Fairfax, VA – The House of Representatives approved the Federal Housing Administration Reform Act.   The purpose of FHAR is to bring stability to the FHA lending program. Currently, FHA loans make up about 30 percent of the loans originated in the US. This is a far cry from early to mid 2000’s when real estate agents frowned on any government loan of any type.
 
The FHAR Act is a two-step process which was designed to shore up the crumbling foundation of FHA’s capital reserve account.  The first step to increasing the reserve account occurred in April of 2010 as the up-front MIP (mortgage insurance premium) premiums collected from the borrower was increased from 1.75 percent to 2.25 percent of the loan amount.  But the bigger plan was for FHA to increase the monthly mortgage insurance premium which is currently .55 percent for purchase loans with less than 5 percent down payment or refinance loans with at least 5 percent equity to .50% for homes or loans with at least 5 percent or more equity.  Under the law passed today, the agency will be allowed to increase its annual premium to 1.55 percent of the unpaid balance of the loan. The change or increase is expected to be a two part process. The first change is expected to increase annual MIP to from .55 percent to between .85 percent and .90 percent, then increase the annual MIP to the full 1.55 percent later in the year.  The thought from FHA and Capital Hill is that the increase in the annual MIP will allow for FHA’s capital reserves to increase, but with less impact to the consumer since the annual MIP is paid over the life of the loan instead of a lump sum addition to the loan amount at the time of closing. But this is incorrect.

The FHA reserves were getting hammered by homes going into foreclosure or just plain scammers at work with straw buyers or however mortgage fraud is perpetrated.  This is fact. What I am not sure is taken into account is the effect of the higher monthly mortgage insurance will have on the home buying public. How can tripling the monthly mortgage insurance have no impact to the consumer or to the nation’s housing market?  I read a Freddie Mac article in the early 1990’s that stated for every .25 percent increase in interest rates 250,000 home buyers are priced out of the market. To show this is not true see the example below. Using a $300,000 loan amount as the example, the numbers don’t look good for home buyers after September 7^th.   This date can change, call me if you have any questions. 

Fairfax, VA – With the increased role FHA has taken in the lending world since 2007, FHA has experienced an increase of foreclosures which caused FHA to tighten lending guidelines, increase down payment requirements and institute minimum credit score requirements to qualify for an FHA loan.  Here are some changes that have been made or are on the horizon.

Credit Scores – A minimum credit score of 500 is required.  Borrowers with credit scores below 580 would have to put at least a 10% down payment on the property.  Although FHA has minimum scores of 500 and 580, most lenders have score requirements of at least 620 or higher.

Underwriting – Underwriting is a tool lenders use to document information about the property (value) and the borrower (income, credit score, debt).  The underwriting process is used to assess whether the borrower is likely to repay the loan.  Most lenders today use an automated underwriting system (LP - Freddie Mac or DO/DU – Fannie Mae) to get approval of the loan.   If the automated system flags the loan, a more in-depth manual underwriting procedure would take place to ensure the borrower qualifies for the loan.  The underwriter could require additional funds for cash reserves equal to one mortgage payment or explanations or documentation to further clarify certain aspects of loan file. 

Cash-out Refinancing – Is when a homeowner removes equity from the home in the form of a higher loan amount than before the refinance.  Currently a borrower can take up to 85% of the home’s current value.  Previously, this amount was 95% of the home value.  In order to be eligible for a cash-out, you must have excellent credit and have at least 15%  equity after the refinance. (Example: Value $100,000, Owe: $50,000, Equity available is $35,000 less any applicable closing costs.

Seller Concessions – This is a big one.  A seller concession is an amount that is negotiated in the sales contract that the seller will pay towards the buyers closing costs.  The FHA wants to slash allowable seller concessions in half, from 6% to 3%.  Some buyers want to roll in their closing costs, appraisals, etc. into the loan amount. This is not allowed with FHA loans. But this doesn’t ban concessions of over 3%.  What the new guidelines require is a dollar for dollar reduction in the home’s sale price and reduce the amount of the allowable loan.

