Tag Archives: 203K

If Only the House had …

If you’re out hunting for houses, you may be finding that not every house seems to fit your needs or your wants to a “T”.   Maybe the houses you find have 75% of what you want, but the other 25% makes it so you don’t want “that” house.  And it makes sense to not settle for something that doesn’t meet most of your needs.

Or maybe you have found the perfect house, but it isn’t up to snuff electrically or needs a new roof or just has too many things wrong with it to even consider starring in your own Money Pit movie!  It’s no fun going into a house knowing that you will spend a ton of money out of pocket just to get it structurally and mechanically livable.

There is a light at the end of this tunnel, hopefully one that gets you the house that meets 75% of your needs and with some help, gets you to 100% perfection (well, we know that really can’t happen, but it’s worth a try!).

In comes the renovation loan. There are a few options out there – both of which MidCountry Mortgage offers.

The first option is the FHA 203K loan.  This loan is specific to FHA financing and follows FHA guidelines for qualifying with a minimum of 3.5% down.  The difference is that you can borrower money to do the work that you want done and the work that the FHA appraiser says needs to be done (also known as work orders).  The work and fees get rolled into your total loan and FHA only allows this loan type on a primary residence.

There are two versions of the FHA 203K loan – one is called Limited and the other is called Standard.  The Limited version allows the borrower to finance up to $35,000 into their loan not to exceed the  FHA county loan limits.  And of course, as with all mortgage loans, the borrower must qualify for the higher loan amount.  The loan amount must include the work to be done, fees associated with the FHA 203K loan, contingency reserve (percentage of the work held aside for overages) and permits.  This usually allows for the bid to be approximately $30,000-$31,000.  The bid must include labor and materials.

It’s called the Limited due to the cap on the amount that can be financed, but it’s also limited in nature to “what” can be done. You could rehab a bathroom, finish a basement, replace shingles or windows, get new appliances or flooring and of course, anything health and safety related that FHA may require.  The house may not have running water or may be in need of a new well – both of which can be taken care of with an FHA 203K loan!  What you can’t do is anything that is considered luxury (pool – bummer, right?) or anything structurally or dealing with the foundation.

There is good news for those of you who are first time home buyers. If you utilize one of the first time buyer programs with MN Housing, you can use the Limited version of the FHA 203K loan to help make this home the way you want and take advantage of down payment and closing cost assistance!

The second FHA 203K version, Standard, has no cap other than the maximum county loan limits.  The Standard has a few additional requirements and fees, such as the need for an FHA 203K consultant.  This person reviews the contractor’s bid and also visits the home to determine the scope of the work, adding in anything that FHA would require in order to meet FHA guidelines, such as health and safety issues.

With this version, you could add a garage, move a home from one location to another, add another story to the house, move a load-bearing wall or do any and all of the things listed above. More than anything, this is going to be for a purchase or refinance that requires more than $35,000 and may possibly require work to the structure or foundation.

With both FHA 203K versions, an appraisal will be done taking into account “after-improved” value (home value given by the appraiser taking the work to be done into account). The maximum loan allowed with FHA is 96.5% of the lesser of the sale price paid for the home plus the renovation bid and 203K costs OR 110% of the after-improved value.

The second option is the Fannie Mae Homestyle.  This is conventional financing, whereas the FHA 203K is FHA financing.  This loan type is more similar to the Standard FHA 203K version in that there are no caps as to the amount of work that can be done, except by your qualifying and the maximum loan limit with Fannie Mae.

The renovation costs include the bid (labor and materials), a contingency reserve and fees specific to the renovation loan, all of which are rolled into the loan. There will also be a fee for a person to perform a feasibility study (similar to the 203K consultant).

For a primary residence, you are required to put 5% down off the lesser of the purchase price plus the cost of renovation or the “after-improved/as-completed” value.   One thing to note is that the cost of the renovation cannot be more than 50% of the after-improved value.   For example, if the after-improved value is $300,000, the renovation costs (including fees) cannot exceed $150,000.

The Fannie Mae Homestyle can also be used to purchase or refinance a second home (10% down required) or investment property (15% down) but 20-25% down is preferable with investment as the monthly mortgage insurance costs are higher on investment homes.

