Mister VA's Mortgage News

FHA Streamline 203k: Use When Buying Foreclosures

Often, when a home is foreclosed, damage is left behind.  It could be deferred maintenance.  It could be the former homeowner exacting a measure of revenge through frustration.  It could be the delay between foreclosure and the time the property becomes available on the market.  The owners [lenders] already are likely losing money.  So, they almost always will sell 'as is' unless there are safety issues or permit issues that would prevent them from selling the property.

And since nobody wants to put money into a home they do not own, and financing damaged properties is not easy, one of the ways around this dilemma for primary residences is the use of the FHA 203k loan.  The 203k is the section of the Housing Act.  FHA is under the auspices of HUD.  And references to this program can be found when looking at the government foreclosure website.  The streamline program is the one discussed here.

From $5,000 to $35,000 can have the same financing terms as the sale price--96.5% of the repairs can be financed.  No structural items like new garages, moving supporting walls, additions, etc. can be included.  Firm bids are obtained from licensed contractors along with copies of licenses and sometimes references for the work to be done.  Up to 50% of the total [not to exceed the materials portion of the estimate] can be disbursed at closing.  The balance upon completion of the work.  60 days from closing is the time limit.

When buying a HUD foreclosure, detailed property information reports are provided.  You shuld still have an inspection done. But some good bargains can be had out there.  If you can look past the work that needs to be done.

Apples to Apples: Rate Comparisons

Often a consumer is doing the best possible job in trying to get the best mortgage for the money.  Procrastination is not the consumer's best friend in making comparisons, however.  A rate & program that was quoted last week, or in some cases, even hours ago, may no longer be valid.  When mortgage rates are not stable, and it has been several weeks since they WERE stable, everything told to you by Loan Officer A is probably very different once you have spoken to Loan Officer B, Loan Officer C, and so forth.  So, it is very important to get pricing quotes for the same time frame--30 days out pricing, for example--from each loan officer.  But, more important than that, it is important to interview your loan officer.

By asking about the loan officer's experience and approaches to an applicant, you may find that 'cheapest' is not 'best'.  This is not to say that the most expensive is the best, either, but don't be so focused on the rate that you do not see the big picture.  One eighth lower on the rate for a loan of $150,000 when you look at 5.5 versus 5.375 as a note rate is about 39 cents a day on a 30 year loan.  Peace of mind and confidence in your loan officer's abilities is surely worth that.  Especially if the competition is someone who you will never meet.

One of the best way to discover how well your choice may depend on your circumstances is to get references or ask if people you know have had experience with a lender.  If you hear bad things, then you may want to pay attention.  Remember that there are many people around who will tell you what you want to hear--they over promise and under deliver.  And once you have made that decision, it is harder to pull away.  Especially, if an appraisal has been ordered and paid for by you.  Would you rather someone quote high and deliver low or the other way around?  That is why it important to compare apples to apples and that doesn't just mean mortgage rates.

Float or Lock: Know the Difference

In times of turbulence, being seatbelted can help.  Making assumptions that you are seatbelted when you are not is unwise.  As a consumer, you place a lot of faith and trust in your loan officer.  Especially, when it comes to rates and payments.  In recent weeks, interest rates have fluctuated wildly.  And the trend has been toward increasing rates.  These changes occur in a small space of time and your loan officer may or may not be at the ready to lock your rate in time.  But, it is YOUR loan, and YOU are the one who makes the decision on when to lock your rate.

Underwriting times have increased dramatically in the past few months, and that means a rate lock period may not be sufficient to protect your rate all the way to closing.  Once you lock a rate, then you are guaranteed that rate as long as you close within the lock period.  If closing is delayed beyond the lock date, you will have 'worst case pricing'.  That means if rates are lower, you get the original rate.  If rates are higher, you get the current rate.  The house always wins.

