HUD’s Home Purchasing Time Line

December 17, 2009 by Leave a Comment

HUD has unveiled their new "Shopping for your Home Loan – HUD's Settlement Cost Booklet".  What was once a ppamphlet that was included with your loan application has been replaced by a 49 page booklet.   This revised guide for borrowers was created to accompany HUD's new Good Faith Estimate which goes into effect on January 1, 2010. 

HUD's new guide is to help consumers navigate the new Good Faith Estimate.  I'm not going to go all the way through it on this post, I do want to point out issues with HUD's Home Purchasing Time Line (which you'll find on page 4).

 HUDTimeline

Do you see anything wrong with this picture?   Let's review step by step.

1. Determine what home you can afford.   I agree with this.  What home you can afford may be different than what home you qualify for.  You don't have to buy as much home as you may qualify for and you might qualify for less than you desire.  What's most important is being able to afford the home.   I think this step is referring to doing some serious gut checking and reviewing of your personal budget BEFORE meeting with a real estate agent or mortgage originator.

2. Find a real estate agent.  I think step two should be to find a mortgage professional instead of the agent.  They have the cart before the horse with this step.  The last thing a home buyer needs is to be shown a bunch of home they may not qualify for.  Meeting with a mortgage originator first will help them narrow down what programs they qualify for that will suit their financial needs (I think this is HUD's Step 5).  Agents may debate me on this because they like to direct buyers to their preferred lender.

3. Find a home and negotiate the terms.  This is unbelievable!  HUD is recommending that you enter into a binding contract before knowing if you're approved for the mortgage.  Yes there are financing contingencies, but you do not tie up a seller's property when you don't even know that you can close on a transaction.  Plus, most real estate agents will not show you a home until you have been preapproved by a mortgage professional.

4. Shop for your loan — compare multiple good faith estimates.  This is very flawed.  HUD's new good faith estimate carries RESPA reform which in a nutshell means that if a mortgage originator provides a borrower a good faith estimate, they are presumed by HUD to have obtained enough information from you to have created a loan application.  This creates a certain amount of liability for the mortgage originator that in this day and age, most will not accept.   Not to mention that rates change constantly, sometimes several times a day.  If anything, you should shop for the most qualified mortgage professional and not "the loan" or rate…this step should take place around Step 2.

5. Chose the loan that's best for you.  This should take place at step 2 or 3 (after you select your mortgage professional).  This is too late in the game to be determining your financing.

6. Loan originator processes the loan.  Your mortgage originator begins processing your loan at application for purposes of preparing your preapproval letter.  Your loan may actually go into processing and underwriting once you are proceeding with your transaction.

7.  Have house inspected.  This typically take place after you find your home and have negotiated your contract.  You're not going to want to be paying for an appraisal (which would take place at processing) if your potential home doesn't pass inspection.

8.  Shop for other service providers (title, attorney, escrow agent).  Is this a HUD after thought?  If you are going to shop for your title or escrow, you're going to need to do this prior to the contract being written as the purchase and sales agreement dictates who the providers will be (unless the agent writes "buyers choice").  Plus, HUD's new GFE dictates how much the title and escrow fees can change at closing based on if you shop or if you allow the lender to select these service providers.

9. Loan is approved.  There are different steps of loan approval.  This is most likely "final loan approval" meaning all conditions (documentation) have been provided and reviewed by underwriting.

10. Get insurances and do final walk through.  I recommend shopping and selecting your home owners insurance much earlier in the process.  Once you have a bona fide contract and your home has passed inspection, you can start shopping for your insurance agent. 

11. Go to settlement.  In Washington, you're probably going to your signing appointment at the escrow company a couple days before closing.   Sometimes signing will feel like it's at the eleventh hour!

12. Move in. 

Watch formy next post where I share how I think this purchasing time line should look. 