Regardless of using the FHA 203K or the Fannie Mae Homestyle, you will be taking a loan out for more than what you paid for the home. Almost all lenders/investors require that you use a contractor (self-help not allowed), even though FHA guidelines allow for self-help.

Keep in mind, these loans take a little bit longer from start to finish since each situation is different and we are dealing with a third party – the contractor you choose. In the end, though, it’s worth the wait to be able to get as close to the 100% perfect home you want and need!  I am here to help make the home you find the home you will love!

The Little House that Couldn’t … Pass FHA

Here is an all-too-common situation that could happen to you.  Your lender has you pre-approved to buy a home using FHA financing  and you found the perfect home.  Better yet, your offer got accepted and your loan is proceeding nicely through processing.  A little snag hits — the FHA appraisal came back, and while the value supports the price you paid, there are work orders.

Work orders are items the FHA appraiser calls to be corrected prior to closing on the home.  If these aren’t repaired, the home isn’t eligible for FHA financing.  Typically, work orders are called to correct safety or health issues.  The most common is in homes built before 1978 that have any peeling paint, as it could be lead-based.

Courtesy of Stuart Miles|freedigitalphotos.net
Courtesy of Stuart Miles|freedigitalphotos.net

Let’s say this home is owned by a bank who sold it “as is” or sold by a seller unwilling, or financially unable, to make the repairs.  More than likely, this will cause your perfect home purchase to fall apart, unless your lender handles 203K loans.  In a nutshell, a 203K allows you to finance the costs of repairs into one loan.  It’s a great way to cover the work orders called by the appraiser — and the best part, these items don’t have to be completed before closing!

There are two types of the 203K rehab loans.  The first is called the Streamline K – the most common.  It offers up to $35,000 to cover repairs including the 203K contingency reserve and affiliated fees.  That means you have up to $31,000 to work with for the rehab costs.  Just about anything can be done — repairs that FHA calls, a rehabbed kitchen, new flooring, new roof, furnace, new bathroom– even appliances if you choose.  What you CAN’T do is any luxury items (whirlpool, pool) or anything structural or foundational.

For you MN first time home buyers, the 203K streamline can be paired with MN Housing or the Dakota County Bond program!  A great way to get the money you need to do the work by financing it into your loan, plus getting down payment and closing cost assistance that you need upfront to close.   You really can make it your “perfect” home!

The second type of 203K loan is the full-blown 203K.  There is no maximum loan amount for the rehab piece and this loan allows for structural or foundation work.  You could add a room, move a load-bearing wall and/or do any of the above items.  This version has higher costs associated, but are still rolled into the full loan.

Some quick 203K details — your 3.5% down payment is figured off the “acquisition cost” which is the purchase price of the home PLUS the rehab cost and fees.  As with all FHA loans, you need to qualify for the new payment and this home must be your primary residence.  Though self-help is allowed according to FHA, most lenders require the use of a contractor and be aware, these loans take a little longer to get from start to finish, but each situation is different.

Ideally, working with a lender that offers the 203K loan and educates you on these during the pre-approval process will help you to be more prepared when looking at homes.  It’s my practice to advise all buyers of this option, whether they’re using FHA or Conventional financing.  Also, with the help of your Realtor, you can determine ahead of time if the house will need a 203K loan, hence helping your perfect home become the Little Home that COULD pass FHA!!  Let me help you get there!

 

FHA, PITI and LTV … Oh My!

If you’re looking to get financing for a home, you’re probably hearing a lot of acronyms flying around.  The mortgage industry is famous for them; but if you’re new to this process, they can be a little confusing.  As I was sitting here working on my RD loan, I started to think that maybe a little explanation might help.

IMG_1283Let’s start with my “RD” loan.  RD stands for Rural Development and is a great loan that requires NO down payment.  There are certain restrictions for this loan type — the home needs to be in a rural area, as determined by the RD website, and there are household income limits.  RD is like VA, in that VA doesn’t require a down payment either.

VA is the Veteran’s Administration.  This loan is specifically for a veteran of the armed forces.  They could be in the reserves or active.  We get a COE – certificate of eligibility — to prove a borrower is eligible for this type of financing.  This is the creme de la creme of all loans.  Literally, the seller could cover all costs, making it so the veteran needs nothing out of pocket.  Also, there is no PMI on this type of loan, making payments lower.

