Why FHA Buyers Should Buy Now

FHA loans are on the cusp of some significant changes that will impact 2013’s FHA buyers.  If you are a FHA home buyer or if you are a Realtor working with FHA home buyers, this is information you need.

First – Some Background

Most of us know little about FHA, so let’s start with some basic history.  The FHA was formed by congressional decree in 1934 to help improve the housing market.  Back then, buying a home was tough.  Mortgage approvals typically required a down payment of 50 percent and loans would normally balloon within 5 years, requiring the buyer to pay them in full or try to refinance.

The creation of the Federal Housing Administration changed all that.  FHA set minimum loan approval standards and, if a bank would make a loan subject to those standards, FHA provided mortgage default insurance on that loan.  This allowed banks to shift the risk of default off of themselves which made them much more willing to extend mortgage loans.

Even though Congress created FHA, FHA wasn’t funded by tax dollars.  Instead, FHA created a mortgage insurance system in which they charged insurance premiums to the home buyer and used that money to self-fund their costs and losses.  This system was put in place almost 80 years ago and, even with the challenges our housing market has faced, FHA still operates entirely from the insurance premium income today.

Fast Forward to Today

While FHA has been able to continue covering its costs with insurance premiums, it’s not nearly as solvent as it should be.  The FHA is expected to keep $2 in reserves for every $100 insured. As of November 2011, though, it held just 24 cents per $100 insured.  To try and  strengthen the reserves level, the FHA has raised its mortgage insurance premiums 4 times in the last 4 years.  Still, the solvency of FHA is a high concern for our economy as a whole.

Just how much of a concern is it?  It worries our elected officials so much that a whopping 98% of the House of Representatives voted to pass the Federal Housing Administration Fiscal Solvency Act of 2012 this fall.  This act, along with some additional changes being implemented by HUD, will impact FHA buyers in 2013.

What to expect in 2013

One key thing included in the FHA Fiscal Solvency Act is the permission for HUD to raise the monthly mortgage insurance premiums (MIP) being charged to buyers.  Currently, monthly MIP is set at 1.25% of the original loan amount per year.  For example, let’s say a buyer has a $100,000 FHA loan.  That buyer will pay $1,250 per year in MIP ($100,000 x 0.0125) which works out to $104.17 per month. 

The Solvency Act grants HUD permission to raise the annual MIP up to 2.05% if needed.  This would increase the MIP for our example above to $170.83 per month, which is quite a chunk on  a loan amount of only $100,000. 

While this is disturbing, even more disturbing is HUDs plans to no longer allow buyers to remove the annual MIP once their balance hits a certain level.  Currently, monthly MIP goes away once the balance hits 78% of the original price or 5 years has passed, whichever comes last.  HUD will be canceling this provision, meaning that mortgage insurance will stay on the loan as long as it exists, regardless of the balance.  MIP levels stay the same each month, even as the balance declines, so our $100,000 home buyer could still be paying $170.83/month in MIP even when the balance is down to $10,000 or less if they don’t pay the loan off or refinance it into a new loan.

What You Need to Do

While we don’t know exactly when these changes will take place, the expectation is early 2013.  Given this, a FHA buyer should do one of two things:

·        Become Conventional Eligible – FHA buyers typically use FHA financing because they need the flexibility it offers with credit history, income or down payment.  If you need it for one of these reasons, work with your lender to see if you can strengthen that weak area and make yourself eligible for conventional financing.  Conventional mortgage insurance is significantly lower and can typically be removed once you have 20% equity in your home.

·        Buy Now – if your situation is such that a conventional mortgage will not work for you, start home shopping in earnest.  If at all possible, you will want to close on your FHA loan before these changes are put in place.

If You Want to Know More

These changes look severe and, frankly, they are, but they won’t stop buyers from buying homes with FHA financing.  They will hopefully encourage buyers to explore their options more deeply, though, and not go with FHA just because it’s the first thing their lender suggests.

If you want to know more about the FHA vs. Conventional option for your unique situation, I can help you.  Feel free to give me a call at 574-234-5201, email me at lori.hiscock@ruoff.com or visit my website at www.SouthBendHomeLoan.com. 

You Have To Feed The Puppy

About two years ago, my daughter Jessica got puppy fever.  I blame it on our next door neighbor who got an adorable little black cockapoo.  It yipped a lot, but man was that dog cute.

But I digress…So Jessica had a case of puppy fever, and it was bad.  She knew the family rule though – if you want it, you save for it and buy it with your own money – so she did just that.  Week by week, she set aside her allowance until she finally had just enough money to cover the adoption fee for a rescue dog.  With her hard earned savings in a little Ziploc bag, she came to us with overflowing happiness believing that now now NOW she could finally have the doggie she wanted so much.

It’s moments like that that make my heart swell and break all at once.  I was so proud of her for working so hard for her goal and saving every penny she had to get that puppy, but I still had to ask her an important question “And how are you going to feed the puppy?”

Jessica’s face crashed in a second and tears started to bubble.  She’d worked for weeks and weeks to save up the money to get the puppy, but she hadn’t given any thought to taking care of it once she had it.  Seeing that realization hit her, I was hit with a realization of my own - My 10 year old daughter was very similar to my first time buyers.