Filed Under: Escrow and closing, Good Faith Estimate, Opinion, Residential Purchase

Tax Credit for Home Buyers who have Owned a Home

November 24, 2009 by Leave a Comment

I was asked this question by one of my friends on Facebook:

"I was listening to one of your videos from last Monday and you mentioned something about a tax credit for people who has owned their homes for the past 5 out of 8 years… Do you know what that is all about yet?"

When the first time home buyer tax credit was extended with the "Worker, Homeownership, and Business Assistance Act of 2009", Congress added a few goodies, including increasing the qualifying income limits and allowing folks who have owned a home out of the past 5 out of 8 years to participate with a tax credit of up to $6,500.   This tax credit has been pegged as one for a "move-up" home buyer, however it just needs to be a primary residence–it does not need to be larger or more expensive than the last residence.  In the Act, these home owners are referred to as "long-time residents of the same principal residence".

One does not have to sell their current residence in order to qualify, from the IRS:

If you meet all of the requirements for the credit, the law does not require you to sell or otherwise dispose of your current principal residence to qualify for a credit of up to $6,500 when you buy a replacement home to use as your principal residence.

The IRS uses this example for occupying your home in the last five out of eight years:

The requirements are that you must buy, or enter into a binding contract to buy, the replacement principal residence after Nov. 6, 2009, and on or before April 30, 2010, and close on the home by June 30, 2010. Additionally, you must have lived in the same principal residence for any five-consecutive-year period during the eight-year period that ended on the date the replacement home is purchased. For example, if you bought a home on Nov. 30, 2009, the eight-year period would run from Dec. 1, 2001, through Nov. 30, 2009.

The tax credit is only valid for homes priced under $800,000.   I'm not sure why they put this limit on the sales price when there are all ready income limits and limits to the amount of the tax credit in place.   The upper end of the housing market can really use some help.

Qualifying adjusted gross income limits have been raised for first time home buyers and repeat home buyers to $125,000 for single people an up to $225,000 for married couples for the full tax credit.

If after 36 months from purchasing the home, if it ceases to be the residence that you occupy (you've sold the home or converted it to a rental, for example), the tax credit may be required to be repaid.

I don't recommend buying a home just because of the tax credit.  There are costs to owning a home that will present themselves long you've enjoyed your $6,500.   If you are counting on receiving the tax credit, do visit the IRS's site and make sure you will actually qualify by completing the proper form.  I remember meeting with one of my clients who was buying her first home, when we reviewed the tax form together and she discovered she barely made too much money to qualify, she was disappointed.  She did go through with her purchase and she loves her home…but knew before getting too far into a purchase transaction that she was not going to qualify for the $8,000 first time home buyer tax credit (she would now with the increased income limits).

Check out this FAQ for the Repeat Homebuyer Tax Credit for more information. 

Filed Under: First Time Home Buyer, Legislation, Residential Purchase

What a Relief! The Home Buyer Tax Credit is Extended

November 7, 2009 by Leave a Comment

Whether you are for or against the tax credits created by our Congress and President Obama trying to recover our housing industry, you could hear a huge sigh of relief from professionals in the mortgage, escrow and real estate industry on Friday when President Obama signed the extension for the first time home buyer tax credit which was set to expire at the end of this month.

If you've been reading my posts for the last few months, you know I've been trying to warn potential home buyers eying that credit of what a short month November is for closing real estate transactions–with or without the tax credit.   The November 30th deadline did spur on some last minute transactions for first time home buyers.  Many mortgage companies issued memo's to borrowers regarding the tax credit stating they would not be held liable in the event the transaction did not close in time. Now, if the transaction closes on December 1, and the borrower qualifies for the credit, the home buyer won't be robbed of the credit…which could be up to $8,000.   Whew!

Speaking of relief, check out this vintage Alka Seltzer commerical singing about passing bills in Congress.  

