However, one thing to remember is that not only do YOU, the buyer, have to qualify for a mortgage loan, the home must also qualify under typical FHA 203(b) loans (the most common type). A home in good repair with typical maintenance generally is no problem … it’s the home that’s been neglected that can so often be problematic–those homes may need a Rehab loan FHA 203(k) where the cost of home repair is included in the home loan. FHA wants to be sure that the home they insure … the one you’re buying … has no health or safety issues that could compromise your ability to repay your mortgage.

As you tour a home with your agent, anticipating that you’ll use an FHA loan for purchase, watch for these items. The FHA appraiser that values the home for your bank loan will be watching for these items as well:

1. Roofs that are at the end of their useful life, or in tough shape. Curling and missing shingles, gutters that are missing, lots and lots of moss. In our area, moss is common, but it should be minimal at best and easily removed with a light sweeping or cleaning. Most appraisers look for roofs that have an obvious 5 years or more life left in them. That original roof from a home built in the 1980′s or earlier could be problematic.
2. Cracked or missing window panes. It’s certainly not necessary that the windows be newer — old, single pane windows can be just fine as long as they’re sound and in one piece. In a recent transaction, however, I did have an FHA appraiser insist that a window that had a broken seal (indicated by fogging between the panes) be replaced prior to closing.
3. Peeling, cracked, or checked paint. Where the house is older than 1979, that paint could be lead based. Not a problem where the paint is in good shape, but where it could possibly be ingested — that can be a problem even on outbuildings. For that matter, abestos potential in a popcorn ceiling that’s falling down could also be an issue.
4. Water issues. This is one of the biggest hot spots for an FHA appraiser, and rightly so. A quick glance under a sink to see rotting floors and moldy walls will nix a loan every time. Watch for soft floors around toilets and tubs, leaky faucets, roof leak stains in the ceiling. Water in the crawl space is a definite no-no as is significant water standing in the yard.
5. Open/exposed wiring … Not good, not good. Electrical wires must be properly terminated, secured and finished in an electrical box and covered with the appropriate plate. Even outlet plates need to be in place.
6. Missing electrical fixtures. Especially on foreclosure sales, the dining room light fixture is missing. Sometimes it’s all of the kitchen lights or bedroom center light fixtures.
7. Missing appliances. A missing free-standing refrigerator, washer or dryer aren’t problems. It’s the built-ins such as a missing dishwasher, range, cooktop, or oven that’ll cause a comment in the Appraiser’s report. I’ll include the missing hot water heater and furnace here as well. A home has to have heat and water!
8. Missing or damaged carpets, drywall, or typical finishes. Yeah, sometimes that plywood floor is a problem as are huge holes in the drywall where the previous owner got creative and cut through the sheetrock to find who knows what. Note, however, mere cosmetic issues are generally not a problem unless the carpet is so soiled with maybe pet stains that it’s not cleanable. Remember that the goal here is to have a home that is safe and healthy.
9. Add-ons that were obviously not permitted. We’ve all seen them. The deck built on stilts that isn’t properly attached to the house, the garage/bedroom conversion with sloping floors, the rented basement apartment that doesn’t have its own meter and is accessible only through the main house door.
10. Critters in the crawl space or attic. Ugh. But facts are that four-legged and/or winged creatures like to infiltrate the crawl space and attic if allowed. Evidence of lots of droppings and open foundation or attic vents can be an issue. Especially if the appraiser pokes his/her head up into the attic and is greeted by a pair of green eyes looking back at him. Not so good.
11. Concrete cracks. A small crack typically isn’t necessarily a problem, but that foundation crack extending from top to bottom and is over, say, a 1/4″ or so can be an issue. Same thing in large cracks in garage floors or even walkways leading to the doors, especially where the surface is uneven or slabs have sunk.
12. Septic or Sewer issues. A rehab loan or full repair will absolutely be needed to purchase a home with one of these problems!

