VA Loans – The Flax Seed of Mortgage Lending

I’ve hit an age where I’m paying more attention to health-related issues than I used to.  I even bought a subscription to Prevention Magazines and find myself reading it cover to cover each month.  The articles often overwhelm me, though, and I end up doing nothing because I don’t know what steps to take.

Take flax seed, for example.  They say it’s some kind of wonder food that can fight heart disease, diabetes and cancer, but how am I supposed to actually use it?  Ground or un-ground?  Baked or stirred in?  Always with dairy, never with dairy?  It’s so easy to use a good thing wrong and, in the process, cancel out the benefit of that good thing.

When it comes to mortgage financing, I find that Realtors feel the same type anxiety about some very good things, like VA lending.  They know it’s probably great for their clients, but they don’t know enough about it to feel like they won’t mess it up.

To help take the fear away, let me put on my ‘Loan Doctor’ hat and explain the uses, benefits and, yes – potential side effects - of the VA Mortgage.

What is a VA Mortgage?

A VA mortgage is a loan made by a mortgage lender that is guaranteed by the Department of Veteran Affairs.  The borrower must be an eligible Veteran or the surviving spouse of an eligible Veteran, and they must qualify for the loan with an acceptable credit history, income and employment history, just like with other loan types.

Why is a VA Mortgage Good?

A  VA mortgage is not just good – it’s GREAT.  It offers 100% financing and lets the seller pay all of the closing costs and prepaid items as long as they don’t exceed 4% of the price of the home.  This lets most Veterans purchase a home with no personal investment needed.

VA mortgages normally have great interest rates (lower than conventional rates currently) and there is no monthly mortgage insurance charged on the loan.  This piece alone is HUGE and can save the Veteran a ton of money over time.  VA does charge a funding fee that is rolled into the loan, but if the Veteran has at least 10% VA disability, that fee can be waived. 

What are the potential ‘Side Effects’?

The problems that occur with VA financing can typically be avoided with some upfront education.  For example, VA requires that the home meet some minimum property requirements.  Much like with FHA financing, these requirements are there to protect the buyer.  Full detail on VA’s requirements can be found here:  VA Minimum Property Requirements.  In a nutshell, if a Realtor looks at a home from the standpoint of ‘is it safe, structurally sound and sanitary?’ they will likely be able to rule most homes in or out without studying VA’s full code.  

VA also has some unique rules on which costs it will allow the buyer to pay.  VA will not allow the buyer to pay the title company’s settlement/closing fees.  A pest inspection is also required with all VA loan and the buyer can’t pay for it.  The Realtor should write it into the purchase agreement upfront that these items will be paid by the seller.  Realtor office administration fees also can’t be charged on VA loans, so the Realtor should make sure their broker is aware of this.

The Veteran’s Administration is also going to be very exact on the paperwork, and they typically require all documentation related to the purchase to match the Veteran’s Certificate of Release or Discharge from Active Duty, known as the DD214.  This form is used by the lender to confirm that the buyer is eligible for VA Financing.  It’s wise for the Realtor to ask the buyer how his/her name appears on the DD214 before writing the purchase agreement and then use that full DD214 name on all paperwork.

So, summarizing, the Realtor should 1) look the property over carefully, to make sure it would be safe, sound and sanitary for the buyer; 2) get the full name from the Veteran’s DD214 to use on the purchase agreement; and 3) write that the seller will pay for the title company’s closing fees and pest inspection as a part of the initial offer.  Doing this will avoid the most common ‘side effects’ of VA financing. 

Time to Try the Flax

Definitely, there are some unique features of VA financing.  A little education goes a long way, though, and those unique items don’t need to be a problem for you or your buyer. 

Print out this post and keep it where you can find it when a VA buyer comes calling.  Better yet, put my name and number in your phone (Lori Hiscock, 574-707-0196) and call me when buyers mention their military service.  I can walk you and your clients through the process step by step so that they can benefit from all of the great features offered by the VA mortgage.

Speaking of benefiting from great features…it’s time to take some action on my part too.  I’m off to my local health food store to get some flax seed.  Wish me luck!

