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.

What is the Difference Between Short Sales and Foreclosures (REOs)?

A client recently asked me this, so I thought I'd share: So here is a basic rundown of short sales: A homeowner/borrower is behind on their mortgage payments (in default of their loan). The property that the loan is on is not currently worth an amount that would pay off the outstanding balance of the loan (ex. Bought it for 200k, put 40k down, house is only worth 120k). What more banks/lien holders are doing nowadays are loan modifications. They will have their underwriters determine if it is a better deal to modify the loan to something the homeowner can afford, or if they should allow them to go through with a short sale. If they choose short sale, they will need to have a real estate broker list the property, and negotiate a price less than the outstanding balance of the loan for the bank to accept. A couple of years ago, it was not uncommon to spend 6+ months waiting on a response from the bank in regards to a new buyers offer (it only matters where the offer gets put into the stack on the bank's negotiator's desk). The longest I have had a client wait to hear back was 6 months, but the longest I've heard of is 1.5 years (in CO). Whether or not you want to stay away from them depends on your timeframe. Sometimes banks respond within days. Aside from that, the process is exactly like purchasing a "normal" (equity) sale. The headache is normally with the seller, and thus, listing agent. No reason to rule them out altogether because of the word on the street. It's a buzzword more than anything.

Foreclosures are where you're going to find the "deals" that are actively listed. These are properties that the owners have defaulted on, and either couldn't sell during the time allotted for the short sale, or didn't even try. Banks are not in the business of holding properties (much to a lot of people's dismay). They don't want the carrying costs, and they don't want negative cash flows. They are typically in rougher shape than a market value equity sale, but that is where you can get your savings and then apply those to renovations (keep in mind, I have had clients close on foreclosures that had been completely redone by the banks because they were in such bad shape no one would touch them). Banks only care about their bottom line, so there is no emotion involved, and unlike short sales, they respond very quickly to foreclosure offers (all of this paragraph also applies to HUD owned properties, as those are just foreclosures on FHA loans as opposed to a Wells loan, or Chase, BBVA, etc.).

Now, for equity sales. These include properties that have been flipped by professionals, estate sales, your neighbor's house who just wants to move onto the next part of their life, etc. These owners have enough equity in the property (either from paying down the mortgage, or from appreciation) that they can list it on the market and see what comes back. They are not "distressed" sales. What really makes some of these different than the distressed sales is the owners emotional attachment (unless you are buying from an investor/flipper, estate sale, etc.). People are not always rational when selling the home they have lived in for X years, and that can sometimes make deals fall apart (enter awesome broker that knows what they're doing).