Not only was the first time home buyer tax credit extended to April 30, 2010, Congress added a tax credit for existing "long time residents" (defined as owning a home during the last 5 out of 8 years) buying another home of up to $6500.  In addition, income limits for the tax credits have been dramatically increased. 

I will be providing more details soon about both of these tax credits for home buyers at Mortgage Porter soon!

Filed Under: First Time Home Buyer, Legislation, Residential Purchase

How Much Home Can I Afford?

October 8, 2009 by 2 Comments

This is a common question from first time home buyers.  When working with home buyers who are just beginning the process, after discussing credit and other information, I like to ask in return:

  • What type of monthly mortgage payment would you be comfortable making?
  • How much money are you planning on using for a down payment and closing costs.

To me, it’s better to solve for your potential sales price rather than finding a home or getting your heart set on a certain sales price first before knowing what you actually qualify for.

For example, Seattle Sally has saved up $75,000 and would like to use $40,000 towards a home purchase.  She has been paying anywhere from $2,200 – $2,000 a month for rent and would like to keep her payment around $2000. 

NOTE: Rates quoted below are from October 2009 and are outdated. If you would like a current mortgage rate quote for your home located in Washington, please contact me.

Beginning with a conventional scenario, a payment of $2038 (principal, interest, estimated property taxes, estimated home owners insurance and private mortgage insurance) with about $40,000 for down payment and closing costs would produce a sales price of $325,000.  This is based on a 30 year fixed rate of 4.625%* (apr 4.790).

A sales price of $365,000 with a 10% down payment and the sellers contributing towards closing costs would produce a payment of about $2283.

The only issue I would have with the conventional financing is that private mortgage insurance is that these days, pmi underwriters are picking all mortgages to pieces.

FHA would provide a total payment of $2076 with about $40,000 for down payment and closing costs and a sales price of $325,000.  This is based on a rate of 4.875% (apr 5.400).

If we have the seller pay most of the closing costs and prepaids, a payment of $2287 would produce a sales price of $365,000 with Sally bringing in approx. $38,000 for down payment and closing.

One thing to consider, beyond more forgiving underwriting, with FHA is that your mortgage will be assumable.  Imagine having a rate of 4.875% a few years from now when rates will most likely be much higher.  If you are a seller competing with other similar home on the market, and you can offer an assumable mortgage at a tempting rate–this will be a serious advantage.   Once inflation happens, mortgage rates will be much higher.

If Seattle Sally’s credit score comes in lower than expected (this is all based on very preliminary information) FHA may become a better option as well.  

*rates quotes are as of 1:30pm on October 8, 2009 and are based on mid credit scores of 740 or higher.  Rates can and do change often.  Follow me on Twitter to see live rate quotes.

For your personal rate quote on a home located anywhere in Washington, click here.

Filed Under: Fannie, Freddie and FHFA, FHA, First Time Home Buyer, Mortgage Insurance, Residential Purchase Tagged With: , , , , ,

Before You Negotiate the Patio Furniture into your Purchase and Sale Agreement

June 10, 2009 by 3 Comments

You find the home you've been waiting to write an offer on and the Seller has patio furniture (or a bbq,Patiofurnmtgporter riding lawnmower, furniture, etc.) that you'd like to make part of deal.  Perhaps the Seller's offering to leave you these items because it's convenient for them as well.  You and the seller include the items as part of your real estate purchase and sale agreement.  The agent is keen to include on the addendum that these items "have no value"…which may be true or it may be just to try to avoid having to deal with having a sales concession.

A sales concession is something that is not part of the real estate, such as cash, furniture, automobiles, decorator allowances, moving costs, or other "giveaways".  The value of the sales concession must be deducted from the sales price when calculating loan to values. 

For example, if you have a sales price of $200,000 and patio furniture valued at $3,000; the sales price the lender will use is $197,000 (200,000 – 3000).   Let's assume you're putting 10% down payment.   Without the sales concession, 10% down would be $20,000.   With the sales concession, 10% down is going to be a bit more:

The loan amount would be based on 90% of the adjusted sales price of $197,000: $177,300.  However the sales price, per the purchase and sales agreement is $200,000.  So the down payment would be $22,700: $200,000 less the loan amount $177,300.