You get better pricing with a shorter rate lock period, but you are gambling that between time of application and time of rate lock, that rates will improve.  In times of rate volatility, that may not always be the case.  If you are 'FLOATING' the rate during processing, you have no guaranty that the rate will not change by the time you lock the rate.  If you lock the rate, you will sign a rate lock disclosure outlining the length of time the rate is guaranteed and the terms of that rate lock.  You may or may not be required to pay a deposit on that rate.  If you ask the rate to be locked and do not have a signed disclosure by both you an the lender, then your rate is not locked until that occurs.

Some loan officers, though not a large percentage, will use a 'quote and float' strategy that is designed to make them more money.  By locking for a shorter time frame, the loan officer hopes that rates will improve, deliver you the promised rate, and have a higher commission check at closing.  If rates go the wrong way, the 'quote and float' loan officer will probably be very evasive until things improve on the rate scene.  Your signed rate lock disclosure is your protection.  A verbal request to lock means nothing without it.  And a direct question that demands a 'yes' or 'no' answer, such as "Is my rate locked at x%?" will tell you what you need to know.

Be advised, however, that rates can change at any time, and they can change from the time of your request until the time the rate lock is requested of the lender or lock desk.  Even if that time lapse is only a few minutes.  The underlying responsibiity to lock the rate is yours.  And until you are locked, your loan application processing rate is not guaranteed.

Return of the 5/1 ARM [and the 3/1]

For the past several years the hybrid adjustable rate mortgage [ARM] was window dressing. NOBODY took them out.  The difference in pricing was negligible.  Something funny is going on in the midst of the mortgage rate panic of the past 10 days.  THESE RATES LOOK GREAT.  Even the FHA ARM is making a comeback with its 1.75% margin and 1/5 caps.  Why go for a fixed rate if you can go with a hybrid and save a lot of money in monthly payments and not have any rate adjustments for 3 or 5 years. A  5/1 ARM could save well over 1% in the note rate.  So it would take 6 years to even reach the fixed rate levels we see now.  And a lot can happen in 6 years.

Conventional loans can adjust at higher margins and 2% in any given year with the initial cap being 5%, so there is more inherent risk there.  But there is also a 5 year period to watch fixed rates and to refinance if those rates go back down.  There seems to be more appetite for these loans right now on the part of lenders due to shared risk perceptions and averse feelings toward a portfolio of fixed rates in the 4s.  So, you may want to consider this as an alternative to the nerves of ever climbing fixed rates.

First Time Homebuyer Tax Credit Early?

As with the big announcement a couple of years ago about the FHA Secure plan, the details were not quite in place and there is a lack of identified participants.  To refresh, about 3 weeks ago, HUD Secretary Donovan announced that FHA would allow funds at the closing table from the anticipated tax credit afforded to first time home buyers [FTHB] for the down payment and closing costs.  Mortgagee Letters that follow such announcements usually provide the clarification of such announcements from HUD.  There was very little participation in the FHA Secure program which was heralded as the subprime savior.  Perhaps this is more of the same.

FTHBs using FHA STILL will need a 3.5% down payment from their own or gifted funds.  This new program does not allow funds available from the tax credit to go toward that 3.5%, however.  Any of those funds used for down payment would be additional down payment over and above the 3.5% required.  Using the funds to pay the Up Front Mortgage Insurance Premium of 1.75% makes more sense than additional down payment in many cases.

The bigger question is:  Where are those advance funds coming from?  Spelled out in a recent Mortgagee Letter, apparently from municipal, county or other agencies such as homeownership centers extending a silent or not so silent second mortgage with spelled out repayment or forgiveness terms.  It is anticipated that when the tax refunds actually arrive, that the FTHBs will then pay off the loan.  Just how many of these cash-strapped entities will participate in the program remains to be seen. 

Let's not forget that there are some provisions already at play here.  The seller CAN pay some or all of the buyers' closing costs if it is made as a part of the offer.  The down payment of 3.5% is less than what conventional programs require and the mortgage insurance premiums are less.  The FTHB can still get the tax credit only the entire amount will remain with them as long as the home is maintained as a primary residence for 3 years. So, was this announcement just another case of political grandstanding?  On the surface, it appears so, but time will tell.