Expert Real Estate Answers in Virginia, Maryland and Washington, DC

New FHA Guidelines Coming

posted on Friday, August 22nd, 2008 at 11:54 am

This information is courtesy of the Michael Farrell Team of Countrywide:

New FHA Minimum Cash Investment Requirements on the Horizon
A mortgage letter on the new FHA cash investment requirement (not less than 3.5%, currently 3.0%) is expected in the next 30- 60 days. FHA has indicated that the trigger for this change will be case numbers assigned on or after January 1.

New Permanent Loan Limits
The FHA Stimulus Bill implemented in March temporarily put in place higher FHA loan limits until December 31. Mortgagee Letter 2008-06 states that the limits are effective for mortgages endorsed for insurance on or after the date of the mortgagee letter and remain in effect for those mortgages for which the mortgagee has issued credit approval for the borrower on or before December 31, 2008.

As of January 1, new limits will be put in place and in many areas the new limits will be lower than those currently in effect.

Comparison:
Calculation process for high cost areas in the Stimulus bill that expires on December 31.
Area median sales price multiplied by 125% = maximum mortgage amount (i.e. mortgage limit in effect)
Calculation process for high cost areas beginning January 1.
Area median sales price multiplied by 115% = maximum loan amount

Areas with mortgage limits at the current maximum of $729,750, effective January 1, the maximum loan limit is $625,500
Areas with mortgage limits below $729,750 and above $271,050, limits lowered on January 1.
Example of impact:
Atlanta         current area sales price                $277,000
Current Mortgage Limit                            $346,250 ($277,000 x 125% = $346,250)
January 1, 2009 Limit                             $318,559 ($277,000 x 115% = $318,550)
Area at the current base loan limit of $271,050. (65% of base GSE limit of $417,000) No change to the base loan amount is expected.

Implementation of Risk-Based Premium
Uncertainty on MIP premiums.
In July the 1.50/0.50 premiums were replaced by a risk based tiered pricing. Just recently, Congress stepped in and put the risk-based pricing on hold, for 12-months effective October 1, without establishing what the MIP will be after October 1. One hint of what may happen is that there is a Section in the Housing and Economic Recovery Act that allows the Secretary to charge an up-front premium of up to 3.00%. No increase in the allowable annual renewal rate was granted.

From the Housing and Economic Recovery Act of 2008.
Sect 2133: For a period of 12 months beginning on October 1, 2008, HUD shall not take any action to implement or carry out risk-based MI premiums, as such planned implementation was set forth in the 5/13/2008 Federal Register notice.

For case numbers assigned prior to July 14, use the old MIP structure (i.e. 1.5% up-front – .50 annually/monthly)
For case numbers assigned on or after July 14 but prior to October 1, use the risk-based premium structure HUD implemented on July 14
For case numbers assigned on or after October 1, use the new MIP structure (to be determined)

Down Payment Assistance (DPA) Restriction
DPAs that require contributions from entities that have a financial interest in the transaction will no longer be allowed by HUD effective October 1. Suntrust and GMAC have already terminated the use of DPAs.

From the Housing and Economic Recovery Act of 2008.
Sect 2113: Includes language explicitly prohibiting the following sources from contributing funds the mortgagor's cash investment:
(i) the seller or any other person /entity that financially benefits from the transaction; and
(ii) any third party/entity that is reimbursed by any other parties in (i)
This prohibition shall apply only to mortgages for which the mortgagee has issued credit approval for the borrower on or after October 1, 2008.

Ttimeline for accepting loans using DPAs.
The last day to accept new applications for FHA Loans with Seller/Interested Party Funded DPAs is September 1, 2008.
Loans that will be using Seller/Interested Party Funded DPAs must be "Credit Approved" by September 30, 2008
Loans that are "Credit Approved" on or after October 1, 2008 are subject to the new policy, that is, Seller/Interested Party Funded DPAs are not allowed

Buy and Bail Policy
FYI - HUD is working on a "Buy and Bail" policy. I will keep you informed as information becomes available.

Please note that the information provided is based on the most current information available but is subject to change.

About discount points & origination fees

posted on Monday, August 18th, 2008 at 9:57 pm

Discount points and origination fees can often be confusing to buyers. Here's how they work.

The first thing you should know is that we consider discount points to be "good" points that benefit the buyer, while origination fees are "bad" points that benefit the lender. The difference is that discount points will get you a lower loan rate, but origination fees will not. The origination fee is generally a somewhat to very negotiable fee (although the lender won't want you to know that) that the lender is charging you to do the loan. The lender is saying "based on your risk profile, we have to charge you an origination fee to cover our risk." That origination fee goes right into the lender's pocket and is used to adjust the risk profile of the buyer, so if you're a riskier borrower, that fee is likely to be higher. Often (although not always), the origination fee is used to pay the loan officer's commission on the deal.

Discount points are another matter entirely. These are fees you pay at closing to get a better interest rate. While it is possible the lender may force you to pay discount points to get a certain rate based on your risk profile, usually points are optional. One point is equal to one percent of the loan. So for example, if you're getting a loan for $800,000 and your base interest rate is 6.5%, one point will cost you $8,000. You might expect that one point would lead to a 1% discount on your interest rate, but that is not the case. (That would be too easy, right?!) The first point you pay might get you a 0.5% decrease in your rate. But it's a situation with diminishing returns - the more points you pay, the smaller your incremental lowering of your rate.Here's what you need to consider when you're buying points: How long will you be in the property? If you're not sure, you probably shouldn't buy points unless you know it'll be for a while.

Let's look at an example to learn why: Let's say your rate is 6.5% with zero points (scenario A), or 5.75% with 2 points (scenario B - the first point got you a 0.5% reduction and second point got you a 0.25% reduction in rate). You would have paid $16,000 for those 2 points at settlement.Your monthly payment on an $800,000 loan would be as follows:

Scenario A: $5,056.54

Scenario B: $4,668.58

Now, if you sold your home after 2 years, your principal balance would be:

Scenario A: $777,356
Scenario B: $774,080 (a difference of $3,276)

And if you sold your home after 5 years, your principal balance would be:

Scenario A: $743,833
Scenario B: $736,480 (a difference of $7,353)

And after 10 years it would be:

Scenario A: $671,219
Scenario B: $$657,478 ($13,741)

(Want to run these calculations yourself? You can use a loan amortization table like this one)

So as you can see, even living in the property for 10 years, you still don't recoup your initial $16,000 investment. Now, that statement isn't entirely accurate, because on the one hand, you would have paid less in total, aggregate interest payments with the lower rate, but on the other hand, you're also not counting what $16,000 could grow to if you invested it in a solid investment, so there are other factors at play, but the general idea is that you shouldn't pay discount points up front unless you know you'll be in the property over the long term, because you lose that money when you move after having owned the property for a short amount of time.

4 Tips To Avert A Foreclosure Your Bank Doesnt Want You To Know About

posted on Tuesday, August 12th, 2008 at 10:59 pm

You have to admit, the current economic landscape makes it difficult for everyone, even the banks although you may not see it that way. So what do you do if you've come upon hard times and you're no longer able to make your mortgage payment? Do you sell your home? But what if you owe [...]

Tax Lien Sales and the DC Real Estate Market

posted on Tuesday, August 12th, 2008 at 10:59 pm

What is a Tax Lien and How Do They Work?A tax lien is a lien placed upon a property due to nonpayment of property and/or personal taxes. They move with the property and not with the owner. Therefore, if you purchase a home with an tax lien, that lien now becomes your responsibility. Keep [...]

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