FHA lowered the loan limits in October, but has reconsidered and now the limits are back to previous levels.  Good till 12/12.  And, you wonder why no one can keep up with what’s happening in the mortgage world!!??

• Single Family Residence       –                417,000                       
• 2 Unit                                                  -                 533,850           
• 3 Unit                                                  -                 645,300                                   
• 4 Unit                                                  -                 801,950                       

 Remember, you can get into an FHA secured mortgage for as little as 3.5% down!

 VA  Same as above, however there is such a thing as a VA Jumbo loan.  A jumbo loan is a loan amount (after down-payment) of more than $417,000 on a single-family home in the Portland Metro area.

• Single Family Residence       –                417,000                       
• 2 Unit                                                  -                 533,850           
• 3 Unit                                                  -                 645,300                                   
• 4 Unit                                                  -                 801,950                                    

There’s a time for spontaneity, there’s a time for flexibility and there’s definitely a time for resilience!  But, there’s always room for future planning, especially when it comes to finances and real estate.  Thinking ahead can make you $$$$!  Thinking about your retirement when you are young, can make you an early retiree.  Thinking about the type of loan you secure for real estate can make your property more salable in certain markets (such as those with higher interest rates).  Just sayin……….

I am actually referring to FHA (Federal Housing Administration)  or VA (Veteran’s Administration) loans!  FHA & VA do not lend money, rather they both guarantee the loans.  I remember in the mid-80′s when I began my illustrious career and the mere mention of an underlying FHA or VA loan made a real estate agent swoon!  WHY???  Because FHA/VA loans are assumable at the interest rate of the existing loan (current rates, at that time, topped at 13%…OUCH!).  So, if the new buyer can come up with the difference between the existing underlying FHA loan and the current sales price (and can meet the qualifying standards), they can assume at the existing interest rate.

I know, I know!  It’s been a long time since interest rates were an issue.  But, when (not if) our economy makes a change, interest rates must go up.  They’ve been artificially low for some time.  But, to have attractive financing that could be assumed would add to the future sale-ability!

Consider getting a FHA or VA loan to purchase your home. The present advantages are that these loans are priced competitively and a little easier to qualify for than conventional loans. The future advantage is that FHA and VA loans are assumable at the original note rate for qualifying buyers.

There’s more to sell than the home itself when you have an assumable loan. The mortgage payment could lower the cost of housing significantly.  A buyer may easily be willing to pay more for the home due to the attractive financing, especially if it helps their equity grow faster.

Top 10 FHA Loan Advantages

Fannie Mae and Freddie Mac underwritten conventional, FHA (Federal Housing Administration) and VA (Veterans Administration) loans account for the vast majority of mortgages chosen by buyers to finance their home purchase. While buyers have the choice on which product to use, there are some considerable advantages to FHA.

1.  More tolerant for credit challenges than conventional loans.
2.  Lower down payments than conventional loans.
3.  Broader qualifying ratios – total house payment with MIP can be up to 31% of borrower’s monthly gross income and total house payment with all recurring debt can be up to 43%.
4.  Seller can contribute up to 6% of purchase price – this money must be specified in the contract and can be used to pay all or part of the buyer’s closing costs, pre-paid items and/or buy-down of the interest rate.
5.  Self-employed may qualify with adequate documentation – two year’s tax returns and a current profit and loss statement would be required in addition to the normal qualifying and underwriting requirements.
6.  Mortgage Insurance Premium can be released in five years when the balance is 78% of original sales price
7.  Liberal use of gift monies – borrowers can receive a cash gift to assist in purchase from family members, buyer’s employer, close friend, labor union or charity. A gift letter will be required specifying that the gift does not have to be repaid.
8. Special 203(k) program for buying a home that needs capital improvements – requires a firm contractor’s bid attached to the contract specifying the work to be done. The home is appraised subject to the work being done. If approved, the home can close, the money for the improvements escrowed and paid when completed.
9.  Loans are assumable at the existing interest rate – assumptions require buyer qualification but are actually easier than qualifying for a new mortgage. Closing costs are lower on assumptions than originating a new mortgage.
10.  If the rate on the assumable mortgage is lower than current rates for new mortgages, it could add value to the property.

