Word is out.  HUD is lifting it’s prohibiting against buyers using FHA loans to buy a property recently “flipped” by an investor.  This should be great news, and I fielded a number of phone calls over the weekend from clients and agents rejoicing (way prematurely) in the change.

But not so fast on….

Although HUD has indicated a change in their guidelines, they only insure FHA loans.  Some investor still has to buy them.  So what about those investors; are they on board? I put an email out over the weekend to find out and also talked today with a mortgage banking insider.  As I suspected, the “investors” are not buying, HUD guarantee or not.

This sentiment is the same one that has caused investors to apply HUD’s anti-flip rule to conventional and VA loans, even though Fannie, Freddie, and VA have no such prohibition.  Statistically, there is still a very level of mortgage fraud associated with flipped properties.  Without a large pool of investors for mortgages securities (remember the U.S. government is still nearly the only buyer), there is no tolerance for anything risky.

This could change, so of course I’ll be keeping an ear to the rail for any good news.  Stayed tuned.  While it’s a shame that capital cannot make its way to the market of distressed homes (individual investors could certainly fulfill a competitive market function by buying, fixing, and selling damaged properties), it is the lack of market demand itself that is inhibiting the process.

In a sort of reversal of its former reversal, HUD announced that it would allow FHA approved lenders to monetize the tax credit to allow first time buyers to “apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate.”

This is a modification of the original announcement that stated the credit could be used to meet the 3.5% FHA down payment requirement. In its new form, it may help some people.  A buyer could certainly take advantage of that to write an offer that didn‘t ask the seller for help with closing costs.  Since this type of concession is common practice in our market where most buyers are strapped for cash, not asking the seller to put out extra money might set the buyer apart from the crowd.  Or the funds could be used in addition to any seller credit to buy the interest rate down further making monthly payments more affordable.

However, remember that it takes everybody a little while to figure out how to implement these new rules, and in this case, figuring out the details could be a little complicated.

With foreclosures and short sales in the bullseye, property repairs are a big issue.  Many foreclosed homes are in desperate need of TLC; some appear to have been ground zero of angry evictions.  And many buyers actually want “fixers” where the price might be lower  and they can do some work themselves.  Whatever the cause, the banks have a double standard.  When selling, they don’t want to fix them first, but they also don’t want to finance them either, at least until they’re fixed up a bit.

FHA vs. Conventional Financing

Many people believe that FHA financing will impose tougher repair conditions than will Conventional financing.  This notion is a holdover from the pre-reform days of HUD.  My recent observation is that one isn’t any worse than the other.  The banks are fussy about everything these days, and one cannot safely predict with certainty where the bank will dig in its heals.  Some don’t care about the dishwasher is missing, others want to know what caused the stain in the carpet (true story).   To confirm whether they have expressly different repair standards for FHA vs. Conventional financing, I contacted a number of banks today to ask this question:

“With all of these semi-ratty REO properties for sale, do you see much difference in the way your underwriters address property issues on FHA vs. Conventional loans? I have an “as is” sale with some issues that many would consider cosmetic in nature, while others might consider them more serious.  From my viewpoint, the underwriting responses are unpredictable whether FHA or Conventional.”

Here are seven responses from different banks:

“I don’t see much difference. We are directed by our corp office which is quite strict. All sinks, toilets etc need to be in place even you have 1 fully functional bathroom. All built in appliances need to be in place. If carpet has been pulled but tack strips left then you need to replace the carpet. You can have a hole in a wall, as long as the insulation isn’t oozing out of it. Exposed wiring is an issue. Give you an idea?”

“My experience has been that there is no difference between the two.  It sounds like we are more flexible than most lenders with items that need to be repaired.  Call me case-by-case and I can let you know what we will be able to fund without having done.”

“I echo your thoughts on this. I’ve really not seen any uniformity to draw a fair assessment of what we can realistically try to predict. (How is that for double talk). I’d be interested to hear what you find.”

“Yes case by case that’s why the answers are all over.  If cosmetic in nature, we are trying to go with that on REO’s only.  If things like missing stoves, sometimes we are accepting the paid receipt for the purchase of the stove and let it close to install afterwards.  It really does depend on each transaction.”

“Conventional is easier as we are allowing some holdbacks now.  See attached, this is new.  Watch out for the part about seller paying and us escrowing (actually, we hold the funds) 1.5% x’s and any overage of the actual amount to cure goes back to borrower in the form of principal paydown.  It’s Fannie’s rule and crazy but we’ve confirmed it.  That’s the only sticky part. We don’t do holdbacks on govies.”    

“Fha is more strict then Conventional.  The main issues are health and safety.  Broken windows (not cracked).  Exposed wiring, pool so green you can’t see the bottom etc.   I will ask Lynne her opinion as well.”

“Marc, probably reason that you can’t nail it down is that there are investor overlays. Our investors do not want properties that have to have anything done to them beyond paint, carpet cleaning etc.  Regardless of what fha’s guidelines are, we have to follow the investor overlays.   I guess to answer your question, there is not much difference between fha & conventional in regards to the condition of the property. –Lynne”

So there you have it.  Three say FHA and Conventional are the same.  Two say conventional is easier–one because they do holdbacks again; the other because FHA is theoretically tighter.  A sixth says says “case by case,” in other words no difference.  And the last one–a seasoned underwriter I’ve known for many years–nails it perfectly:  the investors are calling the shots, and what they say goes.   It doesn’t matter what FHA or Conventional guidelines require, the investors who are the ultimate owners of these loans paper do not want ratty properties as collateral.  And they’re the “deciders” now.