PMI stands for private mortgage insurance.  This is required on all conventional loans with less than 20% down.  PMI doesn’t insure you, but insures the lender in case of default.  This is part of your house payment and will automatically go away after you reach 22% equity.

Speaking of conventional financing – meet Fannie Mae (FNMA) and Freddie Mac (FHLMC). Fannie Mae is the Federal National Mortgage Association and Freddie Mac is the Federal Home Loan Mortgage Corporation.  They purchase conforming loans — loans that are under a $417,000 loan amount and “conform” to their guidelines.  Typically, a conventional loan has a little more lenient appraisal process than FHA or VA.

What’s FHA?  It stands for Federal Housing Administration.  One of the oldest loan types.  FHA is a government backed loan and many first time buyers use this loan because it has the most leniency in credit scores and only requires 3.5% down.  Typically, FHA loans have a lower rate than conventional financing and usually is a little more lenient with DTI.

DTI stands for debt-to-income.  In the lending world, we look at numbers called ratios to determine your qualifications.  The debt-to-income ratio looks at your monthly debts in relation to your gross monthly income (before taxes) to determine the PITI you can qualify for.  Ratio limits vary by loan type.

What’s a PITI?  a.k.a. PITI-A.  This is what your house payment is comprised of — principal & interest on the loan, property taxes, insurance (HOI & PMI) along with adding a possible “A,” which are the association dues if you buy a townhome or condo.  You’d pay dues separately to the association.

Homeowner’s insurance, a.k.a. HOI, is the same as hazard insurance and property insurance. This insurance is required for your home in case of loss.  This is something you set up with your own insurance agent.

And last, well, certainly not the last acronym in the mortgage world, is LTV.  This means loan-to-value.  For instance, if you put 5% down, you would have a 95% LTV.  The maximum LTV is determined by the loan type — VA and RD are 100% LTV, FHA is 96.5% LTV and most conventional loans have a max LTV of 95%.  To avoid the PMI on a loan, you need an 80% LTV.  The LTV drives the interest rate, the cost of your PMI and may even determine if you get a loan approval or not.  It’s a very strong acronym in the lending world.

Like I said, that wasn’t the last acronym and I am sure there are more that I failed to mention.  These are the important ones and hopefully, you now have a better understanding of the part they play in your financing.

It would be my pleasure to help you muddle through these acronyms and educate you on the process of buying your home!  TTYL!!

 

Coming April 18th — FHA Payments Going Up for Pre-Approved Buyers

MONEY STEPFHA is trying to re-build its reserves again.  Back in October 2010, FHA lowered their UFMIP (Up Front Mortgage Insurance Premium) from 2.25% to 1% to somewhat offset the increase in the monthly MIP (Mortgage Insurance Premium) from .5% to .9%.  This certainly didn’t help FHA buyers with their monthly payments.  It made it so a buyer couldn’t qualify for as much home.  And it took the argument away that FHA has a cheaper payment than conventional financing because the mortgage insurance is less.

So, why did they do it in the first place if it negatively impacted the borrower?  It was necessary.  FHA is required to keep reserves as a government program.  They have paid out, like many conventional PMI (Private Mortgage Insurance) companies, insurance claims to lenders when FHA insured homes go into default.  Unfortunately, they are still under the 2% reserves they are required to have and again, have to increase the MIP.

With case numbers* dated on or after April 18th, be prepared to see your FHA payment rise if you’re in the buying market.  This monthly figure in your payment will go from .9% to 1.15%.  On a $150,000 loan, that makes a $30/month difference.  For some, this may halt a transaction in its tracks.  This isn’t what anyone wants.

Unfortunately, you can’t change when you get an offer accepted.  The advice I can give, especially if you’re tight for qualifying, is to find a home sooner than later and get your purchase agreement to your lender ASAP.  It doesn’t take much for them to order the case #, but it will be a huge bummer if it doesn’t happen.   And, believe it or not, conventional loans, if you qualify, may actually have a lower payment for mortgage insurance — making the argument now favor conventional financing.

