South Bend Home Loan

Monday, February 25, 2013

Missing Exemptions Still Matter!

I've had a situation come up twice in the last month that has caused loan approval problems for my buyer in both cases, so I thought it might be a good one to share with my active buyers and Realtor partners as well.  Our topic today?  The impact of missing exemptions on a mortgage approval.

First, a little history….
If you’ve been in the Indiana real estate industry for a while, you’ll remember that the homestead and mortgage exemption (aka deductions) used to take a year or more to kick in when someone bought a home.  This was a major problem for buyers wanting to buy a home that had no tax exemptions in place, because the buyer had to pay the existing higher tax bill until the county processed their ownership and dropped the bill to their lower, owner-occupant tax rate.
This rule changed a few years back and buyers were suddenly able to qualify for a homestead tax exemption immediately when buying a home. This was a HUGE win and, seeing the title company was willing to file for the homestead exemption for the buyer, the lender could now set the buyer’s mortgage payment based on the lower, projected property tax cost.   Suddenly, tons of homes with missing exemptions were back in play for buyers.  Realtors and lenders alike breathed a sigh of relief that this home-buying problem had been solved.

What you may not know, though…..
What many Realtors and buyers don’t know, though, is that the problem is only partially solved.  Yes, the buyer qualifies for the exemption right away and yes, the title company will file for it on behalf of the buyer.  There is no guarantee that the exemption will actually be put in place though.  The county may reject the application for some reason.  The paperwork could just get lost.  It happens - Alot.  Tax deductions that a buyer thought were filed are in fact still missing on their home.

Because of this, a lender will…..
Because of this, a lender will put some safeguards in the loan approval to make sure they’re still going to be ok if the exemptions don't stick when filed.  They will typically allow the buyer to set up their new mortgage payment based on the lower, projected tax rate but they will require that the buyer qualify for their loan at the higher, current tax rate.  If the buyer does not qualify for the loan with the tax bill at the higher, existing amount, the lender will decline the loan. 

How this can kill the purchase…..
This little nuance can kill a purchase if you’re not aware of it.  Given that, this is what a Realtor and buyer need to do when considering submitting an offer on a home:

1)       See how much the buyer is preapproved for
2)      Find out the property tax amount that the lender was using in the preapproval calculations
3)      If the property taxes are higher than the lender’s assumption, especially if the price of the home is close to the buyer’s ceiling, DO NOT WRITE AN OFFER ON THE HOME WITHOUT TALKING TO THE LENDER FIRST. 
Remember, it is the monthly payment that is driving the buyer’s approved amount, not the home price.  If taxes are higher, the monthly mortgage payment is higher, and they may no longer qualify.

If you have questions on this or on any other aspect of home financing, I'm happy to help.  Please drop me an email at or give me a call at 574-234-5201.

Thursday, February 14, 2013

Taking the Mystery Out of FHA Property Standards

In 1998, we bought a little bitty house for our little bitty family using FHA financing.  That was two years before I joined the mortgage industry and I had no idea what FHA was or how it would impact me.  The lender just said FHA was what we should use so – we used it.

Unfortunately, our experience was HORRIBLE.  FHA required tons of repairs and we were constantly afraid that the seller would say “Enough!”, making us lose the home we loved.  Thankfully, they stuck it out and we made it to closing, but not before I’d learned to despise all things FHA.

I’m ashamed to say that it was a full seven years before I decided to forgive FHA and propose it to my buyers.  When I finally did, I quickly learned that the FHA I knew in the 90’s was not the FHA of today.  Property standards had SIGNIFICANTLY lightened.  The home’s condition rarely kills the sale anymore, and when it does – it probably should. 

Many Realtors are still afraid of FHA though, largely due to the fear of the home not meeting FHA’s property standards.  To help you overcome that fear, let me review the Top 12 FHA Property Standards that a Realtor should know about when working with FHA home buyers.

1.       Watch for the 3 S’s – FHA is looking at the soundness, structure and safety of the home.  Is it a safe place for the buyer to live?  Would the property be marketable if they had to foreclose?  Keep your eyes open for anything that would make them answer “No” to those two questions.

