How 3% can make all the difference

{{You’re gonna have to hang in there with me, this one definitely gets filed under ‘boring but important’}}

Today, HUD announced new rules for FHA mortgages that will go into effect in the near future (“summer” whatever that may mean). Those who don’t eat, breathe, and live real estate finance like I do may not know this, but FHA has become the go-to loan for most borrowers, especially first-timers and lower income, but really for everyone who doesn’t have 20% to put down.

Here are the proposed changes:

Anyone with a credit score under 580 is required to put down 10%

Hey HUD, maybe we should call you Captain Obvious! In practice, most banks aren’t lending to anyone with a score of less than 620 these days anyway so this one won’t have much of an impact.

The up front mortgage insurance is being raised from 1.75% to 2.25%

For a $100,000 loan amount, this means that the house would cost you an extra $500 which can be financed into the loan. Again, not great but not a huge deal in the grand scheme of things.

Seller concessions limited to 3%

This is the one that gives me heartburn. What’s a seller concession, you ask? In most cases, it’s your closing costs. With FHA, you can get a loan with as little as 3.5% down. For first time buyers without a lot of savings, that means you can buy a $100,000 house with not much more than $3,500 out of your pocket, assuming the seller pays your closing costs. That last part is the kicker. Currently, the seller is allowed to contribute up to 6%. And 6% is plenty when you are talking about a $100,000 loan. You aren’t usually going to go over $6,000. But you are probably going to go over $3,000, the new limit in this scenario.

And if you are looking at an even smaller amount, say $50,000?  Three thousand dollars would probably cover your closing costs so you could buy a $50k house for as little as $1,750 out of pocket. Now, with the seller only contributing $1,500 toward your closing costs, that almost doubles what you’re going to have to pull out of the old tin can in the back yard. That’s HUGE!  Anyone looking to live in a $50,000 – they’re rare, but they do exist in Chattanooga – probably doesn’t have that extra $1,500.

And that’s why I don’t like this change. Looking at houses in the $200,000+ range? You probably won’t notice a difference. But all of those first time buyers who are near and dear to my heart (yes, it’s far more gratifying to sell someone their first house), to put it bluntly, are getting screwed.

So to all those who need to use FHA financing and who don’t have an extra couple thousand dollars in your mattress, now just became an even better time to buy. Don’t wait until ‘summer’!

Click to search Chattanooga houses for sale.

Disclaimer: all those closing costs number I’m throwing around up there don’t mean that I (or anyone else) is offering a loan with those exact costs, those are big round numbers to illustrate the point.

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Julia Odom enjoys long walks on the beach, debating the restoration vs. renovation question and hanging out with plumbing inspectors

Visit her website to search for homes.

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Interest Rates for May 5, 2009

United Community Bank

CONVENTIONAL

30 yr fixed – 4.625% APR 4.755% 360 P&I Payments @ $1028.28

15 yr fixed – 4.25% APR 4.474% 180 P&I Payments @ $1504.56

– based on $200,000 loan and excellent credit

GOVERNMENT

30 yr FHA/VA fixed – 4.75% APR 5.370 360 P&I Payments @ $1021.88

– based on $200,000 sales price

THDA

Great Rate – 5.55% APR – 6.131% 360 P&I Payments @ $562.11

Great Advantage – 5.85% APR – 6.446% 360 P&I Payments @ $580.56

Great Start –6.15% APR – 6.760% 360P&I Payments @ $599.54

-based on $100,000 sales price

Rates courtesy of Sarah Suits, for more information & details call or email:

Sarah_Suits@UCBI.com 423-339-5463

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Current Interest Rates

Rates as of April 28, 2009

United Community Bank

CONVENTIONAL

30 yr fixed – 4.375% APR 4.503% 360 P&I Payments @ $998.57

15 yr fixed – 4.25% APR 4.474% 180 P&I Payments @ $1504.56

– based on $200,000 loan and excellent credit

GOVERNMENT

30 yr FHA/VA fixed – 4.75% APR 5.370 360 P&I Payments @ $1021.88

– based on $200,000 sales price

THDA

Great Rate – 5.55% APR – 6.131% 360 P&I Payments @ $562.11

Great Advantage – 5.85% APR – 6.446% 360 P&I Payments @ $580.56

Great Start –6.15% APR – 6.760% 360P&I Payments @ $599.54

-based on $100,000 sales price

Rates courtesy of Sarah Suits, for more information & details call or email:

Sarah_Suits@UCBI.com 423-339-5463

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First Time Home Buyer Alert!

THDA, Tennessee Housing Development Agency, has introduced their anticipated second mortgage program. The program is designed to be used in conjunction with the stimulus tax credit for first time home buyers. The purpose is to assist potential home owners by providing a no interest loan which will enable many first time home buyers to purchase a home with little or no cash out of pocket. THDA recommends that borrowers use their tax credit to pay the loan off, when the credit refund is received.

Some details:

The THDA second mortgage is for the down payment. It is only available with an FHA loan closed with the THDA Great Rate or THDA Great Advantage programs.

The minimum credit score is 620.

THDA’s maximum income & purchase price limits apply.