I’ve worked with hundreds of first-time homebuyers through the years.  Much like my Jessica, they get incredibly motivated and excited about obtaining their goal. They want a home of their own and they work feverishly to save the money needed to make that dream come true.  Most of the time, though, they don’t think about the cost of actually owning the home beyond the basic mortgage payment.  They forget that they will need to ‘feed the puppy’. 

Being a good mom means asking the question, and so does being a good mortgage lender.  When I see my clients having to stretch so far just to get into the home, I have to raise the question of whether they will be able to take care of the home once they own it.  Just like puppies need food, homes need maintenance – shingles instead of shots, filters instead of flea collars - but additional ongoing costs, none-the-less.

Knowing this, I raise the question.  Being a good mom or mortgage lender doesn’t stop at asking the question though.  I also need to help build the answer.  Jessica and I sat down and figured out additional chores she could do to contribute to the cost of the puppy's maintenance.  Likewise, my homebuyers and I talk about the importance of a home maintenance fund and a home improvement fund.  We talk about budgeting and buying below their ceiling so that there is room in the family finances to take care of their home after they own it.

After we worked out a plan, Jessica got her puppy.  Cotton has brought a great deal of joy to our household in the two years since and, for the most part, Jessica has continued doing what she committed to do to contribute to the care of her dog. 

As for my first time buyers?  I can only pray that they also stick to the budgetary commitments they made to themselves so that they can care for their home and enjoy the pleasures of it for years to come.  Feed the puppy, take care of the home, and one can reap the joys for a lifetime. 

The Blessing of a Cut Appraisal

When the appraisal on a home purchase comes in lower than the agreed on price, it’s a very stressful situation for a home buyer.   That was definitely the case for Charlotte, whose appraisal came in $4,000 below the $117,000 price on the condo she was buying this fall. 

I personally wasn’t concerned in Charlotte’s case though.  The $113,000 appraised value that we received actually looked really good to me.  There had been several condominium sales in that development this year and the vast majority had sold for $105,000-$107,000.  The units were all very similar so Charlotte’s Realtor and I both expected the seller to see that it could have been a lot worse and to renegotiate with her on the price.

You can never predict what people might do, though, and this seller did the opposite of what we’d all expected.  He dug in his heels and refused to negotiate so, with a heavy heart, Charlotte walked away from the purchase of her new home. 

There’s no doubt that Charlotte was disappointed. She really liked that condo.  Even worse, she had already sold her previous home and was temporarily staying with some family.  This temporary situation was only supposed to last for a week or two, but now that the purchase had fallen apart, it looked like it could go on indefinitely.  After years of having her own space, living as a guest was taking a toll on Charlotte.

Luckily for her, Charlotte had partnered with Bethany Rowe, an amazing Realtor with At Home Realty Group.  Bethany wasn’t about to give up because the going got tough, and she immediately hit the streets to find Charlotte another home.  In a matter of weeks she found and negotiated a purchase on another wonderful condominium for Charlotte in the same development as the previous one but this one cost $14,000 less than the first one.

So the moral of the story?  Sometimes a home buying disappointment is a blessing in disguise.  Charlotte was definitely discouraged when the initial purchase fell apart, but five weeks later she was able to close on the purchase of the RIGHT home for her, at the right price.  Thanks to the hard work of her excellent Realtor (and me, for getting the second purchase closed super-fast), Charlotte is now happily living in her new home that she purchased at a great great price.  Congratulations Charlotte!

The Pay It Now Plan



Yesterday I gave some advice to a buyer that I thought might be beneficial to more than just that one client.  It's the "Pay It Now" approach to preparing for a home purchase.  To learn more about how this could help you (or your buyers) to better prepare for home ownership, enjoy this video blog:

 



The Realtor Who Cared Enough to Say No

Let me just start by saying that I really like Realtors.  In general, they are a caring, funny, hard -working bunch of entrepreneurs, so – yea - my kind of people. 

Every now and then, though, a Realtor and I butt heads on what a buyer’s price range should be.  I’ve been known to encourage buyers to lower the price range for the home they buy even when they are technically eligible to buy at a higher price.  Not all home buyers really understand their budgets, so when I review their financial situation with them, I talk to them about how wise and realistic it is for them to buy at the very top of their ability.  Realtors don’t always think I should be offering this advice, and I’ve been scolded a few times for it.

Which brings me to my story – Last week I was talking to some first time buyers.  They were eager to buy a home at the top of their price range.  They are financially able to get a loan approved at that level but, as I reviewed their information, I didn’t feel that they should.  They were relying on her part time income and his overtime to make it work, but he’s about to be changing to a new shift that may not have as much overtime and she’s due to have their second child so her part time work may slow down.  While they could make the payments now, I felt that they may not be able to as easily in the future so I told them that.  I asked them to consider buying a lower priced home that gave them more breathing room, and they said they’d give it thought.

