FHA Loans- Affordability Solutions for First Time Homebuyers

“FHA” and “First Time Homebuyers” are real buzzwords as far as home buying is concerned…especially when those terms are used in combination. Many readers I’m sure have heard the “FHA loans
are great for first time homebuyers” street talk, but without detailed, supporting information as to why.

The intent of this article is to quantify the features of the FHA loan, both good and bad, and discuss the circumstances under which it’s a beneficial program to the homebuyer (either first, second, or third time homebuyer).

First, FHA stands for Federal Housing Authority, and though the phrase “FHA loan” implies otherwise, the FHA does not lend money. Rather, the FHA insures the loan. The money still comes from the
lender selected by the borrower, but the FHA now provides an insurance policy to protect the lender in the event of borrower default. With this insurance, the lender has less risk, and so guidelines are less restrictive than with conventional financing.

The reader should be aware that FHA is completely different from Fannie Mae and Freddie Mac (otherwise known as GSEs, or “Government Sponsored Entities”). There has been a lot of buzz
recently about Fannie and Freddie, but these entities, and the associated loans, are completely different than the FHA.

Recent events in the credit markets have made the FHA loan a true affordability solution for buyers. In fact, it is this author’s opinion that without the availability of the FHA loan, there would be very few people buying houses these days.

In mid-December of last year, a report began circulating amongst all the direct lenders citing “counties of declining market value” throughout the country. This report placed counties in one of 3 categories:

1) par (little or no depreciation in home
values),

2) soft (significant depreciation)

3) distressed
(extreme depreciation). Since that time, the report, and the
consequence to lending guidelines, has been revised and updated.

Where things currently stand is that lenders mandate a 5% LTV reduction for soft market, and a 10% LTV reduction for distressed markets. LTV stands for “loan-to-value”, and refers to the
maximum amount of financing (as a ratio to the sales price) the lender will allow. So, for example, if a loan program in a “par” market allowed 90% financing, that same loan program in a distressed market would only allow 80% financing.

Since most counties in major metropolitan areas are on this list, hefty down payment requirements are placed on borrowers purchasing homes in these areas. On average, this means 10% down payment requirements in par markets, 15% down payment requirements in soft markets, and 20% down payment requirements in distressed markets.

But this is where FHA loans provide a saving grace. FHA loans are not subject to this “LTV reduction”. Rather, it is only the non-government loan programs (ie Fannie Mae and Freddie Mac)
subject to this constraint. Further, FHA loans allow up to 97.75% LTV (so 2.25% down payment). On a $450,000 home in a soft market, this means the borrower only has to put down $10,125 instead of
$67,500 on a non-government loan.

The other major benefit of the FHA program is the reduced credit requirements. Whereas non-government loans require credit scores of 700+, the FHA loan accepts credit scores as low as 640.

Is there a catch to all this? Somewhat. The FHA loan carries a mandatory Mortgage Insurance Premium of 1.5% of the loan amount that must be paid at settlement; on a $400,000 loan, 1.5% would
be $6,000. This will change to 1.25-2.25%, depending on the borrower’s financial strength, when the new FHA guidelines are released July 14, 2008.

However, even with the 1.5% Mortgage Insurance Premium, the total “down payment” required from the buyer (2.25% + 1.5%= 3.75%) is less than with a non-government program (10% in a best case
scenario). True, the additional 1.5% fee is not going towards equity, like a down payment, but the total out-pocket expense is still less.

Another “catch” to the FHA loan is that, assuming the borrower does the 97.75% financing (or at least anything above 78%), the borrower will have to pay Monthly Mortgage Insurance (MMI). MMI
is similar to PMI (Private Mortgage Insurance on non-government loans). However, the MMI payment of 0.50% of the loan amount is slightly less than a PMI payment would be for the same loan amount.

But is MMI or PMI really a bad thing? Before January 2007 it was, since it was not tax deductible. But as of January 1, 2007, following the “Tax Relief and Health Care Act of 2006” which President Bush signed into law, mortgage insurance premiums are now tax deductible. Before this time, buyers wanting financing in excess of 80% got a second mortgage to avoid MMI or PMI (and 2nd mortgages, when used for a purchase, are tax deductible). But with the new tax law, the mortgage insurance premium carries the same tax benefit as a second mortgage. Thus MMI can be thought of as a “second mortgage”.

And lastly, another “catch” to the FHA loans is they do take slightly longer to process. The reason is that there is more paperwork, steps, and procedures for the lender to go through then with non-government programs. In total, this means about 10 extra calendar days to the process, so 35-40 days instead of the usual 25-30. What I tell homebuyers making an offer on a home and planning to use FHA financing is to simply request a 40-45 day escrow instead of the usual 30. In this market, with sellers eager to sell, this is never a problem.

And those are the “catches” to the FHA loan, but minor if not insignificant in this author’s opinion. Truly, the only real thorn in the “FHA rose” is the 1.5% Mortgage Insurance Premium. And for borrowers that have the assets to afford a 15%+ down payment, I tell them to use conventional financing, so they can avoid this Mortgage Insurance Premium (and also qualify for a better rate with the larger down payment).