A few things to remember:

• Not every FHA appraiser will note the same defects. Some appraisers will overlook moss on the roof, or a small corner crack in a window while others will insist that the item be corrected before the loan can close.
• Ideally, the Seller is able and willing to make repairs so that the home can be sold. However if that can’t be accomplished, the Buyer may need to pass on the home, change loan types, or make small repairs prior to closing (not a good idea, but it happens).
• Work with an agent that has experience with FHA transactions. He or she can often spot issues that will be problematic and can direct you to further resources as needed.
• Be absolutely certain that you are also working with an experienced FHA loan officer, especially if you decide to pursue an FHA 203(k) Rehab loan. You’ll need their help!

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You may have heard that costs surrounding FHA loans is changing in October, reducing the dollar amount needed at closing for Upfront Mortgage Insurance, while increasing the monthly portion of mortgage insurance that is added to a homeowner’s payment.

If you have previously been approved for an FHA loan but haven’t yet found a home, you’ll want to be sure to factor in the larger payment requirement into your budget, along with contacting your home loan advisor to be sure that your preapproval is still valid for the higher payment amount. You may also want to consult with your advisor to see if a different mortgage program might now be more attractive.

If you are a Seller, you may be expecting to contribute towards a Buyer’s closing costs, which are dropping considerably when the Buyer uses an FHA loan. In the past, I’ve suggested to a Seller that the buyer’s closing costs could easily total 3-4% of the purchase price. With the 1.25% drop in upfront mortgage insurance, contribution towards closing costs may be less hurtful towards your net amount at closing, thus perhaps becoming an attractive marketing tool.

Monthly Mortgage Insurance for FHA Increases October 4th:  For FHA case numbers that are assigned after October 4th, FHA will

• decrease the Upfront Mortgage Insurance premium from 2.25% to 1.0%. 
• increase the monthly mortgage insurance premium from .50%- .55% to .85% – .90%, depending on the combined loan to value.

My trusted Mortgage Advisor sent along this chart to help you understand how this will affect a homebuyer’s mortgage:

In mid-January, 2010, the Department of Housing and Urban Development (HUD) issued a temporary waiver (good until February 1, 2011, or until extended or withdrawn) to give FHA borrowers the ability of obtaining an FHA-insured mortgage on a home that was purchased less than 90 days previous. What this means is that a Buyer can use FHA financing for a home which was bought by an investor less than 90 days before, then repaired or rehabbed.

On its surface, it would seem as though this waiver would be greatly beneficial to investors. After all, an investor needs to purchase a real bargain house, do some repairs, and then re-sell the home as quickly as possible for a profit.

In my experience, most investors look for the original purchase to be no more than 70% of its repaired value, with 50-60% (or even less) preferred. Considering that the cost of buying and then selling a home can easily run approximately 10% of its resale value, that there are costs of borrowing funds for purchase, and, of course, the necessary costs of repair, an investment home must be sold for far more than 120% of the investor’s purchase price.

It’s also important to bear in mind that many buyers (if not most) are also looking for homes that are a bargain … and are using FHA financing to secure their purchase.

So .. where this gets difficult is that there is a 20% variance to the flip rule for homes being resold within 90 days of an investor’s acquisition of the property:

* If the home is being sold for no more than 120% of its purchase price, then flipping guidelines do not apply.

* If the home is being sold for more than 20% above its purchase price, then the Buyer’s lender will require an independent home inspection, selected by the lender and likely paid for by the Buyer (OUCH!), and

* The Lender must justify the loan value by acquiring support documentation of the increased value or TWO appraisals, and

* Even if an appraiser doesn’t find the need for a repair, a lender can require that any issues revealed by a home inspection be fixed prior to closing!

A home inspection in the hands of an underwriter can be problematic. Every home requires some repair–no home is perfect. In a typical transaction, Buyers and Sellers often agree to financial adjustments rather than repair. Underwriters aren’t necessarily equipped to interpret the findings presented on a written inspection report, and an transaction otherwise acceptable to a Buyer and Seller may be stalled or cancelled.

Finally, in most transactions, the Buyer pays for the appraisal of the property they wish to purchase, used to assure their lender that the value of the home is at least equal to the amount of the loan. With the requirement that a flipped home sold for more than 120% of its investment purchase price, the Buyer may be required to pay for two appraisals, which further impacts the Buyer’s closing costs. In today’s buyer-driven market, remember also, that the Seller is very frequently asked to pay all or some of the Buyer’s closing costs.

