Industry NewsRehabilitation loans for those "fixer-uppers"
Can you use the $8,000 tax credit as down pament? Utah "Home Run" grant has run its course Is FHA in trouble?
Many people who would love to buy a “fixer-upper” often give up on the idea as soon as they learn about the financing challenges, and the difficulty in obtaining cash for the needed repairs. Did you know there is a way to purchase a run-down home using the FHA minimum 3.5% down payment – and at the same time, get the cash for the remodel. Sound complicated? Not if you work with a lender who understand FHA’s property rehabilitation loans. Although this loan program is not new, there is a relatively new “streamlined” version of this loan program that has made it simpler than ever for buyers to finance that project house. Conventional and FHA loans both require that the house be in “sale-able” condition before the loan can be closed. This means that if the home you are trying to buy is damaged or dilapidated, either you or the seller will have to repair it before closing. This works for most small repairs, but if the home is too far damaged the underwriter will simply decline the loan. FHA rehabilitation loans have been created for just this purpose. The program requires the buyer to get bids from licensed contractors to document the cost of the proposed repairs, and then allows the lender to disperse additional money (above and beyond the purchase price) to be used for the repairs. Of course, the lender will not lend more than the expected value of the repaired home. These funds will be held by the title company until the work is completed. When the lender is satisfied that the work is done, they will instruct the title company to release the funds to the contractor. Home buyers can do some of the work themselves if they are qualified. These programs are only available for “owner-occupied” homes – in other words, you must certify that you intend to live in the home for at least 1 year after closing in order to qualify for a rehab loan. “Streamlined” rehabilitation loans can be used to repair roofs, replace carpet, doors, windows, cabinets, and even more extensive remodels, up to a maximum cost of $35,000. If repairs beyond the $35,000 limit are needed, FHA still has a program for that too! In both cases, buyers should expect to do some “footwork” before closing, and you should allow extra time for the loan to be processed when you’re setting closing dates in your contract. We are fortunate at Academy to have a wealth of experience in our dedicated FHA rehabilitation department. If you or your clients are interested in this program, please give me a call at 801-677-1044
Can you use the $8,000 tax credit as down payment? - June 11, 2009 There has been a lot of confusion lately regarding whether or not home buyers can get access to the $8,000 tax credit before they buy their first home and use it as a down payment. The US department of Housing and Urban Development (HUD) can take part of the blame for this; they made an announcement earlier this month regarding their plan to make it available, and then promptly removed the announcement form their web-site. Last week HUD released a highly anticipated 2nd announcement with details on how borrowers could gain access to this money and use it as a down-payment. The announcement, however, was met with disappointment by most, however, because borrowers in most cases must still have their own 3.5% down payment before they can use the tax credit advance. It seems HUD is stuck between a rock-and-a-hard-place: on the one hand, the IRS can’t send the tax credit until after you close on the home (and even then, they will only send the tax credit directly to the home buyer) and on the other hand federal statute does not permit home buyers using FHA loans to borrow the money for their down payment except in very strict circumstances. After discussing this with FHA officials on a conference call earlier this week, and after reading the policy announcement I have put together a summary of the policy: There are 2 ways to access the money early 1. A loan from an approved government entity FHA policy has always permitted home buyers to receive a 2nd mortgage from an approved government agency (such as Utah Housing) to cover down payment. At least 10 states have already put in place “bridge loans” intended to help borrowers access their tax credit early. These states are: Colorado, Delaware, Idaho, Kentucky, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania and Tennessee. 2. A bridge loan from your lender or an approved non-profit agency. The FHA policy released last week states that approved FHA lenders and some select non-profits can “purchase” the tax credit from potential buyers and then apply the funds for down payment. Under this method, however, the borrower must still put down 3.5% of their own money before they can use the tax credit toward down payment. These funds can, however, be used to pay closing costs and other prepaid expenses The bottom line is that it is still too soon to know exactly how we’ll be able to make use of these programs. Remember, however, that the FHA announcement that allows the tax credits to be used as down payments is not even a week old. As the days and weeks go by I expect to see more and more avenues open up to allow us to access this money ahead of closing and help get more first time home buyers into new homes! If you would like to read the FHA policy letter yourself, follow this link: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-15ml.doc)
The Utah “Home Run” Grant Has Run Its Course - June 11, 2009
The $6,000 state grant offered to buyers of newly built homes have all been officially spoken for. Initially the State allotted funds to allow for 1600 of these grants, and as of this afternoon, the last of the grants were claimed by home buyers. Some have asked if the State will release more funds for such a grant. Utah Utah housing has stated on their web-site that the legislature has not appropriated additional home run funds. (see www.utahhousingcorp.org for more details) Although the money is used up, I believe we have only begun to see the benefits of this grant program. Much more good will likely come to our local market as the effects of a reduced housing inventory levels begin to kick in.
Today the Federal Housing Administration announced that it intends to tighten lending guidelines and raise the monthly mortgage insurance premiums that borrowers pay as part of their monthly payment. Some of the planned changes include an increased minimum down payment (currently at 3.5%) and an increased minimum credit score (currently at 620 for most lenders.) They also intend to reduce allowable seller-paid concessions from 6% of a home’s purchase price to 3%. FHA has also recently announced controversial changes to their criteria for condo loans, streamline refinances and they have begun to limit the lenders and brokers they will work with.
These changes will also affect Utah Housing Loans, because they are based on the FHA 1st mortgage. We may also see similar changes to VA loans and USDA rural housing loans - all of which are government guaranteed loan programs with much easier qualification criteria that conventional mortgages. These changes have been announced as FHA faces scrutiny about their capital reserve ratio. By law FHA is required to keep assets worth 2% of the total amount of insured loans they have. Recently it was announced that their actual reserve ratio had fallen to 0.53%. This announcement lead the CEO of Toll Brothers, one of the nation’s largest home builders to refer to FHA as “yesterday’s subprime” and to call FHA lending a “Train Wreck.” He also predicted that in the coming months the FHA will ask congress for their own bail-out.
Presently FHA loans have the “loosest” guidelines of any loan program we can offer, and often borrowers who will not qualify for conventional loans are able to close quickly on FHA loans. Over the past few months we have already seen a rapid succession of guideline changes for FHA and we expect them to continue. It is my opinion that in 2010 buyers, sellers, and industry professionals will feel much more pain from the tightening of FHA guidelines than we have felt the tightening of conventional loans over the past 2 years. In 2007 and 2008 there was a lot of talk about guideline changes, but still most borrowers could get financing through FHA – this FHA safety net softened the blow to most of us as conventional loan guidelines tightened. This coming year, however, with each successive guideline change, more and more buyers will be left with no loan options at all. I think most of us can agree that the short term pain required to solidify the footing of FHA will be worthwhile if regulators succeed in their goal to preserve the FHA option for future buyers without requiring huge Federal Stimulus. It is looking likely, however, that by the end of 2010, federal money will be needed. It’s also certain that by the time 2010 ends, FHA loans will be harder to get and more expensive.
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