Short Refinancing – If a borrower has no equity in their home,  they would be allowed to refinance into an FHA loan.  This is on the first loan only.  If there is a second mortgage, the two loans combined cannot exceed the current value of the home by more than 15% once the first loan is refinanced. Not every lender will allow a short refinance since the current service could be losing money by reducing the loan amount.

The Federal Housing Administration (FHA home loans in Virginia) is eliminating one of the mainstays to its program sometime this summer. Gone will be the 6 percent seller concession and in will be the 3 percent seller concession. The reason for eliminating the concession according to FHA is the 6 percent seller concession exposes them to too much risk. This has been one of the key selling points with FHA for decades. But if sellers and buyers move fast there is a possibility they can still take advantage of the higher seller concession.

The buyers must still save or be gifted the money for the down payment to purchase the home. The current minimum down payment is 3.50% of the sales price. The current guidelines on seller concession allow sellers to pay for all of or part of buyers closing costs when purchasing a property.  Items connected with the transaction such as — loan origination and discount points, state and county transfer stamps and fees, an appraisal, inspections, attorney and title closing costs.  

When it comes to lower priced homes, closing and loan expenses typically represent a higher percentage of the total loan closing costs than on higher prices homes. In Fairfax, Virginia and Northern Virginia, closing costs typically run between 2.50% and 3.50% of the sales price of the home. So on a $300,000 home purchase, that could be an extra $7,500 to $10,500 of out of pocket expenses for a home buyer. Current with FHA financing rules, the contract can be structured so the seller agrees to pay all closing costs up to 6% ($18,000) at settlement. This amount could even include some small required repairs.  Once the rule change takes effect, the max concessions will be a flat 3% of the sales price.

If you use Fannie Mae or Freddie Mac financing, seller concessions is generally limited to 3%  for down payments below 20% of the sales price. Although concessions can be much higher when larger down payments are being used.

Bottom line is this: the helping hand of an FHA home loan is getting smaller and smaller. First the down payment was increased from 2.25% (3% in the new home) to a flat 3.50% down payment. Then a minimum credit score, now a decrease of seller concessions from 6% to 3% of the sales price.

Why Payoff Your Mortgage

Fairfax, Virginia: Homeowners have been arguing this point since the invention of mortgages many years ago. Should a homeowner payoff their mortgage faster in order to save interest? Or should the homeowner invest that money into 401-K and other retirement vehicles to accumulate more money for retirement? The true answer lies in what is the right choice for your financial situation. Below I have tried to present both sides of the equation equally. Please let me know what you think. Once you are finished with the article check out some great information on my other site:

Calculators
Borrow Smart Information
Borrow Smart Application

There are several advantages to paying off your mortgage early.

Freedom- Not much more needs to be said about this. The freedom from monthly mortgage payments can be huge both psychologically and emotionally. What would it feel like to not have a mortgage payment each month?  If you paid off the mortgage and eliminated your other consumer debt, you could live debt-free. Well maybe – no mortgage would allow for more consumer spending, which could mean more bad debt. But it could leave additional money for basic necessities such as: food, heat, electric, gas (car and home). Not having a mortgage would certainly cut your monthly expenses.

Safety: Once you’ve paid off your mortgage debt, you own your home. Taxes and insurance must still be maintained even after the mortgage is paid-off. Believe it or not, homeowners actually lose their home for not paying their property taxes on homes owned free and clear of any mortgage. Your home is always a liability as long as it costs you money each month. Never forget that. Here is a nice article from AARP writer Jonathan Pond.

Reduced Stress: No monthly mortgage obligation would certainly be nice! You wouldn’t have to worry as much about losing your job, for instance.

Liquidity: Less spent on paying down the mortgage allows more money for other investments. But no mortgage allows for more money to be allocated for other investments also. But the real question has to do with the opportunity cost of money. Where is the biggest bang or investment opportunity for your money and will it grow faster now or later.  You could invest your monthly payment in a financial product, or build up a large rainy day / emergency fund.  Cash is still king and it is very liquid.