Click to read the HUD Waiver of Requirements for FHA loans, then be sure to factor in these additional requirements that may be impactful of your desire for a quick resale of your investment property.

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Almost everyone I talk with these days is … as I am … backwards on their home loan-to-value ratios. Many of us bought our homes in the early 2000′s and then even refinanced them or added home equity loans somewhere in the 2005-2007 days, bringing our total home loan indebtedness to a number that is now out-of-whack with today’s home prices. These values were reasonable at the time, but, of course, with the falling real estate values, it’s become impossible to refinance the house to take advantage of today’s incredible home loan rates.

As various programs have come about that are/were designed to help struggling homeowners, most of these programs were really aimed at folks that had already fallen behind in their payments, or anticipated doing so in the near future. President Obama’s Loan Modification program has thus far fallen woefully short in performance, as had earlier programs that were to allow struggling homeowners the ability to refinance their home if their loan:value ratio was as high as 125%. Very few lenders chose to participate in that program; and likewise few are dropping payments or writing off loan amounts to bring payments down to the 38% of gross income goal.

According to HUD, starting on September 7th, this newest program is aimed at homeowners that currently do not have FHA home loans. The new FHA Short Refinance option will provide FHA loans for folks that are current on their existing mortgage and whose lenders agree to write off at least 10% of their existing unpaid balance.

According to the recent HUD press release:

“The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values.”

I’m excited to see this program — hey, it may work for me! However, I also know that, in my case Bank of America would have to agree to write off a significant part of my mortgage to bring the value of the loan down to today’s market value. That’s going to be a challenge. My lender-advisor chimed it to say:

“While FHA announced this a few days ago, it will take a couple of weeks for the lenders to decide if they are going to do these loans or not. My guess is that when these loans come available the borrower will have to go through their current lender to get the refinance done.  This is because……  Even if FHA is willing to do the loans no lenders are willing to go to that high of a loan to value ratio.  We will have to watch and see where this loan program goes.  I will let you know when I hear more.”

She’s usually right on the money …..

Click here to read the full HUD press release yourself.

Matt Person of The Legacy Group in Puyallup stepped up this morning with a compelling reason for Buyers to get off the fence and submit any FHA applications before the end of March. Since the business of selling houses is dependent on the ability of our clients to obtain financing — whether a Buyer or a Seller — Matt’s information is helpful.

Thanks, Matt! This is useful and I can understand this one!

4 Reasons Why Those Who Wait to Buy a Home Will Pay Thousands More This Spring!

Waiting a few extra days or weeks to purchase a home this spring could cost buyers thousands of extra dollars as the office of Housing and Urban Development (HUD) implements several changes for loans guaranteed by the Federal Housing Authority (FHA).

These FHA changes make it even more important to act now to save big.

Here are a four reasons why:

1.    Coming just weeks before the April 30 deadline for the Home Buyer Tax Credit and just days after the March 31 expiration of the Federal Reserve Board’s mortgage backed securities purchase program (which has kept home loan rates artificially low for over a year)

2.    On April 5th, the cost of required up-front mortgage insurance for loans guaranteed by the FHA will increase from 1.75% to 2.25%.

3.    For a borrower purchasing a $200,000 home with a $7,000 down payment, the up-front mortgage insurance will increase by $965. Up-front mortgage insurance is typically financed in the final loan amount so the impact to a monthly payment will be minimal but overall, the increase is still borne by the borrower both upfront and monthly.

4.    Later this spring, the amount of money that a seller can return to the buyer from their sale proceeds will be reduced from 6% to 3%. The reduction in these “seller concessions” can increase the amount of cash a buyer will be required to pay at closing by $6,000 for a home purchase of $200,000.

There is only one way to avoid being affected by all of these costly changes that lie ahead – submit all FHA mortgage applications by the last week of March.

I know Matt would be delighted to be of assistance to you in your home financing needs. And, it goes almost without saying (gotta say it though) … I’d also be delighted to be your advocate in your home purchase and/or sale. Or … if you just have a question, well, give me a call and we’ll figure it out!