Still, some buyers will HAVE to use FHA.  Why?

  • FHA is more lenient on credit scores and allows for “creating” alternative credit.  So, if you don’t have a credit score, you could get FHA financing combined with a first time buyer program.  As of now, the first time buyer programs only require 620 for the mid-score using FHA financing.  Conventional financing will require a higher figure — 680+, if not even 720 or higher.
  • FHA also allows non-occupant co-borrowers to help qualify for the loan.  Let’s say part of your income is salary and some is commission and that income started a year ago.  Though you know you can count on it, lenders won’t for qualifying.  Commission income requires a 2-year history to establish a pattern.  Other income of this nature would be tips, self-employment, bonus and overtime.  Without 2 years, you can’t use it to qualify.  However,  if you had a family member co-sign with you, your qualifying ability could increase.  Keep in mind, my assumption is your family WON”T be paying your house payment, so you still need to use your head and stay within a payment range in which you’re comfortable
  • Did you know FHA offers job-loss protection?  I bet many people, including financing professionals, don’t know this.  If you can’t make your payments due to a job loss, FHA could pay up to 12 months of your house payment to your lender so you don’t fall behind.  The amounts you get will be added to your loan on the end — FHA is nice, but not that nice!
  • Another reason people may choose/need FHA financing is for rehab.   A loan type, called the 203K loan, offers rehab assistance that is added to the purchase price.  You still pay a lower amount for the home, but we add the fees and repair bid to the purchase price.  Your 3.5% down is figured on that higher number.

Long and short — if you have to do FHA, I suggest getting a purchase agreement prior to April 18th.  Otherwise, prepare to pay the price when the 18th rolls around.  So stop waiting for something  better to happen with the market.  It’s not going to happen.  Get pre-approved and get out there and look!

*Case number — a number assigned to a loan and a property address.  Lenders enter the property information into the FHA system, which then generates this number.   It’s like a social security number for the house.  If the current borrower doesn’t buy the home, and another person does using FHA financing, the case number will still attach to the address.  This also means if an appraisal was done, the appraisal sticks too and is used by the new lender.

Why are You Buying a Home?

Do you know the answer to this?  Have you thought about the responsibility that comes with homeownership?  It is nothing like renting.  You can’t just call the supe to come over and fix the clogged sink or make a call when your neighbors are too loud.  It’s a really big deal this thing called homeownership.

In a recent survey, the main reason first time buyers bought was an affordable market.  The two reasons that followed were the tax credit and the low interest rates.  Now, today is the last day you can take advantage of the tax credit.   As you have heard over and over, you need a signed and accepted purchase agreement  by today AND must close on your new home by June 30th.

Honestly, how did you answer the question above “Why are You Buying a Home”?  Was it because you could get an $8000 tax credit?  As much as I hate to say this, if your answer to this was yes, you’re not alone.  I have talked to so many people in the last 12 months that decided to buy because of the money the government was giving away.  My advice to them — great incentive to get out and start looking, but only purchase if you’re ready AND completely understand what you’re getting into.  I just tweeted that it’s better to have “lost” $8000 vs. $80,000 or more due to a bad judgment on buying a home just to get the credit.

Here’s the thing.  Yes, the money will be gone and that’s a bummer.  I can’t help you there.  BUT, what I can do is offer up the other two reasons people bought this year — affordability and low rates.  Seriously, this couldn’t be a better time to buy.  As we discuss weekly on our radio show, MN Real Estate Show on KTLK 100.3, this market is going to be here a little while — at least another 2-3 years.  Home prices are not going to rebound fast because we have more foreclosures to get through.  With that said, homes under $250,000 are still being gobbled up fast if they’re decent homes.  Regardless of that, you have the lowest prices to purchase at in record years.

And what about low rates?  I don’t have a crystal ball — wait, I DO have a bouncy crystal ball, but it doesn’t help me predict the future.  I wish it did and I wish I had that ability.  What I do know is that there are PLENTY of first time buyer programs out there with down payment assistance and lower-than-market interest rates.  I have access to them all, PLUS, we do a few other things that most lenders don’t.  For instance, in one of my blogs I talk about the 203K loan with FHA.  I noted in the paragraph above that homes are gobbled up if they’re decent.  What about the less-than-perfect homes?  As a first time buyer, it’s tough to afford a home and then on top of it have money to do work.  This is your BEST opportunity to make the house “yours”.