The underwriter may (or may not) call for the concession item to be appraised or other supporting documentation to determine what the value is (or isn't)–even if the purchase and sale agreement states there is no value and the item was just left for convenience.  

It may sound silly or nit-picky to you…but would you buy the home at $200,000 without the concession?  The lender does not want the concession to be a part of what's factored into the financing.  If you have a significant down payment, this may not impact you.  Even with a 20% down payment, it could. 

20% down payment of $200,000 equals a loan amount of $160,000.  With a sales concession of $3,000; this can be treated a couple of ways:

  • Sales price is reduced by the concession to $197,000 (in the lenders eyes).  20% down payment based on 197,000 equals a loan amount of $157,600.  $157,600 less the actual contract sales price of $200,000 equals an actual down payment of $42,400 in order to have the mortgage still treated as an 80% loan to value with no private mortgage insurance or…

  • Sales price is still reduced to $197,000 and the loan amount remains $160,000.  Now the lender will treat this as mortgage with a loan to value of 81% which means: private mortgage insurance…even though the borrower is putting $40,000 down (20% of $200,000).

So you may want to think twice before you include items that are not real property in your purchase and sale agreement…unless you're putting a significant amount of funds towards your down payment or the items are truly worthless and you can prove it to the underwriter.

Filed Under: Residential Purchase, Underwriting and Qualifying

HUD Approves First Time Home Buyers Using Tax Credit Advance for FHA Loans

May 30, 2009 by 1 Comment

There's been a lot of rumbling about whether or not first time home buyers would be able to access the tax credit created by The American Recovery and Reinvestment Act of 2009 towards the purchase of their new home.  From HUD's announcement yesterday:

Current law does not permit approved lenders to monetize the tax credit to meet the required 3.5 percent minimum down payment, but, under the terms of today's announcement, lenders can now monetize the tax credit for use as additional down payment, or for other closing costs, which can help achieve a lower interest rate. Buyers financing through state Housing Finance Agencies and certain non-profits will be able to use the tax credit for their downpayments via secondary financing provided by the HFA or non-profit. In addition to the borrower's own cash investment, FHA allows parents, employers and other governmental entities to contribute towards the downpayment. Today's action permits the first-time homebuyer's anticipated tax credit under the Recovery Act to be applied toward the family's home purchase right away.

Here are some important points for you to know regarding using the tax credit towards a home purchase:

  • The tax credit advance loan cannot be used towards the mandetory 3.5% down payment.  (Update: unless it is through a State Housing Financing Agency).
  • The tax credit advance loan may not exceed the anticipated tax credit due to the home buyer based on the computations of form IRS 5405. 
  • The borrower will need to provide a copy of their tax refund and/or form IRS 5405.
  • Borrower cannot have unsettled obligations with the IRS.
  • If the tax advance is in the form of a loan with payments, the borrower must qualify with that payment (unless the payments are deferred for at least 36 months).

Reminders about the First Time Home Buyer Tax Credit…

You can claim the tax credit if:

  • You purchased your main home after April 8, 2008 (who picked that day?) and before December 1, 2009.
  • You (and your spouse, if married) did not own any other main home during the 3 year period ending on the date of purchase.

The IRS defines "main home" as the one you live in most of the time.  It can be a house, hosueboat, housetrailer, cooperative apartment, condominium, or other type of residence.

You cannot claim the tax credit if:

  • Your modified adjusted gross income is $95,000 or more ($170,000 or more if married filed jointly).
  • Your home financing comes from tax-exempt mortgage revenue bonds.
  • You are a nonresident alien.
  • You aquired your home by gift or inheritance.
  • You acquired your home from a related person.