Why Have A Mortgage

Taxes: Interest and taxes are deductible up to your income tax bracket. Not having a mortgage means that you can’t deduct your interest payments off your federal income taxes.  But that alone is not enough of a reason to keep a mortgage. Here is one recent NY Times article on why it might not be a great idea to pay off your mortgage.

Investing: This nice article by Ric Edelman on having a mortgage where he puts forth that it makes better financial sense to pay your mortgage payments regularly, and invest the extra money instead. Theoretically, you make more in the long-term with this method; after all, average returns on stocks over the past 60 years are in the 9-10% range. But the recent fall in the stock market make it hard to stomach investing sometimes.

Liquidity: Yes – this again.  It works both ways. Todd Ballenger at Kendall Todd also says that keeping your money in liquid form (ie: stocks, bonds, etc.) might be a better option until you are ready for retirement.  If you pour all your money into your house, then the question is can you access your money again? If yes, how easy is it to get to? How fast do you need the money? With the drop in home values across the country and in Fairfax, Virginia your equity (money) might not be their or you might not qualify for the mortgage program. Staying liquid means that you can access your money quickly when you need it.

When we think of Valentine’s Day, we usually think of flowers, a box of chocolates and a romantic dinner with the one we love.  Those are very nice ways to show the special people in our lives just how much we love them.

But I want to share with you a way that you can show your love, perhaps one you’ve never thought of.  But before I do, let me share a couple of stories I have heard over the years from clients and other professionals.

“About a year ago, I received a call from a very dear friend of mine.  Her husband of 20+ years had suddenly and unexpectedly passed away.  I dropped everything to be at her side and help her through the agonizing weeks to follow.  Her husband loved her very dearly; there was no doubt about that.  But he had not taken the time to change the beneficiary of his life insurance policy from his ex-wife to the love of his life.   He always meant to, they had even discussed it many times.  But he just never got around to it.”

“Just two days before this past Christmas, I received a call from a loved one that his fiancé had passed unexpectedly in her sleep at the age of 56.  I flew out Christmas Day to be with him during his time of sorrow.  I stayed with him for about a week.  Our time together was spent crying and offering comfort in any way I could.  Together, we accepted the task of trying to find her will and other important paperwork.  But to no avail.  My loved one and his fiancé had co-mingled their finances but now those monies are inaccessible until the will and other important paperwork are found.  It’s been over a month now and nothing has been found.”

You may ask “What does this have to do with Valentine’s Day?”  I’m glad you asked.  I would like to share with you what my wife and I have done to show our love for each other and our families long after we are gone.

We have created what we call “Life Box”.  We took a couple of hours one Saturday morning and went to Staples and bought a small plastic box with lid that holds hanging file folders.  Together, we assembled the contents of the box with all the information one of us would need….leaving nothing to memory or chance.

This time together was very special to both of us. The hardest part of this was actually setting the appointment with the estate attorney. Very few people like to talk about death and taxes. But when done in a way to protect and provide for the future, it can have a lasting affect. But if it does, a lasting sign of our love will be found in “Life Box”.   

I would like to encourage each of you, my friends, my family and my clients, to take a couple of hours and put your “Life Box” together. 