2.       Think 2 Years – FHA wants to know that the operable elements in the home (furnace, water heater, etc.) should be working for at least 2 years.  If they look like they’re on the last leg, an inspector will need to say they have 2 years of life or they will need fixed or replaced.

3.       Functioning Utilities – the house has to have running hot water, a working bathroom, heat, and electricity.  The appraiser needs to verify this so if anything isn’t turned on at the time of the offer (water, electricity, gas, etc.), get it turned on before the appraiser goes out.

4.       Acceptable Attic – if there is an attic, the appraiser must look at it.  They’re looking for proper ventilation for heat/moisture from the home and no obvious leaks.  A simple ‘stick your head up there and look around’ inspection is typically enough for this.

5.       Dry & Sound Basement – if the home has a basement, the appraiser is going to be looking for potential structural problems or dampness that could indicate structural or mold issues.  Basically, look out for water or big cracks.

6.       Crawl Space – if the home has a crawl space instead, the appraiser has to look at it.  He’s primarily looking for excessive dampness/pooling water and if it’s large enough for any ductwork or plumbing located there to be serviced.

7.       Ground Grading – this tends to go along with the wet basement situation.  If the basement is wet, the appraiser will look at the grading to see if that’s the cause.  If so, re-grading will be needed to divert water away from the house.

8.       Common Safety Issues – common safety issues with FHA are broken windows, doors, or steps.  Inadequate or blocked doors can also be a concern, as can steps without handrails.  Just a couple of handrail-free steps are typically fine, but once you get to 7-8 steps or more, a handrail should be installed.

9.       The Dreaded Lead Based Paint – this is the most common FHA property issue.  For homes built before 1978, look for chipping/flaking/peeling paint and look for it EVERYWHERE including all outbuildings, decks and fences. Pay attention to windows as they seem to be a popular area for peeling paint.  While this is a frequent problem, it’s also typically easy to fix.

10.   Life of Roof – the 2 year rule applies here too.  The appraiser needs to say if the roof has 2+ years of life.  If he’s not sure, a roofer will need to inspect it.  The only exception to this is if the roof is snow covered.  In those cases, this can be waived.

11.   Septic/Well Water – Our County already requires these to be inspected so that typically takes care of this.  The well water will need to be checked for Lead, Nitrates, Nitrites and Coliforms which is more than the county minimum, so tell the water lab the buyer is going FHA.

12.   Termite Inspection – a termite inspection is not required unless the appraiser notices evidence of infestation.  If they do, it needs looked into further.

Are these the only rules, you ask?  Nope, there are others that pop up in the rare situation, but these are the common ones that you as a Realtor should look out for.  These are items that you would likely be looking out for anyhow, though, because you want to make sure you’re buyer is getting a safe and sound home.  Now you just have them in a nice list format!
To learn more about these items, FHA financing in general, or any other aspect of mortgage lending, feel free to call me at (574) 707-0196 or email me at  Good luck and Don't Fear FHA!

Friday, February 1, 2013

FHA Mortgage Insurance Increasing - Why Your Buyers Need to Buy NOW!

Do you remembering my warning in November that FHA was going to be increasing and lengthening the mortgage insurance premiums? Well....

In Mortgagee Letter 2013-04 released 1/31/13, HUD announced the following changes:
Increased Monthly Cost - right now, the typical FHA buyer is charged a 1.25% annual charge for mortgage insurance (divided by 12 and paid monthly). With this change, that rate will go to 1.35%.
No Removal of Mortgage Insurance - Currently, the typical FHA buyer can have the monthly mortgage insurance removed after 5 years if they have 22% equity by then. Effective with this change, that goes away. They will have monthly MI for the entire life of the loan (yes, all 30 years!).
These changes are significant and you want your buyers to get their FHA loan before they take effect. These changes go into effect for case numbers issued on April 1st, 2013 or later.
PLEASE NOTE - this is case number, not contract date. A case number is not issued until after your lender starts the loan process (typically 3-5 days after) so you will want to have your buyer in contract by mid-March if possible to be safe.
As you're talking to your buyers, remember that no one does FHA lending better than Ruoff. If they want to get their home purchased smoothly before these increases take effect, have them give me a call. I'd be honored to assist.