A few hours later, my phone rang.  Caller ID said it was their Realtor, who is a gentleman I haven’t worked with a lot.  I’ll admit it – I was nervous as I picked the phone up.  I started bracing myself for him to yell at me about talking his buyers into a cheaper home and wasting his time seeing he’d already been showing them some at the higher price range. 

This Realtor didn’t yell at me though.  He didn’t complain about wasted time or reprimand me about overstepping my role.  Instead, he thanked me.  He said he had been worried that they might be putting themselves into a tight spot and he never wanted that for his clients.  He appreciated me suggesting limits and would support my suggestions when showing them homes.  If they asked to see a home above what I felt was wise, he said “I’ll just tell them no”.

After we hung up the phone, I just stared at it for a minute in shock and delight.  We’ve all heard bad stories about Realtors (and mortgage lenders) who aren’t looking out for the buyer’s best interest.  Here’s proof that some -  likely most – really do.  Thank you, Mr. Realtor, for caring enough to say no.

The Best of Both Worlds – Using a Gift with Conventional Financing

If you were to ask a random sampling of mortgage lenders if you could buy a home using conventional financing and a down payment that was a gift from a family member, they’d probably all tell you “No”. 

Guess what?  THEY’RE WRONG.

When structured right, a qualified home buyer can purchase a home with the more advantageous conventional financing terms and gifted down payment money.

Why Would You Want Conventional Financing?

FHA financing is typically the route lenders use when a buyer is using gift funds for a down payment.  Conventional financing is often a better financial option, though, for the following reasons:

• Lower fees – FHA has a 1.75% upfront mortgage insurance premium that is typically added into the loan balance. This is a fee that you don’t have to pay with conventional financing.
• Lower monthly Mortgage Insurance (MI) – mortgage insurance is currently at 1.25% annually for FHA loans.  Conventional loan MI rates vary depending on credit score, down payment, etc.  The conventional MI is very likely going to be less than the FHA MI, often significantly less.
• Lighter home standards – FHA has tighter requirements on the condition of the home.  In our area, interior or exterior peeling paint often becomes a problem with FHA financing.  Conventional financing doesn’t have the same requirements, so some homes will be eligible with conventional financing that couldn’t be purchased with FHA financing.
• Faster removal of Mortgage Insurance – FHA requires MI to stay on a loan for a minimum of 5 years.  Conventional financing can normally remove it faster (typically 2 year minimum).

Interest rates between conventional loans and FHA loans vary, so sometimes FHA is still a good option just because the interest rate is better.  Given the lower closing costs, mortgage insurance and property requirements, though, conventional financing is often a better option.

So….Why would the other Mortgage Lenders Say “No”?

That’s a great question.  They would likely say no because they just can’t do this.  Many lenders are locked in with one MI company and the MI company is the one that says you can’t have the down payment gifted.  Ruoff Home Mortgage shops your MI to several different companies, though, to get you the best rate and the best terms.  One of the many MI companies out there will allow gifted down payments.  If you need this option, that’s the company we’d use.  Our competitors either won’t, can’t, or don’t even realize this option exists.  In any of those cases, they’re not the lender for you.  Ruoff Home Mortgage is.

4 Things a First-Time Buyer Should Know

If you’re considering a home purchase, here are four things you should know upfront to help you get started on the process:

1.      Focus on your Credit Score – Your credit score is a critical part of your mortgage approval, so you’ll want to have it reviewed early on in the process.  A person who isn’t credit readily initially can often change that with time.  Having a knowledgeable, qualified mortgage lender review your credit report is absolutely mandatory early on for any hopefully home buyer.

2.      It’s not WHAT you do, it’s THAT you do – buyers often worry that they can’t get a mortgage because they recently started a new job or finished school.  The old myth that you need to be on a job for 2 years to get a mortgage isn’t true.  Banks don’t care WHAT you’ve been doing for the last 2 years.  They care THAT you’ve been doing for the last 2 years.  Have you been employed in some form?  Have you been in school?  The mortgage lender will typically rely on your current income from your current job – even if you’ve only recently started it – as long as you can show them that you’ve been actively working or learning in some form for the last 2 years.

 3.      Try to have a Down Payment – Do you need to have a down payment to buy a home?  Probably not.  Most first time home buyers can qualify for a ‘no down payment’ option.  Even though these options are there, you should still try to save up a 5% down payment if you can.  Your closing costs will be cheaper, your interest rate will likely be lower and your monthly PMI will typically be less.

       4.      If you truly need down payment help, explore USDA – If saving up a down payment just isn’t going to work for you, explore USDA financing.   It offers 100% financing to eligible buyers, has good interest rates and very low PMI.  There is a financing fee that is rolled into your loan, so you’ll owe more when you pay the home off, but – on all other fronts – it’s a low cost 100% financing option.  The biggest drawback is that you can only use this loan type when buying a home in an area considered rural, but that area is larger than many think, so it’s worth exploring as you home shop.

Credit score, income and down payment are the three main things that a lender will focus on when approving your mortgage.  To learn more about these and other important aspects of home buying, visit www.SouthBendHomeLoan.com and www.youtube.com/SouthBendHomeLoan.