by Corey on January 15, 2010
Or as I like to subtitle this post “DUH”
If you have been in Real Estate as an Agent, Investor or Lender during the past 3 years, you have likely run into the “Anti Flipping Rule” imposed by FHA.
The origination of this rule is one of my favorite topics to discuss as FHA’s logic essentially went something like this:
FHA is seeing an increase in Defaults > HUD (FHA Foreclosures) homes need repairs > Most people Cant get a loan if it needs repairs so investors purchase to fix up and sell for a profit > People buy homes using FHA Loans which require little or no money out of pocket (in the DPA days) > Most of the defaults occur in the first 3-5 years of the loan > When the defaults occur the homes loans are often upside down resulting in a loss to the FHA Insurance fund > Therefore Clearly the Investor tricked FHA, and the lender into letting the borrower borrow too much money against the house.
Ok, sorry for the rant. I’m sure you picked up on my sarcasm.
Essentially the FHA anti flipping rule said if you buy a house you cannot sell it to anyone using an FHA loan until you have been on title (legally owned it) for 90 days.
Apparently this will effectively stop anyone from over paying, or lets be honest here, stop any investors from making FHA lend too much money on a house. CLEARLY this worked. NOT.
What the anti flipping rule did do, is discourage investors from bidding on HUD homes because of the necessary holding costs. What it did not do, is help stem the tide of FHA foreclosures by not over lending on properties.
Factors that did lead to FHA foreclosures are:
- No down payment requirement, or allowing the Seller to contribute towards down payment (buyers were often not invested in the property, and so walking away is an easy decision when troubled financial times come along)
- Low FICO score requirements. FHA was allowing loans to be insured when the borrowers scores were as low as 500
- Streamlines (Faster, easier refinances for people in FHA loans). A great idea poorly executed. People who had qualified for a particular rate (based at least loosely on risk I assume) were given the ability as little as 90 days after purchasing, to refinance without re-qualifying or having an appraisal done. Many lenders did not require a verification of employment or even a credit score for these loans. Didnt think the Government was doing No Doc loans? Think again, they just waited until after the borrower had closed on their original loan to do it.
You can read the release from HUD here, which I will deftly translate for you:
FHA: Our fund is running out of money because we have become the default Sub Prime lender in the wake of the mortgage melt down. Due to our lax lending standards in the past, we have seen increasing defaults which are taxing our reserves.
Therefore, if we lift the flipping rule investors will start buying our foreclosures again which will help replenish our funds both through their purchases and the sales of those homes to borrowers that utilize FHA loans.
Look for this to coincide with a tightening of lending standards in the next 30-60 days. The changes likely to be seen are an increase in the down payment requirement from 3.5% to as much as 5%, and a decrease in the allowable seller paid closing costs from 6% down to as little as 2%. Effectively increasing a borrowers needed cash by 100%.
Additionally, there are some restrictions and conditions that come with the change.
- The transaction must be “Arms Length” or in other words, you can’t be buying it from your family members, or selling it to the previous owner who lost the home to foreclosure. It needs to be a clean transaction with no undisclosed relationships between the parties.
- If the price increases over 20% more than the sellers purchase price, the lender needs to see supporting documentation of all the repairs so they can verify, and justify the new greater sales price.
- If there were not repairs made, the appraiser must provide an explanation as to why the property is worth more than what the seller paid
- The new lender must order a property inspection and provide it to the buyer. This cost can be passed on to the borrower.
Bottom line…welcome to Common Sense underwriting 10 years too late.
by Corey on January 7, 2010
Lets talk about Roles.
My Friend Justin McHood over at Mortgages Unzipped humorously explained how most people end up choosing a title company when they purchase a home or refinance. In the end the answer is, they rarely do…choose that is.
This is something that has bothered me for a long time, so I wanted to take a moment and clarify REALLY who “GETS” to choose the title company.
YOU DO. The guy paying the charge for the services performed.
Not your Agent
Not your Agent’s Broker
Not your Mortgage Broker/Loan Officer
YOU.