These are all great reasons to buy a home.  And there are more, such as no longer paying another person’s mortgage by renting.  May as well put your money into something that will appreciate — though that will take a little time, it’s still a better investment.  There is something to be said about having your own place.  Downside is you will have more expenses, maintenance, including furnishing and decorating.  These are all things to consider.  But, it’s yours.  Not someone elses.  You can do whatever you want to the house.  You don’t have to answer to anyone.  It’s the pride of ownership and that alone is one of the best reasons to buy in my opinion!

Then there’s the “tax credit” you get.  No, not speaking of the one that expires today.  That would be silly.  I am talking about the tax benefit of owning a home.  Most of you probably don’t get to write off any expenses, like the donations you give of stuff or money.  Wouldn’t it be nice to get a benefit from that?  As a homeowner, each year you can itemize all of the interest you pay on the loan and all the property taxes you paid that year.  Did you know, you can also itemize the state income tax that you pay?  Nice benefit there.  I don’t want to mislead you.  Not everyone will get this tax benefit, or I should say, be able to utilize it.  If the loan size is smaller, along with lower rates, you may not have enough itemized deductions to EXCEED the standard tax deduction listed on page 2 of the 1040’s.  And that’s okay.  Sometimes not paying a lot for a home loan is a really good thing!  There’s more to this and I am happy to explain further your benefits based on your situation.

So, the question still stands — “Why are You Buying a Home?”  I’ve given you plenty of reasons that still make sense even though the tax credit is expiring.  My hope is you have other reasons for owning.  But as I said earlier, it’s NOT something to enter into lightly.  As a matter of fact, the best advice I can give you, short of coming to one of my seminars 😉 , is to go to a Homestretch Course.  This will not only teach you most of what you need to know when buying, but also what it takes to maintain your home after it’s yours.  Also, this will meet the pre-requisite to be eligible for most of the first time buyer programs.  Look at that — kill 2 birds with one stone — learn about homeownership AND qualify for down payment assistance.  And who doesn’t want interest-free money and lower rates?  Sign me up 😀

Looking for a Way to Buy the House that Needs Work?

Ahhh, the  market.  The market that is flooded with foreclosures — some that are in decent shape, some that are stripped of anything of value and homes that fall somewhere in between.  Here’s the dilemma that many buyers are experiencing … how do I buy that house when the lender won’t finance it due the condition it’s in?  There’s a great question.  With so many opportunities to get a great deal on a house right now, use first time buyer money and take advantage of a 40-year low in rates, how can anyone “make it happen”?

It’s called the FHA 203K loan.  A little background first on where the mortgage market is now.   Most buyers are using FHA financing, which stands for the Federal Housing Administration.  The main reason is the minimum down payment requirement of 3.5%.  Another reason for its popularity is being the closest thing to a “sub-prime” loan.  Now, I am not saying it’s like a sub-prime loan in the true meaning of it.  It is, however, the most lenient loan on credit score requirements.  You need a minimum mid-score of 620.  Conventional loans recently came back to the marketplace with a 3% down loan in part due to the PMI (private mortgage insurance) companies are willing to insure them.  To do 3%, you must be a first time buyer and in most instances, need scores over 700.  My experience these days supports that score being tough to come by.

Since most buyers are using FHA financing, many are unable to get offers accepted on foreclosed properties with any work that needs to be done.  Why?  A few reasons.  First, FHA is a little more strict on safety and structural issues with the homes.  When we send an appraiser to the property, they’re supposed to look for those things that could pose a hazard, such as missing cover plates on outlets, or the biggest one, peeling paint ANYWHERE in/on the home if the house was built before 1978.  Those homes have a higher chance of the paint being lead-based.  If you eat the paint chips, you could get sick — too many, like a little kid might, and you could die.  That’s scary and that’s why FHA is very clear on their position.  So, if any issues are found, they must be fixed prior to closing on the home   Second, many banks won’t accept FHA financing.  Due to the amount of work potentially required by an FHA appraiser, they don’t want to have a deal fall through if an FHA appraisal comes in with work orders.  In 99% of the cases, the bank won’t fix the issues.  Banks are known for selling the home “as is” and really, this makes sense.  They never lived there, so they really can’t comment on water damage or storm damage or stolen fixtures.  Yes, some people DO take the toilet and sink.  Seriously, what are they going to do with that stuff?  Nothing, I would assume — it’s just a way to say “I’ll show you bank for taking my house away”.