Speaking of rate, the reader may be envisioning a monster rate for the FHA loan. But the rates are in fact quite modest. As of mid-may, wholesale rates on an FHA loan with 97.75% financing
(2.25% down) were about 6.00%, compared with 5.625% on a conventional loan with 80% financing.

Thus, with the 15-20% down payment requirements of conventional loans for houses in “areas of declining market value”, FHA loans are a great resource for home buyers unable to afford these large
down payments. And since the FHA loan limit has been raised as high as $729,750 in some areas, the applicability is even broader. Yes, there are a few “catches” to the FHA loan, but overall the pros outweigh the cons for the borrower with limited assets.

Jared Martin is President and CEO of GOTeHomeLoans, Inc., an
Upfront Mortgage Broker Firm serving CA, DC, MD, VA, and PA.
Questions and comments can be emailed to Jared at jaredm@gotehomeloans.com http://www.gotehomeloans.com/

The top secret to triumph in the Baltimore housing market as an investor; is locating bargain homes that you can “flip” rapidly for a profit.

1) Acquire good guidance from investors who are by now successful. Associates and Realtor can send you to people who have demonstrated making a profit on real estate sales.

2) What are you investment goals. Do you desire to buy a home to live in, to repair and sell, or to hold for your future?

3) Study real estate investing books and articles; go to real estate investment clubs and seminars, while keeping away from out of date infomercials junk.

4) Pick a lender with fantastic service, a first-class closing record, and fair closing costs, and get approved for mortgage and line of credits.

5) Identify the neighborhoods you like, and develop into an expert. Research real estate newspaper sections, search the web with sites like Baltimore HUD Homes or Zillow, and note down sales prices in your housing market area neighborhoods you want to buy from.

6) Talk with Realtor and gain knowledge from them, but be careful of any agreements that will limit your search for bargain properties. You’re searching for agents who know your real estate needs meticulously and will work intensely to find properties for you.

7) Find a good title company and an settlement agent try to have them for every transaction. They’ll know your needs and will quickly learn how to expedite your transactions.

Learn home remodeling techniques by views videos on the web from sites like DIY Network and DVD form your local library. Search the cost of materials, supplies, and building trades by visiting home improvement warehouses websites and speaking with remodeling professionals.

9) Put together many offers on distressed homes, including bidding on HUD Foreclosure, VA REO, asking for great terms and concessions from home sellers even ask about short sales if you think the owners are facing foreclosure. The more offers you make, the greater your chance of success.

10) Constantly have your transformation in mind. Have a plan for what will turn a doghouse into a dollhouse. It will speed turnaround time and save you money on mortgage payments

If you are facing a Baltimore home foreclosure, you are in a dangerous position. However you are not by yourself. Home appreciation on the slow down, a lot of homeowners are having difficulty hanging on to their homes.

There are plenty of real estate investors banking on the fear that foreclosure causes. You may have spotted advertisements popping all over Baltimore to help avoiding foreclosure. Are they legit?

First of all, no matter what your circumstances, you should always treat any recommendation of help with prudence. Many cons use “helping” as a way to swindle struggling Baltimore homeowners out of their equity. You could lose the money you have in your home and your home too.

Mortgage foreclosure saving come in a number of forms. You may be loaned money by the knight in shining armor in order to pay off the mortgage that is facing foreclosure. You will be asked to sign a loan agreement, but it isn’t what it seems. You are in fact handing over all of your interest in the Baltimore property to the rescuer. You are then occasionally; the homeowner knows that he is signing over the title to the property. The rescuer pays off the property and the homeowner agrees to lease the home and continue to live there until he is back on his feet financially. However the lease payments will turn out to be larger than the mortgage payments. The victim falls behind and is evicted. If the victim doesn’t fall behind, the rescuer will set the price of the home so high that it cannot be repurchased.

Many homeowners believe that if they are foreclosed on, they lose everything. Even if you lose your home to the lender, you may still receive money for it. The lender will only take any unpaid mortgage and associated fees out of the sale price of the property. The rest is your equity and will be paid to you. If you sign over your property to someone else, they will receive the proceeds from the sale.

How do you recognize and avoid scams?

1. Ignore any signs or bulletin board notes that offer foreclosure help. If they are advertising on the windshield of your car, they probably aren’t legit.

2. Don’t give out any information to anyone who contacts you wanting to help. Cons frequently check the public foreclosure notices for potential targets. They are betting that you are desperate to find a way out of your situation.

3. Read every single document, front and back. If an offer is too good to be true, it probably is. If someone says that you won’t get a dime after your home is sold, don’t put your trust in them. There is often a good chance that you will. For a few hundred dollars, you should have an attorney accompany you to read through every document that you are expected to sign. Also, watch out for documents with blanks and empty spaces.

4. Check out any company you are considering turning to with the Better Business Bureau and the state Real Estate Commission. You might even want to contact the state attorney general’s office to see if there are any open investigations of the company or its owners.