Life Box Contents

• Copy of Will(s) with a note as to where the original can be found.  It is a good idea to provide a copy to the executor of your Will.  
• Provisions for Children:  be sure they are clearly identified.  It is especially helpful for a guardian to leave a note regarding younger children and any special needs or desires they may have.  Keep school info up to date, name, phone and location of doctors, etc. 
• Copy of Life Insurance Policies with a note as to where the originals can be found 
• Copy of Beneficiary page from Life Insurance Policies 
• List of all Banks with account numbers, location, phone number and name of personal contact at the bank.  (Note:  if you are only an account signer, you will not be authorized to sign after the account owner has passed.  Check into a “Payable on Death’ form at your bank. 
• List of Investment Accounts, name and phone number of personal contact 
• Copy of Beneficiary Page for Investment Accounts 
• Location of Safe Deposit Box and the location of the key (many states will lock you out of the safe deposit box once they are aware of the death.  In this situation, they generally will accompany you to the box and only allow the Will to be taken out of the box.  Ask your bank how this is handled and make appropriate plans.) 
• Copy of Health Directive (if you do not have one, go to your local hospital and obtain a blank one and complete it) 
• Copy of Durable Power Of Attorney (can be obtained at local hospital, please note that all Power of Attorney’s cease upon death) 
• Important papers for pets, vet info 
• A personal note that could eliminate stress about other things, for example:  where is the key to the lawn mower, how the gas and oil is mixed for the weed eater, where is the check book kept,
• Any other important info a loved one would need 
• Military Veterans:  please contact us for additional information you will need

Fairfax, Virginia:

The Worker, Homeownership, and Business Assistance is the larger bill that included the homebuyer tax credit additions. Taxpayers wanting to take advantage of the first time home buyer credit (up to $8,000) or the new repeat home buyer tax credit (up to $6,500) can now get the revised IRS form 5405 to submit with their 2009 tax filing from the IRS website. Existing northern Virginia homeowners have been waiting for months for the revised form and instructions for months. The revised form is now posted on the IRS site. http://www.irs.gov/pub/irs-pdf/f5405.pdf – Please verify with your tax professional this is indeed the form you need.

Revised Form 5405 & Proof Needed for Federal Tax Credit

How much?

• First-Time Home Buyer Tax Credit of up to $8,000 to first-time home buyers that have a ratified contract on or before April 30, 2010 and close before July1st, 2010.
• 10% of the sales price up to maximum of $8,000 and $6,500 for current homeowners that meet the guidelines on home purchases up to $650,000.

Who is eligible?

• A “first-time home buyer” is defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. Married taxpayers, the homeownership history of both the home buyer and his/her spouse. If one spouse has owned a principle residence in the past three years, the credit cannot be taken.
• For unmarried joint purchasers, IRS Notice 2009-12 allows to allocate the credit amount to any buyer who qualifies as a first-time buyer. For example, a parent might help their child buy a home. Or two people buy a home together where one has not owned a home and one has. The credit can be taken by the eligible Ownership of other properties, such as a vacation home or rental property that was not used as a principal residence in the past three years does not disqualify a buyer as a first-time home buyer.

Special rules for people in the military

• People serving in the military on extended duty outside the U.S. for 90 days or more have an extra year, through June 2011, to buy a house and claim the tax credit.

Income:

1. What is “modified adjusted gross income”?
   Modified adjusted gross income (MAGI) as defined by the IRS.

 a)      First determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before Schedule A itemized deductions or personal exemptions are subtracted.

b)      AGI can be found on forms 1040 and 1040A tax form, is the last number on page 1 and first number on page 2.

c)      AGI on the 1040-EZ tax form, AGI appears on line 4.

d)      AGI is inclusive of all types of income received including wages, salaries, interest income, dividends and capital gains.

2.  There are partial deductions available for higher incomes, but they fall off dramatically.

For further information please review the IRS site and as always consult your tax professional. See IRS Form 5405 for more details on completing the tax credit.

Documentation Needed for First-Time Home Buyers

First-time home buyers must provide the IRS with proof of purchase. The IRS indicates that one of the following documents must be attached in order for a federal tax credit for home purchase to be processed correctly:

• Copy of Form HUD-1 (Settlement Statement) or similar document that shows all parties’ names and signatures, the property address, sales price, and date of purchase.
• Copy of the executed retail sales contract (in case of mobile home purchases) that shows the same information.
• Copy of the dated certificate of occupancy (in case of new construction) that shows the owner’s name and property address.