You must repay the tax credit if your home ceases to be your main home within the 36 month period beginning on the purchase date.  

HUD warns that homebuyers should beware of mortgage scams and carefullly compare benefits and costs when seeking out tax credit monetization services.

Don't forget, Mortgage Master is a direct endorsed HUD lender.  If you're buying a home in Washington State and are interested in an FHA loan, I'm happy to help you.

Filed Under: FHA, First Time Home Buyer, Residential Purchase

Relocating to Washington State and Getting Preapproved for a Mortgage

May 5, 2009 by 1 Comment

When relocating to a new State, many want to have their next home purchased to avoid the inconvenience of having to move twice from temporary housing to their permanent home in Washington.  Lenders want to know that the borrower have employment and the ability to make their mortgage payments.

If you have a job waiting for you at your new location, often times a copy of your employment contract documenting the start date, salary and probability of continued employment.  A verification of employment will be performed either/or verbally or with a VOE (verification of employment) form to be completed by the new employer.  It’s also important to know that the new employment must be in the same line of work as the previous employment.

What if you’re self employed and moving your business out of area?  Unless your clients are able to follow you, such as an internet based business, it may be challenging to use your past income for qualifying as you are leaving your client base behind.

There various types of income may not impacted by relocating (subject to underwriting guidelines), such as:

  • Rental income
  • Retirement/Social Security
  • Alimony or Child Support
  • Notes receivable
  • Interest and dividends
  • Income from Trust

Other types of income may be considered as well…but if you’re planning on qualifying based on income from your “future” job–make sure you’re actually on pay-roll and do discuss your personal scenario with a qualified Mortgage Professional before you make any moves.

Filed Under: Residential Purchase, Underwriting and Qualifying Tagged With: ,

Documentation for Self Employed or Commission Paid Borrowers

April 27, 2009 by 2 Comments

Sonia asks via commenting on a post at The Mortgage Porter:

“I’m a first time home buyer, but I am self employed I would like to be preapproved for a mortgage loan and want to know what paper work will be required by the bank…”

Self employed borrowers will most likely need to provide the following documentation:

  • Last two years complete (all schedules) tax returns for both business and personal including W2s or 1099s.
  • Year to day profit and loss statement.
  • Bank statements, asset accounts (all pages).  Be prepared to document you have enough funds to cover your down payment and closing costs at minimum.  You may have to show proof of having reserves (additional savings remaining after closing).

Self employed borrowers need to show at least two years of income for their business.  The borrowers often income is averaged over the past two years.  If the borrowers income shows a decline from the previous year, the lower income may be used and the self employed borrower should be prepared to explain why they are showing less income to the underwriter. 

These guidelines may also apply to:

  • People who are receive commission income that accounts for 25% or more of their annual income.
  • People who own 25% or more of the company they work for.
  • Independent contractors.

If you’re a commission paid sales person, you’ll need to provide your last two years tax returns as well and those un-reimbursed business expenses are factored against you. 

When a borrower has income that has the possibility of fluctuating, they need to be able to review a period of time (two years).   Underwriters are looking for trends with any borrower’s income. 

I recently met with a newly self-employed person who wanted to take advantage of the First Time Home Buyer Tax Credit.  She’s bought her business just shy of a year ago.  Even though it’s showing great profit right now; her first year tax returns report a loss (as many new businesses do).  She does not currently qualify for a mortgage.  After she has two years tax returns (track record) her income will still be averaged with the first year loss factored in. 

The days of “stated income” or “no income verified” are gone (so are many of the lenders who offered those products).  Be prepared to fully document your income and down payment.  You’re showing the lender you have the ability to pay the mortgage with your successful two year track record as a self employed person or commission paid sales person.

I’m happy to work with self-employed or commissioned paid borrowers. Click here if you would like a rate quote for a home located anywhere in Washington.

Filed Under: Refinance, Residential Purchase, Self-Employed, Underwriting and Qualifying
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