FHA Annual Mortgage Insurance Premium To Rise Quarter Of A Point

HUD this afternoon released the attached Mortgagee Letter 11-10 notifying lenders that with case numbers assigned on and after April 18, 2011 the annual premium will increase 25 basis points. The one-time upfront fee will stay at 1%. With loans in excess of 95% LTV the annual premium will move from 90 basis points to 115 basis points.

How Is A 203k Renovation Loan Different?

Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the home improvements to be finished before a long-term mortgage is made.

When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203k program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.

How the Program Can Be Used

This program can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:

To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.

To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.

To refinance existing liens secured against the subject property and rehabilitate such a dwelling.

How long does it take to process and close a 203k loan? After the loan application is taken the borrower and BNC will work together to complete a renovation loan package for the home. A home inspection of the property (we require the use of a 203k consultant for all 203k loans including streamlines), gathering bids from various vendors, developing the draw structure and agreeing upon the length of time to complete construction are all issues that have to be accomplished during this time. The renovation package can take one week to two months to complete depending upon your renovation needs. The total time to process and close a 203k will vary depending upon the time needed to process your credit and the time required to complete the renovation package. 203k loans with a renovation loan package that takes less than four weeks to complete should be in a position to close within 60 days from application (remember all renovation takes place after closing).

First Time Home Buyer Tax Credit Still Available For Some Veterans

In the fall of this year, all eyes were on our industry and the last push to close loans under the First-Time Homebuyer Tax Credit (extension deadline: September 30, 2010). Like many of you, I took a deep breath after my last closing and moved forward.

However, I let the provision for veterans and other federal employees fall by the wayside, and only last night while searching the Internet for mortgage data did I have my moment of clarity and realize that I had dropped the ball in marketing to my veteran clients. When Congress took action in November 2009 to extend the date for the First-Time Homebuyer Credit to April 2010, they also added additional language for our country's military veterans and other federal employees. The guideline reads as follows:

Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit. Thus, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2011. If a binding contract is entered into by that date, the taxpayer has until June 30, 2011, to close on the purchase. Members of the uniformed services, members of the Foreign Service and employees of the intelligence community are eligible for this special rule. It applies to any individual (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

More First-Time Homebuyer Tax Credit information can be obtained from the IRS website. Remember this is a tax credit and can be used on any loan program that best represents the veteran's needs, including VA, FHA (including the 203k), USDA and conventional.

Originating More Energy Efficient Mortgages In 2011

Under the FHA Energy Efficient Mortgage (EEM) Program, a borrower can finance into the mortgage 100 percent of the cost of eligible energy-efficient improvements, subject to certain dollar limitations. To be eligible for inclusion into the mortgage, the energy-efficient improvements must be cost-effective — i.e., the total cost of the improvements (including maintenance costs) must be less than the total present value of the energy saved over the useful life of the improvements. The cost of any improvement to the property that will increase the property's energy efficiency and that is determined to be cost-effective is eligible for financing into the mortgage.

The maximum amount of the portion of the EEM for energy is the lesser of 5% of:

• the value of the property, or
• 115% of the median area price of a single-family dwelling, or
• 150% of the conforming Freddie Mac limit (formula changed June 10, 2009-Mortgagee Letter 2009-8)

The FHA maximum loan limit for the area may be exceeded by the cost of the energy-efficient improvements. However, the entire mortgage cannot exceed 110 percent of the value of the property. The cost of the energy improvements and the estimate of the energy savings must be determined via a physical inspection of the property by a home energy rating system (HERS) or energy consultant. For a 203(k) loan, the entire cost of the HERS or energy consultant can be included in the mortgage.

Insulation and infiltration with adequate R-values or infiltration barriers in the form of:

• Insulation in ceilings, roofs, or attic floors that are over conditioned spaces, exterior walls, under floors that cover unheated areas, around slabs, around heating and cooling ducts and pipes in areas that are not conditioned, around the sill area and hot water heaters.
• Caulking and weather-stripping around window and door areas and at the sill areas.
• Special fireplace devices or features, such as combustion-air and flue dampers, and a fire door.
• Sealing of the sole plate and penetrations of the exterior shell.
• Dampers for exhaust fans.

Windows

• Double or triple-paned
• Storm windows
• Storm or insulated doors

Heating and cooling — new efficient systems may include:

• A high-efficiency oil or gas furnace with an Annual Fuel Utilization Efficiency (AFUE) rating of 80% or higher
• A high-efficiency heat pump with a Seasonal Energy Efficiency Ratio (SEER) measure of 9.0 or greater
• A Heating Seasonal Performer Factor (HSPF) of 7.0 or greater
• A central air conditioner with a SEER rating of 9.0 or greater

Heating and cooling system modifications may include:

• A flame retention oil burner
• Vent dampers for oil and gas furnaces
• Pilotless ignition for gas furnaces
• A secondary condensing heat exchanger for gas and oil furnaces

An EEM can be used with both the Streamline and a Standard 203(k) loan. One interesting combination is to use the Streamline (k) with an EEM. If your repairs will exceed the $35,000 limitation, the energy-efficient improvements can be pulled out of the 203(k) calculation (use your energy audit to identify the energy improvements). Once the 203(k) repair escrow is calculated, the energy improvements can be added back onto the loan, exceeding the $35,000 threshold if needed.