Additional Proof Required for Existing Homeowners

Existing homeowners are eligible for a $6,500 tax credit if they have lived in their old house for five consecutive years out of an eight-year period ending on the purchase date of the new house. In addition to the documentation requirement above, taxpayers who fall into this category must also provide proof of the five-year residence with mortgage interest statements, property tax records, or homeowner’s insurance documents.

Useful links

These links are external links that we have found useful. The links provide information some are duplicates, but each has their own point of view expressed to support their companies mission.

 From Realtor.com

Detailed information about the extended homebuyer tax credit, including

1. The Basics: Extended Home Buyer Tax Credit 2009/2010
2. How to Get the Extended Home Buyer Tax Credit
3. In-Depth: 2009 First-Time Home Buyer Tax Credit
4. American Recovery and Reinvestment Act of 2009
5. Comparison of the 2008 and 2009 first-time homebuyer tax credits.

From the National Association of Homebuilders.

Home Buyer Tax Credits – First-time homebuyer tax credit and the repeat buyer

From The IRS:
  1.  First-Time Homebuyer Tax Credit
  2.  First-Time Homebuyer Credit

90-Day Seasoning Waiver Expanded

Fairfax, Virginia: This update from FHA Virginia Loans was released on Friday January 15th, 2010, as an excerpt from the CFR (Code of Federal Regulations) without a corresponding Mortgagee Letter and contains information about FHA’s policies regarding the waiver of the 90-day seasoning required for sellers.

Here are the 6 things you need to know about these changes:

1. Waiver takes effect February 1st, 2010 for a period of one year unless extended.
2. Investors are now exempt from the 90-day seasoning rule.
3. All transactions must me arms-length.
4. No identity of interest can exist between buyer and seller.
5. If sale price is 20% or more of the seller’s acquisition cost, the lender must:

            a. provide supporting documentation and/or a second appraisal and
            b. order an inspection of the property and provide it to the buyer.

6.  The waiver is limited to forward mortgages only. 

To read the text of this waiver and specific details: http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf

This is going to help a lot of home buyers get into a home. The seasoning rule was essentially locking people of bidding for certain homes. The next item that must be addresses is sellers and listing agents from eliminating all government loans (FHA, VA and UDSA loans) from submitting purchase bids.

I have clients all over the northern Virginia area. Recently two similar calls from clients that live in Alexandria and Vienna . Both had a question about keeping their current home as a rental when buying  another primary home.  As simple as this question may seem, it is much more complicated when trying to qualify for a mortgage carrying two mortgages. Fannie Mae and Freddie Mac have specific language for how much equity is needed in order to not count a current mortgage payment.

Fortunately both had the required equity in their current homes to avoid having to qualify carrying two mortgages. Other clients I have spoken to were not so lucky. The value of their home dropped to much and they had a big decision, sell or stay. What is the correct answer? Well that answer differs with every client I talk to. Below are the current Fannie Mae guidelines for converting a primary home to an investment home.

Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. The borrower can:

1. Sell the current residence and pay off the outstanding mortgage,
2. Convert the property to a second home, assuming they can qualify with both the existing and new mortgage payments, or
3. Convert the property to an investment property and provide documentation that they will rent the property and use the income to offset the mortgage payment.

On a primary home conversion to an investment property Fannie Mae will continue to permit up to 75 percent of the rental income to be used to offset the mortgage payment in qualifying if there is documented equity of at least 30 percent in the existing property (equity is determined from an appraisal, Automated Valuation Model, or Broker Price Opinion, then minus current value of the mortgages against the property).

The rental income must be documented with:

1. A copy of the fully executed lease agreement; and
2. The receipt of a security deposit from the tenant and deposit into the borrower’s account.

If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment. 

Both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction; and

Six months of Principle, Interest Taxes and Insurance for both properties is required to be in reserves after closing. In today’s real estate market, this is where most borrowers get caught. Being able to save for the down payment, closing costs and have six months mortgage payment for two homes is typically too much for most borrowers to over come.

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