The Cost to Obtain FHA Mortgages Expected To Increase

Expect to hear from the Federal Housing Administration (FHA) today, regarding rate and fee increases associated with obtaining FHA insured mortgages.  According to a Wall Street Journal article, the increased borrower fees are necessary to avoid the future need for an FHA bailout.  In recent years, FHA insured mortgages made up about 5% of all mortgages, in our market.  The economic crisis, increased difficulty in obtaining conventional financing and low down payment requirements has boosted the ratio of FHA insured mortgages from 5% to 40%, in our market.

According to the WSJ article, the upfront insurance premium charged on all FHA mortgages is expected to increase from 1.75% to 2.25%.  The additional fees are meant to ensure a safe operating level of required capital reserves.   The FHA doesn’t make mortgage loans; it insures the mortgage lenders against buyer default.  Capital reserves are in place to pay the lenders should the homeowner default.  When this happens, the homes are then taken back by the FHA and sold as HUD owned properties.

Additionally, there has been mention for a few months that the current 3.5% down payment requirement will also increase.  This low down payment requirement has been a significant reason for the increased popularity of FHA insured mortgages.  Industry analysts have been pushing to raise the down payment requirement to 5%.  The intent is that homeowners with greater equity and interest in the property will be less likely to walk away or lose the asset.

Also, look to see seller paid contributions reduced from the current 6% to 3% of sales price.  It is believed that higher seller paid contributions have led to mortgages greater than the home’s value.  There are much tighter guidelines on loan to value ratios, and for good reason.

Should these changes become reality, it will likely push or delay some from entering the housing market.  Is that a bad thing?  It’s probably long overdue.  It’s time to get back to sensible lending requirements and FHA insured mortgages should be no exception.  It will be a very long time before we see the days of little or no down payment required loans, if ever.  We’re looking at the consequences of those products, right now.  Conventional wisdom shows that when one has had to work hard to achieve something, it’s usually far more rewarding.  So, work hard, save money and when you make that purchase, you’ll be happy you did.

Will FHA Announcement Bring About Quicker Sale Of Foreclosed Properties?

HouseAccording to a January 15th HUD press release, the rule requiring sellers to hold title to real property for at least 90 days prior to sale (also known as title seasoning) has been temporarily waived, with very strict guidelines and conditions.  This temporary waiver has tremendous positive implications for Gwinnett real estate and home values.

What is Title Seasoning?

The process of a seller holding title to real property for 90 days before another sale or title transfer takes place is commonly referred to as title seasoning.  This FHA requirement was brought about to ward off mortgage fraud committed through illegal house flipping.  Illegal house flipping occurs when a property is bought and sold (often 2 or 3 times in a row) quickly, before title and security deeds are properly recorded with the intent of defrauding lenders, sellers and purchasers.  Unfortunately, while this solution has helped to stop the criminals engaging in mortgage fraud, it has penalized legitimate investors making it extremely difficult for them to help bring about quicker market recovery.

Why is this temporary waiver important?

Until now, if an investor purchased a property – let’s say “on the courthouse steps”, improved it with repairs and/or renovations, and then marketed it for sale, that property would not be eligible for FHA financing until the 91st day, when title seasoning had taken place.  Since our current market is so heavily dependent upon buyer’s using FHA financing, this process significantly limited an already small pool of potential buyers.  In the absence of FHA financing, only buyers with cash or conventional loans are qualified to purchase these properties.  Furthermore, not all conventional loans allow purchase prior to completion of the title seasoning period.  These challenges typically bring about longer market times and lower sales prices.  Since investors and neighborhoods alike are placed at greater risk the longer a property sits vacant, it is in everyone’s best interest to bring about a quick market sale.  Greater risk and difficulty means fewer investors will be willing or able to make a difference.  The FHA knows that being able to return rehabilitated properties back to market for quick sale has been critical to successful Neighborhood Stabilization Programs.  This is why these programs were granted waivers in 2009.