The Case for Concessions

I had a Realtor text me today to ask if it was in her buyer’s best interest to request financial concessions from the seller.  The poor lady was overwhelmed, I’m sure, when I sent her back a 5 paragraph text full of the pros and cons.  It was a great question though, and one that should be discussed so – let’s discuss!

What are Concessions?

First, let me explain what I’m meaning by concessions.  In most home buying scenarios, the buyer can ask the seller to pay certain buyer cost on the buyer’s behalf such as their closing costs or prepaid items.  When the seller does this, it is called a seller concession.

Why would a buyer want the seller to do this?

Most buyers ask for this simply because it’s needed.  They have the money for their down payment but they do not have enough savings to cover their closing costs and prepaid items as well.  By asking the seller to pay those for them, they don’t have to wait to buy a home until they can save up that additional amount.

Sometimes buyers do have enough money saved up, but they would rather use that money to hit a higher down payment threshold.  When a buyer is using conventional financing, they will have a monthly charge added to their payment for private mortgage insurance (PMI) if they are not putting 20% down.  The cost for this insurance drops with every 5% increment hit for down payment, meaning it’s one rate at 5% down, cheaper at 10%, cheaper still at 15% and gone at 20%. 

If a buyer has enough money to put 8% down, for example,  and pay their own closing costs or to put 10% down and have the seller pay them, they may choose to have the seller pay them so that they hit 10% and drop the cost for their PMI.  This will reduce their monthly mortgage payment and save them money. 

Why wouldn’t a buyer want the seller to do this?                                                                   

If the seller pays these costs on behalf of the buyer, they are going to have to charge more for the house to cover that additional cost and still make the money off of the sale that they want.  That means that the buyer is typically going to pay more for the home and, subsequently, borrow more on their mortgage because the seller is paying this for them. 

How could this impact the buyer’s loan approval?

There is one primary way that this can cause a problem with the loan and that’s with the appraisal.  The appraiser’s job is to decide if the buyer is paying a fair market value for the home they are buying.  If they are paying more than the true value of the home because of the concessions, the appraiser will tell the lender the actual market value of the home.  The lender will base their loan approval off of that true, lower market value which means the seller will have to drop the price or the buyer will have to bring more money for the buyer to be able to get the loan.

While the appraisal coming back low is possible, this doesn’t happen most of the time.  Most home prices are within a fair market range even with those concessions added in.  A cut appraisal is a risk though.  Especially when buying a home in an area where the recent sale prices have been all very close to each other, paying more than that average because of these concessions can cause problems with getting the loan.

If the buyer wants the concessions, what should they know to use them right?

First, the buyer needs to remember to ask for this seller assistance at the very beginning with their offer.  The Realtor will likely ask the buyer if they want seller concessions, but if the Realtor doesn’t, the buyer needs to speak up and request it upfront.  Once the price is negotiated with the seller, it is very hard to go back and adjust for this.

Second, the buyer needs to know that there are limits to how much they can ask for.  Different types of loans set different percentage caps.  Currently, FHA will allow the seller to contribute up to 6% of the price, VA will allow up to 4% of the price, conventional will allow up to 3% and USDA has no cap.  These caps normally allow enough room to cover everything, but lower priced homes may not allow the seller to pay for all costs because of these limits.   If that’s the case, the buyer will need to be prepared to cover the remaining amount needed themself.

What should a Realtor know about seller concessions?

One thing that many Realtors don’t realize is how the concessions impact the sales data used by the appraiser.  When a Realtor pulls the recent sales information to help a buyer make an offer, they typically use the gross sales prices of those recent sales to determine a good market value.  The appraiser, however, will use the gross sales price MINUS the seller concessions to determine the value.  That means that, if the home next door sold for $75,000 and the seller contributed $3,000 towards closing costs, the appraiser will view that home as a $72,000 sale.  The Realtor should do the same thing when helping the buyer decide what to offer on the home they want.

So…what’s the final answer?  Are concessions good or bad?

As it is with most things in life, there is no ‘one size fits all’ answer.  Whether a buyer should request concession or not depends on the buyer’s situation.  Do they need the help or will requesting this save the buyer money on PMI?  Is the home’s value high enough to cover the slightly higher price caused by it?  If so, then it likely makes sense to request seller concessions.  If the answer to any of these is no, though, the buyer is likely best trying to pay for those costs on their own.

 

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.