The program is offered to first time home buyers.

If the borrower decides not to repay the second mortgage with their tax refund, payments can be made. The loan is interest free until June 1, 2010. At that time the loan will convert to a 10 year term with an interest rate 1% above the first mortgage rate.

For the THDA Great Rate program, the current interest rate is 5.55%.

For the THDA Great Advantage program, the current interest rate is 5.85%.

The second mortgage can be used for downpayment or for closing cost, but is in the amount of the 3.5% FHA minimum down payment. The second mortgage can be used with other sources of closing funds that are acceptable to FHA: gift funds, seller paid costs, and of course the 2% grant from the THDA Great Advantage program.

More details on THDA programs are posted here.

If you have any questions about eligibility for this program, please contact me for more information.

Reprinted with permission from Richard Smith, American Acceptance Mortgage, Inc Chattanooga, TN (888) 474-9920 x 15

Richard’s blog

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Buying a HUD Home in TN

Buying a HUD house, i.e. a home owned by the Department of Housing and Urban Development, is generally the same as buying any other home with a few key differences.

1. HUD homes are listed for a set amount of time, usually around 10 days, before any offers will be considered. At the expiration of this bid period, all offers received from owner occupants will be considered. If an acceptable offer has been received, the winner bidder will be notified and the home is then under contract assuming that all original paperwork is received by HUD within 48 hours of notification. If no acceptable offers are received, new bids will then be reviewed on a daily basis going forward. Any offers received before midnight of a particular day are considered to have been received at the same time. Non-owner occupant offers are not considered during the initial bid period. It is a federal crime to represent yourself as an owner occupant if you do not intend to occupy the home for a period of at least two years.

2. HUD allows 3% of the purchase price to be used for closing costs. This amount is already built into the price of the home and an offer for the full asking price which requests this 3% is still considered by HUD to be a full price offer.

3. HUD uses a numeric formula to determine whether or not to accept an offer. So called “low ball” offers will never be accepted. Contact me for more information on what types of offers will usually qualify as a winning bid. HUD reduces the price of its listings on a regular basis. The amount of these price reductions is, in almost all cases, 10% of whatever the original asking price was.

4. HUD homes are usually listed as being “insured,” “insured with escrow for required FHA repairs,” or occasionally “uninsured.” What this means to the buyer is that, if you are using FHA financing, a home “insured” will not require any repairs. “Insured with escrow” will require some repairs as part of the conditions of sale. With non-HUD houses, these repairs would have to be completed prior to the closing of the sale. With HUD homes, the repair allowance amount, shown in the listing, is added to the amount of your loan and amortized into your monthly payment. After the closing of the sale, you will be required to complete these repairs and pay for them out of your pocket within a specified period of time – usually 90 days, although extensions are usually possible. Once the repairs are completed, the FHA appraiser will return to assess the repairs, making sure they have been done to FHA specifications. At that point, the homeowner will submit receipts for the work and will be reimbursed from an escrow account set up by your lender. If the total of the receipts is less than the amount in the escrow account, the remainder will be credited back to the balance of your loan. Any amounts over the escrow amount will not be reimbursed. If a home is listed as “uninsured,” FHA financing is not available. These homes generally require fairly extensive repairs and should be considered by investors or by those who are comfortable tackling relatively long term projects. ***Not all FHA lenders are able to close an FHA loan with escrow***

5. HUD requires a $1000 earnest money deposit for most sales. For lower priced homes, $500 is acceptable. This earnest money check must be in the form of certified funds.

6. HUD is currently offering “$100 down payments” for buyers utilizing FHA financing. This program is subject to change or discontinuation, but for qualified buyers, your earnest money deposit may be the only out of pocket expense to you to purchase a HUD home! Compared to the 3.5-5%+ required for almost all other purchases, this could mean the difference between being able to afford the home of your dreams now or having to wait to save up a down payment.

7. HUD provides a “Property Condition Report” which assesses the overall condition of the home with a checklist of all structural, mechanical and, to some extent, cosmetic items in the home. You can find this report on any currently listed home by clicking here and searching by the address. This report is not a substitute for your own home inspection. Problems with plumbing or electrical systems are often shown simply as not functional without specifying the source of the needed repairs.

8. HUD does not provide utilities for prospective buyers to perform their inspections.The buyer must have any needed utilities turned on in their own name and must pay for any costs to do this. If the inspection will be performed from October-March, a $75 fee is required to cover the cost of re-winterizing the home after your inspection. In addition, your may not back out of a contract without forfeiting your earnest money due to required repairs unless the repairs are: A. structural and/or mechanical; B. were not immediately evident upon a visual inspection, and C. were not listed in the property condition report.

9. HUD requires a very specific pre-approval letter with very specific information from your lender before they will return a binding contract. This letter must be submitted within 48 hours of notification of acceptance and must be from a direct lender, not a mortgage broker. It is best to use a lender (and REALTOR) who is familiar with and has experience completing HUD transactions.

10. Only registered real estate professionals may show and sell HUD homes. Contact me for more information or to view a HUD home. Click here for a list of currently available HUD homes.

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