As our bumpy Portland Metro real estate recovery continues its slow climb, new mortgage programs slowly emerge.  Financing has been a huge obstacle in process of buying and selling real estate!!  Many loan programs disappeared after our real estate values plummeted (as well many of them should).  The former lax mortgage regulations definitely contributed to the recent market correction.  However, there were many “behind-the-scenes”  elements contributing to our present economic crisis of which the average person would have no awareness!  But, I digress!!

Conventional financing (as opposed to government insured programs) are tentatively re-instituting loan programs that were once common-place.  I’m very happy to see programs with reasonable guidelines return.  A new conventional 97% LTV (loan-to-value) is now available.  This program has less costs than the FHA government-insured loan that requires a 3.5% downpayment.  There are some basic requirements to this conventional financing:

• 3% minimum downpayment which must be borrower’s own funds
• 41% max debt-ration.  45% with higher credit score
• 680 minimum credit score
• monthly mortgage insurance is required, but it is cheaper than FHA (which increased on April 18th, 2011)
• no upfront mortgage insurance (FHA is 1% of the loan amount)
• the seller can pay 3% of the purchase price for your closing costs
• Tax/insurance reserves can be gift funds or seller paid

There is more flexibility with a higher credit score and/or other compensating factors.

Why would a buyer choose FHA financing?  The FHA allows for a lower down-payment (3.5%, recently raised from 3%), it allows for lower credit scores and higher debt ratios.  But, now finding the required “established condominium” project for the newbie or return buyer wishing to utilize the FHA financing is becoming increasingly more difficult in my experience.  The definitionof an “established condominium” (according to the FHA/DELRAP approval process) is that the buildings were constructed as condominiums (or completed the conversion process) and all units, common elements and improvements have been completed and the final certificate of occupancy has been issued over one year, no one entity owns more than 10% and the HOA (home owners association) has been turned over to homeowners.  These are all reasonable assumptions but the remaining requirements are stiff.  And, as I’m out looking for a great condo at my buyer’s comfort price point, I am constantly finding projects that are not yet FHA approved!  A buyer can certainly wade through the process of making an offer and getting the condo approved but will have to invest in the process by providing and paying for an appraisal while not being certain that the approval will be issued.  For the first-time or even second-time buyer, that’s a big gamble with what little cash they’ve been able to save to pursue their housing dreams!!  Maybe as Realtors we should encourage the HOA’s of condo listings we take to get the process underway asap!!

The “FIRST-TIME HOME-BUYER CREDIT”    (AND WHAT IT MEANS TO YOU, A FRIEND OR FAMILY MEMBER)!  

PLEASE pass the information to someone you know who might be in the market for their first home!!!

Q:  How much is the tax credit?

A:  The tax credit would be $8,000 or 10% of the purchase price, whichever is less. 

Q:  Who is eligible?

A:  Similar to the $7,500 tax credit included in the Housing and Economic Recovery Act of 2008, the $8,000 tax credit (included in the 2009 Economic Stimulus Plan) is available for the purchase of the primary residence by first-time homebuyers.

Q:  What defines a “first-time home buyer”?

A:  According the IRS, any taxpayer who has not owned a home during the 3 years prior to the date of purchase can qualify for the credit.

Q:  Do I have to repay the $8,000?

A:  No.  Unlike the previous $7,500 tax credit that did have to be repaid (which made it essentially an “interest free loan”), the $8,000 does NOT have to be repaid, UNLESS the home is sold within three years of purchase.  If the home IS sold within that 3 years period the credit is simply reversed.

Q:  What if I have no tax liability?

A:  The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

Q:  Are there any income limitations on the tax credit?

A:  Yes.  The tax credit is strictly for individuals with adjusted gross income (AGI) of under $75,000 or $150,000 for joint filers.  AGI is total income for a year minus certain deductions, but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4.

Q:  If my AGI is a bit more than the designated $75,000 or $150,000 respectively, can I still claim the credit?

A:  It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose AGI exceeds the phase-out limits. 

Q:  What is the difference between a tax credit and a tax deduction?

A:  A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. For example, if you’re in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter which bracket you might be.

Q:  What type homes qualify for the tax credit?

A:  Included are single-family detached homes, attached homes like townhouses and condominiums, manufactured homes or mobile homes and houseboats (as long as all other criteria are met).

Q:  What is the time frame for completing my purchase to be eligible for the “First-Time Homebuyer” credit?