Why do we need investors?  House for sale

Right now, we need investors to lead the way in market recovery by acquiring distressed properties in poor condition and rehabilitating those properties to become market ready.  Though many potential homebuyers start out looking for “the deal” in foreclosures, most often the scope of work needed far exceeds the skill set and financial resources of the typical homebuyer.  Investors have the financial resources, contracting knowledge and relationships to restore these properties back to life.  In most cases, this is accomplished in far less than 90 days, and the properties are returned to market at fair and competitive prices quickly attracting buyers.  This is a win/win situation for the investor, buyer and community as it takes a distressed property off the market, provides good quality and affordable housing helping to preserve neighborhood value.  The 91 day title seasoning period brings about increased risk to both investors and neighborhoods by delaying sale and occupancy of these rehabilitated properties.  It also denies many buyers the opportunity of purchasing a quality product at a reasonable price, as FHA loans are not available during this time.  Vacant homes increase the risk to the seller and the neighborhoods in which they are located by providing greater opportunity for crime and vandalism.  Since FHA financing has increased from 5% of all market sales to 40% of all market sales, it is important for that pool of buyers to have the opportunity to purchase these homes.

FHA/HUD Guidelines for waiver

The following is an excerpt of the guidelines issued by FHA.  The title seasoning waiver begins February 1st, 2010 and is planned to end in 2011.  In order to preserve the integrity of the 90 day seasoning requirement and prevent illegal flipping, conditions and guidelines have been provided:

  1. All sales are to be arms-length transactions.  There should be no identity of interest between buyer, seller or other parties participating in the transaction.
    1. Sellers must hold title to the property
    2. No pattern of previous flipping of property (multiple title transfers in the last `12 months).
    3. Property must be marketed open and fairly in MLS, Auction, for sale by owner and or developer marketing (contract assignments are likely to be a red flag).
  2. Sale prices of 20% or more over and above seller’s acquisition cost will require certain actions by the lender:
    1. Appraisal verifying that the increased price is supported due to the seller’s completion of sufficient legitimate repair and rehabilitation work to the property.
    2. Inspections may be ordered by lender and provided to buyer, prior to closing.

This is a short recap of the FHA guidelines.  Read the full text using the link above.

House soldGwinnett has recently seen increased sales in markets up to $200k.  This increase has been brought about by low housing prices, historically low mortgage rates, the 1st time homebuyer tax credit and investors who are purchasing, rehabilitating and selling distressed properties on open market.  Mortgage rates are expected to rise in 2010, and we can’t ride our way out of this market on the backs of first time homebuyers alone.  We need investors to purchase homes in disrepair and make them market ready to stabilize home values and provide affordable, desirable housing options.  I am incredibly hopeful that this waiver will sustain our positive momentum while still providing reasonable protection against future mortgage fraud.

Don’t Miss This 1st Time Homebuyer Workshop – January 12th, Duluth, GA

IS THIS THE RIGHT TIME TO BUY YOUR FIRST HOME?
Attend this FREE, NO OBLIGATION seminar and get the facts about…

1st Time Homebuyer's Meetup Group
Come Learn With Our Meetup Group!
  • The $8,000 tax credit
  •  Purchasing HUD Homes, Short Sales and Foreclosures
  • What You Should and Should NOT Do When Shopping For A Home Loan
  • Mortgage Options – FHA, Conventional, Fixed, VA, etc…
  • How much money do I really need to buy a home?
  • How Much Home Can You Afford?
  • Long Term Benefits and Responsible Homeownership
  • Why do Attorney’s close loans in Georgia?
  • Title Insurance
  • Neighborhood Stabilization Programs
  • and much more…

The housing industry is changing daily.
Don’t miss this opportunity to get your answers to your questions from a Real Estate Agent and Attorney and a Mortgage Loan Officer. 

Only 20 spaces are available, and RSVP is required.
Tuesday,  January 12th, 6:30pm – 7:30pm 
Please visit the 1st Time Homebuyer’s Meetup group website to register.
Address and details available at the Meetup group website.

Our goal is to educate you! We look forward to seeing you there!