receives the early disclosure.
• If the annual percentage rate (APR) increases by more than 0.125 percent, the lender must provide a corrected disclosure to the borrower and wait an additional 3 business days before closing the loan. The APR includes not only the interest rate on the loan but certain other costs related to settlement, so it will be important for any fees that affect the APR to be as accurate as possible, as early as possible, to minimize the need for a corrected TILA disclosure.
• The consumer may modify or waive both waiting periods for a documented personal financial, but must receive the disclosures no later than the time of the modification or waiver.

Wells Fargo Mortgage has been very proactive in getting this information out.  I received a packet in the mail, plus an invitation for training.  They also have the following six page document that you can review.  It’s written for Realtors, but so many home buyers are educating themselves on the home buying process, I think it’s good info to share.  You will see what documentation and review times you are provided by the new law.

Well Fargo Mortgage Truth in Lending – How the new government regulations may impact your closing dates

Related Posts:

• Getting Pre Approved Makes More Sense Than Ever
• More from the Boring Stuff files, or why your 30-day escrow isn’t
• HERA, HVCC, and Other Fun Acronyms- Ready for New Lending Rules?

photo credit: Dru Bloomfield – At Home in Scottsdale

Many times you will find a condo that’s been listed in the MLS system that indicates that it qualifies for FHA financing.  However, not all condos that have this designation in the MLS have actually gone through the approval process, so it’s worth the extra step to verify through the U.S. Department of Housing and Development web site.

My understanding is that it takes at least 3-4 months for the approval process to be completed, but that occasionally spot approvals can be given.

Here’s the current list of FHA approved Scottsdale condo communities, as of today:

• Casabell Condominiums
• Casitas Chaparral Condominiums
• Club Scottsdale Condominiums
• Discovery at Tatum Place I & II
• El Chaparral Villas Condo
• Hallcraft Villas Scottsdale
• La Contessa Condominiums
• Las Hadas Villas Condominiums
• Los Coronados Amended
• Marble Condominiums
• Mira Vista Condominiums
• Monterra Scottsdale Residences
• Optima Camelview Village Condo
• Condominiums
• Park Scottsdale Townhouse I & II
• Parkview Villas of Scottsdale
• Rancho Antigua
• Sarkis Manor Condominiums
• Scottsdale Casitas Condominium
• Scottsdale Parkway Condominium
• Scottsdale Shadows Regime III & IV
• Scottsdale Somerset Condo
• Scottsdale
• Villas
• Summerfield Units 1-5 Condos
• The Center Court Condominiums
• The Plaza Residences
• Villa Estados Condominiums
• Condominiums
• Walden Place III

For a few more details on the approval criteria, you can read Your Condo Needs to be FHA Approved or FHA Spot Approvals.

Image via Wikipedia

The First Time Home Buyer Tax Credit has been around for a couple of months, but I’ve not really written about it:

Paul Wakefield, with Security Mortgage, emailed me his weekly update this morning, with the details and an example, so I decided it was time to share:

A reminder about the HR 3221 First Time Home Buyer Tax Credit.

This is a $7,500 TAX CREDIT, not a deduction. First-time home buyers or someone who has not owned a home for the past three years are eligible.

They must purchase a home between April 9th, 2008 and before July 1st of 2009. So, if the property is purchased prior to December 31st of this year, the buyer could potentially receive their credit in the next couple of months, provided they file their 2008 taxes right away.

The main features are:

• Income Limits: $75,000 for a single tax payer/ $150,000 for a married couple.
• Repayment: A home buyer claiming a $7,500 credit would repay the credit $500 per year. The home owner does not have to begin making repayments on the credit until 2 years after the credit is claimed. If the home owner sells the home, then the remaining credit amount would be due from the profit of the home sale. So, it really a 0% interest loan.
• Tax credit is refundable. For example: If a qualified home buyer expected, notwithstanding the tax credit, a federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit, the taxpayer would owe the IRS $1,000 on April 15th, 2009. Suppose now, that the taxpayer qualified for the $7,500 credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 – the $1,000 owed).

Keep in mind that the FHA does require a 3% down payment. After the first of the year, the minimum down payment increases half a percent to 3.5% of the purchase price. The down payment can be a gift from family, if the buyer does not have the funds.

As a side note, the FHA Maximum Mortgage Limits in Maricopa County will be lowered to $271,050, from the current maximum of $346,250, as of the first of the year.

I have a client who just closed on her first home last month, and one of the incentives for purchasing now, rather than waiting, was this tax credit. She was able to make her down payment, and know that she would be getting a tax credit back in several months, that would replenish the funds she used for her down payment. 

Here are two more resources for buyers interested in using the First Time Home Buyer Tax Credit to buy a home:

First-time homebuyer tax credit chart
Frequently asked questions about the first-time homebuyer tax credit