Bottom Line?

Don’t turn FHA buyers away or avoid FHA financing because you think a conventional loan will be easier.  But do be cautious when buying a beat up property.  Call your lender to discuss its condition before you write the offer. An ounce of prevention is worth a pound of cure.  And remember that a mortgage banker like me, who can broker your loan to a variety of banks, may be able to find the one who won’t object to your repair issue.

The new 2009 VA loan limits have been announced. Here is a link to those new limits by County.  Although somewhat lower than the temporary 2008 limits, they still offer much needed help in high costs areas.

VA Maximum Loan Limits

People sometimes ask if VA does Jumbo Loans.  Ummm…sort of.   As I wrote in a previous post, VA technically has no maximum loan limit.  What it does have is a maximum amount that it will guarantee; generally 25% of $417k.  However, in the high costs counties, that amount may be higher.

If you wish to buy a home beyond those limits, you must effectively make up the VA guarantee difference with a down payment.  For more explanation on that, read my previous post above or this one, or click this link to calculate that down payment for the home you are considering.

And give me a call when it’s time to get ready.  I can get you pre approved with either VA or CalVet if you are buying in California!

In the ongoing quest to unearth the few remaining 100% home loan options, I wrote a recent article about VA loans called 100% Financing: Focusing on VA.  Since then, I have been asked numerous times whether or not a veteran can have two VA loans.

The answer is yes and yes.  Now I know that the question above refers to two VA loans and not two questions, so let me explain the two yes answers.   As most lenders and veterans already know, a veteran can have two VA loans in succession.  Once a VA loan has been paid off and the property sold, VA eligibility is reinstated and reusable.  On a one time basis, a veteran can even pay off the VA loan while retaining the property.

But the second part of that question is much more interesting.

Can a Veteran Have Two Concurrent VA Loans?

In this down market, it is not unusual for a homeowner to want to buy a new home while waiting until the market improves before selling the current home.  So can the veteran purchase a second using her VA entitlement while retaining the first?

Yes, often they can.  The key is how much of the entitlement was used to buy the first home.  As I stated in my previous VA post, the maximum amount of the entitlement shown on each veteran’s Certificate of Eligibility is $36,000.  That represents a 25% VA guarantee on the old $144,000 loan amount.  But those figures are obsolete.  There is a bonus entitlement of $68,250 available to the veteran buying a home valued at more than $144,000.   The two entitlement amounts total $104,250 which is 25% of the current conforming loan limit of $417,000.  Got it?

Let’s look at how this worked out for a recent client of mine.

Example

A recent client of mine bought a home 8 years ago in Southern California for $120,000.  Of his available $36,000 entitlement, he used only $30,000 (25% of the $120k).  He came back to Sacramento recently from overseas duty and wanted to buy a $290,000 home while retaining the SoCal financed home as a rental.

Because the price of the new home exceeds $144,000, the veteran has 6,000 remaining of his original entitlement plus the bonus entitlement of $68,250.  That total ($75,250) equals 25% of $297,000, so he has enough remaining entitlement to cover the full cost of the new home.  He could buy a more expensive home by simply making up the difference in cash.

As more veterans return home, questions about VA are arising more frequently.  My next post will focus on CalVET loans, available here in California.

Leave your questions or comments below, and join in the conversation!

As 100% evaporates, first-time home buyers are left scrambling for down payment funds again in order to buy a homes.  This full scale lending retreat was caused by the perfect storm of declining real estate values, defaulting borrowers, and the attack on seller-funded down payment assistance programs like Nehemiah.

However, you’ll be glad to know that there are a few survivors, and I’ll be covering those in coming posts.  For now let’s take a closer look at one terrific option.

Qualifying for a VA Home Loan

VA loans are available to honorably discharged veterans or those still on active duty in one of the branches of the military.  Here are some highlights:

• 100% purchase financing
• 90% LTV refinances (100% for distressed veterans with subprime mortgages)
• No mortgage insurance
• No reserves required
• No “front end” ratio maximum
• Up to 4% seller credit
• Owner occupied only
• 1 to 4 unit properties
• VA Funding Fee can be financed into the loan, and is waived for disabled Vets
• 30 & 15 yr fixed rate loans available, with more options on the way

Read the rest of this entry »

The recent housing bill eliminates Nehemiah and other seller-funded down payment assistance programs. Although legislative efforts are under way to restore these programs, these efforts won’t bear fruit before the October 1st deadline set by the recent bill.

Lenders are interpreting the deadline in different ways. Most have already begun closing the door on new applications. That’s tough on buyers who have spent months looking for a home and counting on Nehemiah. But even Wells Fargo, who until recently boasted that it would continue take Nehemiah deals right through September, just announced that you must be locked by September 2nd. And of course rate locks are tied to property addresses, so unless you’re under Contract in the next week, you’re going to need to find that 3% down payment someplace else.

FHA Down Payment Increases

Speaking of needing to find down payment money, the recent housing bill also increases the FHA down payment from less than 3% to 3.5%. That doesn’t seem like a lot, unless you were planning on getting the 3% from Nehemiah. That one-two punch is going to put a lot of buyers back into the saving mode or looking for gifts from family members.