So, if the bank won’t accept FHA financing and most people are buying this way, how can these foreclosures be sold?  The financing that can handle this is called the FHA 203K loan.  Under this program, there are two sub-programs, the streamline 203K and the full-blown 203K or “K” as I call it.  This is a rehab loan that would allow you to get into a home BEFORE those repairs are completed.  The repairs would be addressed in a bid which is added to your loan size.  There are only a handful of companies that do these loans, mostly because they are labor-intensive and carry a lot of risk.  We’ve been doing this for years and understands the niche that is filled by doing the rehab loans.

As I mentioned, there are two sub-programs.  The streamline “K” is a more condensed rehab loan.  The maximum addition to your loan size is $35000 including the “K” costs.  The main difference with the streamline vs. the full-blown “K” is that you cannot do any structural or foundation work on the streamline.  You can paint, carpet, replace the furnace, add A/C, change lighting, add a bathroom, do the roof and even something that isn’t re-habby at all like buying appliances.  Most importantl, you can fix those items that are required by the appraiser to bring the home to FHA standards.  Another REALLY cool thing about this streamline “K” is that we CAN do a smaller version of this in conjunction with the MN Housing Finance Agency loan (max $15000 including “K” costs) and you could still get $5000 in assistance.  We can do the the regular version with both the City Living and Dakota Countyprograms, which are programs that just received a big chunk of money at a low rate.  And speaking of rates, if you don’t use a first time program, then the rate on the 203K loans will be about 1/4 – 1/2% higher than a normal FHA loan.  Trust me when I say, this is a screaming deal even at a little higher rate.

The second sub-program is the full-blown “K”.  The loan amount that can be added to your primary loan is UNLIMITED, assuming two things — 1) you can qualify for the loan and 2) you stay under the FHA loan limits, which in the 11-county metro area are $365,000.  In this rehab program, you can do anything — like items mentioned above, doing an addition to the home and get this, even tearing down a home just as long as you re-build on the existing foundation.  Yes, seriously.  Of course, you’d have to get that home pretty darn cheap to keep a new home build under $365,000.

You may be thinking, ‘this is cool, but how do I qualify for this?’  Are there any special requirements?  Nope, not really.  You need the 620 score or higher, need to be able to qualify for the higher loan amount and need to do a little extra in terms of paperwork and hiring a contractor.  We have a team of awesome contractors that are ready to give a free bid based off what your needs are and what the inspection may bring to your attention.  We don’t require you to use our preferred contractor partners, BUT, we highly recommend it.  I can tell you stories as to why another time!

Okay, what’s the process?  More than likely, you won’t be looking for homes that need the work.  But, the appraiser may just require that work has to be done and now the 203K program becomes a necessity.  Essentially, you locate the home, make an offer using the 203K (since many bank-owned properties won’t accept regular FHA financing), we have an inspection and potentially have the contractor out there with you to assess the scope of work and provide a written bid.  This information goes to processing with your file and an appraisal is ordered using the purchase price PLUS the bid.  The home will be valued “as-is” and also given an after-repairs value.  Here’s an example of built-in equity.  I helped finance a townhome that  just required new flooring throughout and then the client decided to get appliances (were none in the home)  — home price was $115,000, bid items added up to $13000 — it appraised at $150,000.  WOW, that’s awesome.  The work, not that extensive at all nor value-enhancing per se, just brought the home to a level playing field with the other townhomes that are in good shape.

There is more to the process, but I see that this post has become quite long.  You can wake up now!!  To summarize, you DO have a way to do an FHA loan and still purchase a home that needs work or is bank owned.  We have the opportunity waiting to help you and I do profess that this is one of those programs I have done quite a bit and with great success.  I hope I can help you make the house you’re buying a “dream home”.