Buying a Home With FHA Financing? Better Hurry...

For starters, I want it to be known that I think FHA loans are great. They allow buyers without the ability to put down the conventional 20% required for a home purchase to only put down 3.5% (and in some cases, 3%). I personally have an FHA loan, and if the program didn't exist, I most likely wouldn't own my house. But there is a trade off for being able to put so little down, and that is PMI (Private Mortgage Insurance) so that the lender is covered if you default on your loan. PMI is currently 1.25%. However, that is changing come April 1, 2013. Just as the FHA guidelines were changed last year on this date, the Department of Housing and Urban Development will make some slight tweaks this year. The monthly PMI is going from 1.25% to 1.35%. This will be an additional $21 a month on an FHA loan used to purchase a $250k home. The other change that is coming is that the PMI no longer goes away once the outstanding balance of the loan is down to 78% of the value of the property (22% equity in the property). Up until a year ago, the PMI went away as soon as the owner had 22% in the property. On April 1, 2012, that changed to requiring PMI on the loan for five years regardless of the amassed equity (if one were to keep the FHA loan in place as opposed to refinancing).

I see this as an act to spur refinancing down the road. Interest rates can't stay as low as they have been over the last 18 months. If interest rates were to go up 2%, no one would want to get out of their 30-year, fixed-rate, assumable (a future buyer can assume a seller's FHA loan, with their interest rate and payments if they qualify) FHA loans... unless the PMI were to never go away. By sticking the loans with PMI for their entire term, HUD is creating business in the future for lenders.

So, if you are thinking about buying a home and want to use FHA financing, you need to be under contract on a property prior to April 1, 2013 in order to follow the current guidelines. Big thanks to a great lender of mine, Chris Hauber, for breaking this to me two weeks ago.

How Do Real Estate Brokers Get Paid?

Most people are familiar with realtors (note that there is no "i" in there) and what we do, but few actually know how we get paid. A lot of buyers come to me with the expectation that they will be paying for representation out-of-pocket, so when I tell them not to worry, I look like a hero. Here's a basic rundown of how real estate brokers get paid: -Seller's Agent: Before a property is listed and put on the MLS, the seller's agent and seller(s) will discuss compensation. There are instances when the seller's agent will charge a set fee, but more often it is a percentage of the eventual selling price. 99% of the time, the seller's agent will be giving some of this commission to the buyer's agent. The 1% of the time that they wouldn't, would be if the seller's agent procured the eventual buyer (double-ended the deal).

-Buyer's Agent (1): As mentioned, the buyer's agent is paid from the seller's agent's commission. The buyer's agent is not directly paid by the seller's agent, but rather the listing brokerage firm (the brokerage that the seller's agent works for). And for that matter, the buyer's agent is technically paid by their own brokerage. This scenario applies to properties listed for sale on the MLS (Multiple Listing Services require a listing broker, or seller's agent, to offer a cooperating broker compensation).

-Buyer's Agent (2): In the event that the buyer working with a buyer's agent decides to purchase a For Sale By Owner (or FSBO), the buyer's agent will need to negotiate a commission with the individual seller. This can be difficult and you can receive pushback, because the reason the FSBO is selling their house without an agent in the first place is probably because they don't want to pay a commission to realtors.

So, in a nutshell, home buyers do not have to pay for a realtor to represent them. Buyer's agents are paid by the seller (but we now know the money changes hands many times before it gets there).