Now having said that, how would you know which one to choose? Lets talk about that for a moment. This is where our discussion becomes about roles. See, sometimes how things ought to be, are often close to how they are…but like my 5th grade teacher used to always say (and I mean always) Close only counts in Horseshoes and Hand Grenades.
He also would say “You want me to turn you into a water buffalo?” Why a Water Buffalo you ask?, “Because a Water Buffalo’s hind quarters are up higher than its ears…after I kick your @** yours will be too”
Yeah, those were the days. When teachers could say that kind of stuff and not have the ACLU and the evening news there an hour later.
So back to how it ought to be. Professionals in the Real Estate industry are trusted advisers. We should know who you would want to use, not because we were “Bamboozled”, but because you will get the very best service you could get, for a reasonable price.
I will add as a disclaimer, that where you obtain title is a negotiable item in a contract. A seller can specify that if you wish to purchase their property you must use the specific title agency that they require. This is perfectly legal, and common when purchasing bank owned properties. However, in any other circumstance it is your right to choose as the buyer or seller. You might even ask your agent, or loan officer why they chose the agency they are recommending. A good loan officer or Agent will have done their homework and will be recommending someone based on Competency, Service, Communication, Efficiency and Speed, and of course price, but not at the expense of the other necessities…the last thing you want when dealing with the most expensive purchase you will ever make is the guy that is the cheapest just because they are the cheapest.
Someone other than my 5th Grade teacher said “The bitterness of poor quality remains long after the sweetness of a low price is forgotten” -Benjamin Franklin
When it comes to a good Title and Escrow officer, I couldn’t agree more with good old Ben.
Now, I’m off to Walmart…I need milk.
by Corey on December 28, 2009
*If they are within the same 30 day period.
This is due to the Fair Credit Reporting Act which was enacted to help protect consumers credit scores from erroneous facts being reported against peoples credit.
One can shop for a mortgage worry free as long as the inquiries happen within a 30 day period. This means you can visit multiple lenders and brokers to make sure you are getting the best rate possible and not have to worry that your credit will be going up and down as a result.
If you are looking for a Mortgage in Utah and are told by a mortgage lender not to have others pull your credit because it will lower your score, run. This is an old trick that some people use to discourage shopping and competitive rates and fee’s. You want the best deal possible and the credit laws enable you to find it!
Some important things to remember when you know you will be applying for a mortgage:
- Put off applying for any new credit until after the loan is closed not merely approved.
- Credit Cards, Auto Loans, Signature Loans, Satellite TV/Cable, Cell Phone Service
- Make sure all of your credit card balances are below 30% of the available credit limit.
- Maxed out cards are a score killer, pay all balances down to below 30% (10% is optimal). Carrying a small balance, no more than 10% of the available balance can actually help improve scores more than carrying a zero balance.
- Credit reporting can take 30-60 days on recently changed status’s. If you intend to pay down balances to help improve scores make sure to do it well ahead of time as it wont help at all if you do it a week before your credit is pulled for the application.
- If there are some credit issues that need to be resolved, have all of the documentation available that shows if debts were paid or reported in error ect.
- Gather up all the basic required documentation for a loan ahead of time to help speed up underwriting. You will need the following to begin the process (but you may need more once Underwriting starts looking at the file):
- 2 years tax returns
- 2 months pay stubs or profit and loss statements for self employed
- 2 months bank statements (personal and business for self employed)
- Most recent statement from Retirement accounts such as IRA, RothIRA, 401K
- Paper trail documenting the source of your down payment (Bank Statements, Letter of Explanation etc.)
- Personal Identification (Valid Drivers License, Social Security Card, Passport, W-2)
- If you are not 100% sure that you are a ‘perfect borrower’, look into what you qualify before you go house hunting. Nothing is more disappointing than finding out you don’t qualify for that beautiful home or ‘killer deal’ that you just found.
Remember that to get the lowest rate possible you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including a loan origination/discount/broker fee which can be negotiated with your lender representative. You may elect to pay less in fees but you will have to accept a higher interest rate. This is a good strategy for consumers not planning on keeping their home for more than 3 years. Discuss all available scenarios with your loan advisor