A:  This tax credit applies to properties purchased on or after January 1^st, 2009 and before December 1^st, 2009 (so there’s still lots of time).  First-time home buyers who purchased a principal residence on or after April 9^th, 2008 and before January 1, 2009 may qualify for the former $7,500 tax credit (which must be repaid, but operates like a zero interest loan).  Purchase date refers to the date you closed escrow on the property.

Q:  What if I am eligible to participate in another state or local first-time homebuyer mortgage program? 

A:  You may now claim the credit (previously this credit was prohibited if you participated in any other first-time homebuyers initiatives).

Q:  What if the home is a short sale or foreclosure?

A:  The credit does apply.

Q:  What if the home is in disrepair and I’m willing to do the work but worried about getting the home financed?

A:  There are two possibilities for financing:  the FHA 203k loan and a conventional “Purchase & Renovate” loan (more to follow on those forms of financing).

When you compare FHA loans to Conventional loans, here are some pros & cons:

·         FHA loans require only 3.5 percent of the purchase price as a down payment — conventional loans now require at least 5 or 10 percent down (20% down to avoid mortgage insurance premiums).

·         Importantly, the FHA does not mind if your down-payment funds come from a gift, a city-funded down-payment assistance program, or even a charitable organization — most conventional lenders require the funds to be from your own personal savings.

·         FHA loans often offer very low interest rates compared with lower-down-payment conventional loan programs — the government-backed insurance minimizes the risk on the lender’s part, so they charge you less.

·         FHA loans have very reasonable credit qualifying guidelines — while your specific lender might look for a higher FICO score, the FHA itself has a minimum credit score requirement of 500 if you are putting less than 10 percent down. Realistically, though, most lenders are looking for at least a 620 credit score to obtain an FHA mortgage — and they look at the borrower with the lowest middle FICO score.

·         The FHA typically implements home saving programs for homeowners with FHA mortgages much sooner and more effectively than non-FHA loans, in the event they run into financial difficulties during the life of the mortgage.

However, here are some of the potential pitfalls that FHA borrowers have also experienced:

·         FHA loans — like most government programs — are quite paperwork-intensive, causing some mortgage professionals to charge more for FHA loans than conventional loans. However, many reputable mortgage brokers will do FHA loans for 1.5 points or even less, its always best to shop around. FHA appraisals can be slightly more expensive.

·         FHA loans place more restrictions on the condition of the property than conventional loans. All elements of the home must in working order.  Abandoned homes without power, water and heat source will not pass inspection. 

·         FHA loans allow legally married individuals to buy homes on their own, but still requires that their spouse’s credit and debt be taken into consideration in the qualifying process.  Whereas conventional financing will allow spouses to buy separately without consideration for the spouse’s financials.

Action Plan

1. Avoid letting others’ experiences create anxiety or confusion in your mortgage decision-making process.

2. Get a reputable mortgage broker — ideally by referral from your Real Estate agent or a trusted friend or family member – to give you a personalized assessment of your purchasing power and mortgage options.

3. Discuss the FHA pros and cons with your chosen mortgage broker.

1)  FHA 203k regular and stream line, these are owner occupied only and look like regular FHA loans with fixed and ARM loan programs.  The maximum loan to value (LTV) is 110% of after improved value.  Minimum investment is 3.5% down payment. Repairs are to be done within 6 months and sometimes they do extentions up to an additional 6 months.  The only limits are the maximum FHA loan limits which for most our our counties is $418,750.

2)  Conventional Renovation works the same as above and can be done for owner occupied and investor loans.  Maximum loan to values on owner occupied properties are 95% meeting certain criteria and for investor loans it is 80% LTV.  In both cases the lender uses the after improved value.

3)  Conventional construction perm remodel.  This loan is really 2 loans; the first being a construction loan that will modify to a permanent loan at construction completion.  This is for owner occupied only.  Maximum loan to value is 75% of acquisition cost (purchase price plus improvement cost).  This option is used mostly on situations with higher loan needs , such as jumbo deals and some conforming deals.  Build time is 12-24 months.

In all these situations, bids are acquired for all work to be done and the appraisal is after improved value.  Closing happens prior to any work being started.  In all cases, work is done then draws are issued till the work is complete.  The only exception is the FHA 203k streamline where 1/2 of the money is advanced at closing and the only inspection and draw is done after the work is completed.  With all these loans the borrower/builder is set up with a draw specialist.  Don’t be reluctant to look at homes needing repair in Portland, there are financing options out there.  I can recommend some lenders well versed in the process if you are interested.