In 2011, we must be more diligent than ever about exploring different products and means by which to get deals closed. An EEM with a 203(k) or a FHA 203(b) mortgage should be in everyone's financing playbook.

Are FHA Loans Assumable?

If asked, how many real estate professionals could tell you that FHA 203(b) loans can be assumed by an owner-occupied creditworthy buyer? I bet that if a survey was taken today within the real estate community, you would be surprised to learn how many have no idea about this assumability feature. Over the past few months, our company has closed hundreds of FHA loans at 4% or better. As we stand today, those buyers have a selling niche that has not been seen in years: the assumable mortgage at a rate lower than the current market rate.


Did you know that at one time all FHA loans were non-qualifying assumptions? Pay the difference between the loan balance and the purchase price, and you were the proud owner of a new home. In the winter of 1989, FHA changed the ruling to allow only creditworthy assumptions for all loans closed after December 13 of that year.

I started in this business in the spring of 1985. Within weeks mortgage rates dropped below double digits, rose back above 10% in April/May, then returned to single digits in June, never looking back. Twenty-five years to catch what may be a market bottom in rates, and if the bottom is near, the current rate on an FHA loan becomes attractive as a future sales enhancement. It is not the sole reason to choose an FHA loan over another product, but now is the time to add it to your book of knowledge or in some cases dust off an old page that will set you apart from your peers.

When is an FHA Consultant's Feasiblity Study appropriate?

This week I worked a couple of loans for which an FHA Consultant's Feasibility Study was appropriate. I found myself wondering why I wasn't promoting the use of an FHA Feasibility Study more often.

We normally think of an FHA Consultant handling a full work write-up only when a home is under contract and a loan application has been accepted by a lender. However, a feasibility study can be conducted as a preliminary step to the full write-up.

The study is usually a two- to three-page summary of the mandatory repairs and an estimated cost needed to bring the home into FHA compliance. Reports cost between $150 and $300, depending on location and the type of structure being purchased or refinanced. (For example, a study on a 1,300 sq. ft. ranch-style home in Kansas City costs $150, while a study on a three-story, 3,500 sq. ft., brownstone in Brooklyn costs $250-$300). The consultant will usually allow the cost of the feasibility study to be credited to the cost of the full work write-up if the project continues.

When might you use a feasibility study?

A study is helpful if you are planning to refinance your home and are not sure whether including renovation items would be cost-effective or how repairs might affect your home's value. Every week I speak to homeowners who contact me for a standard FHA refi, but after a short discussion on the benefits of the (k), many decide that it's time to catch up on their home's deferred maintenance. A feasibility study is a great way for current homeowners to identify both mandatory and wish-list items for inclusion in their new loan. The study is also a good opportunity to speak with the consultant if your renovation plans include a room addition or other structural changes to your property.

A study is helpful if you are looking at a distressed property and want to identify the mandatory FHA repair items, as my North Carolina buyer is doing presently. In conjunction with putting a contract on a property, the buyer asked a local contractor and friend to walk through the home with him. The contractor identified numerous foundation and grading issues that needed to be addressed. The cost of those repairs prompted the borrower to rethink his purchase. We ordered a feasibility study on Friday so the borrower can identify the mandatory items and cost before he proceeds with this transaction. In this situation, the feasibility study is a cost-effective way to assist the borrower in making timely decisions concerning his purchase.

A study is a great sales tool for sellers to use in moving their property. Today's market is flooded with foreclosures, short sales, and homes with deferred maintenance issues, so it only makes sense to identify the mandatory items and use that information in a positive manner to sell your home.

A study is a great tool to use with a Streamline 203(k). Since I conduct business nationwide, I use an FHA Consultant on the majority of my 203(k) loans. A consultant's involvement is waived on one- or two-item loans (such as a roof, siding, a deck). But when I identify multiple repairs that can be made at a relatively low cost, I favor a feasibility study instead of a complete work write-up, in order to keep the consultant's cost in line with the repairs. Such was the case with my second situation, here in Overland Park: The foundation needed epoxy, the bathroom finished, the chimney tuck pointed, the electrical box needed review, GFIs in kitchen, holes in drywall — total repairs under $5,000.00. In this instance, the consultant need spend no more than an hour on site for a feasibility study, as opposed to two hours for a full write-up.

Information is king when you are working on a 203(k), and a feasibility study is a cost-effective way to gather essential information for your project.

FHA to provide free FHA 203k Webinar

October 19, 2010 – FHA 203(k) Webinar. This FREE Webinar includes an overview on how to combine a 203k, rehabilitation mortgage with a purchase or refinance transaction in order to be eligible for FHA mortgage insurance. This training will benefit lenders and real estate agents alike. The 203k program helps maximize a property's potential in this current housing market. Registration required, no fee. ALL TIMES ARE MDT. More info at: http://www.hud.gov/emarc/index.cfm?fuseaction=emar.registerEvent&eventId=653&update=N