Socialebb Strategies and Solutions

Tucson real estate agents and agents elsewhere in  Arizona have asked me for names of lenders who handle FHA 203(k) rehab financing. I am attending the annual conference of the Arizona Mortgage Lenders Assn. and I am happy to offer some names. Feel free to add you name in the comments if you are a lender who supports FHA 203(k) financing.

Tom Heath Tom@TheHeathTeam.com
Consolidated Lenders (Tucson)
520-271-7495

Sherry Olsen sherry.olsen@bankofamerica.com
Bank of America (Chandler)
480-224-6949

Jill Hoogendyk  jhoogendyk@bncnationalbank.com 
BNC National Bank (Scottsdale)
602-508-3768

Jackie Atkins  jacqueline.atkins@wellsfargo.com 
Wells Fargo Home Mortgage (Green Valley)
520-400-7234

Yvonne Herreras  yvonne.herraras@ncmc.com 
National City Mortgage (Tucson)
520-299-4106
  

FHA financing has been a mainstay of financing for many years. In my own market in the Lehigh Valley (PA) and elsewhere, FHA financing has accounted for some 75% of the total loan volume.

FHA offered the first low-down-payment loan program in the country, opening the door to home ownership for the working class Americans with limited savings. The Federal Housing Administration was established in 1934 with a mission to raise housing standards and design a home financing system with a federal mortgage insurance program that would lessen the risk for lenders. The program made home ownership possible for families who were otherwise excluded from the housing market. It continues to serve that mandate today.

In the 1940s FHA programs were designed to help financing military housing and for returning veterans and their families. In following years, through the 1970s, FHA stepped in to help galvanize production of millions of units of private apartments for elderly, handicapped, and lower income citizenry. When high inflation and runaway energy costs threatened the economic viability of private multi-family housing units, FHA stepped in with emergency financing to help property owners keep their heads above water.

The 1980s recession offered special financing challenges to homebuyers when private mortgage insurers left oil-producing states. FHA stepped in and helped stabilize declining home prices and designed programs to help homebuyers obtain mortgage financing.

In 1995 FHA placed increased emphasis on minority and first-time homebuyers and implemented the National Homeownership Strategy to provide increased marketing and outreach to those groups.

Advantages of FHA Financing

There are numerous FHA “wannabe” conventional loans and 100% loan products. FHA has certain advantages over conventional financing:

The total down payment for an FHA loan is only 2.25% of the sale price.
Income-to-debt ratios are generally higher with FHA loans. Buyers can
qualify with 29% front-end ratios and 40% ratios on the back end, compared
with similar conventional products that limit borrowers to 33-36% on the
back end. Borrowers have more borrowing power with an FHA loan.

Front End Ratio: Monthly Income x 29% = Maximum PITI (principal,
interest, taxes, and insurance. For a monthly income of $3, 000, that means that
$870 is the maximum mortgage payment for qualifying purposes UNLESS THE
BACK END RATIO NUMBER IS LOWER.

Back End Ratio: Monthly Income x 40%- other debt = Maximum PITI
(principal, interest, taxes, and insuranc)t. For a monthly income of $3, 000, that
means that $1,200 minus other monthly debt is the maximum mortgage payment
for qualifying purposes. (This reflects other revolving debt such as charge cards,
student loans, car loans, etc.)

FHA lets the buyer negotiate a 6% seller assist toward closing costs. In many cases, a borrower needs no more than 3% of the total sale price as a total cash-out-of-pocket investment. There are other alliances and programs that will let the seller pick up the whole tab. Some of these plans are under close scrutiny by the U.S. Internal Revenue Service. Developments in this
arena will be updated on this book’s blog at www.HUDhomeSaleBook.com .

FHA is much more lenient with credit issues than conventional lenders.

Even bankruptcy discharges a year old can work with FHA if good credit follows the discharge. FHA underwriters give much credence to letters of explanation about credit recitals. (See Chapter 5 Confronting The Credit Gremlin.)

HUD Homes offered with FHA financing offer special incentives to buyers. HUD Homes that are eligible for FHA 203(b) financing have reduced closing costs because there is NO APPRAISAL fee. Lenders are required to use the appraisal that HUD has on file.

Keep in mind an important fact about FHA financing of HUD Homes for Sale: FHA will only finance a maximum loan amount that corresponds to HUD’s asking price. If a buyer is inclined to ‘bid up” a property and finance that property with FHA financing, he will have to make up the difference between the asking price and the bid amount with additional down payment monies. This can put an FHA buyer at a serious disadvantage in the bidding process. It is advisable under these circumstances to have alternative financing in place to maximize bidding potential.

For instance: A buyer expects that there will be competing bids for a house at 123 Main Street. HUD’s list price is $85,000. The buyer is confident that the real value of the property is closer to $100,000. He bids $90,000. His down payment will increase from 2.25% of $85,000 ($1,912 down payment) to that amount PLUS an additional $5,000 ($6,912 down payment).

FHA LOAN CHECKLIST

• Address of your place of residence (past two years)
• Social Security numbers
• Names and location of your employers (past two years)
• Gross monthly salary at your current job(s)
• Pertinent information for all checking and savings accounts
• Pertinent information for all open loans
• Complete information for other real estate you own
• Approximate value of all personal property
• Certificate of Eligibility and DD-214 (for veterans only)
• Two most recent pay stubs
• W-2 forms for past two years
• Personal tax returns (past two years), current income statement and business balance sheet for self-employed individuals.

(Frances Flynn Thorsen is author of HUD Homes for Sale - A Complete Buyer's Guide and HUD Homes for Sale - Sales and Marketing Guide for Real Estate Agents.)

"I don't have bad credit, I just don't have any credit." How does someone establish credit? Conventional wisdom says, "Borrow some money and pay it back."

People are putting themselves into debt to establish a credit score that did not recognize the payments that they were already making. Pay Rent, Build Credit, Inc. (PRBC) is a web-based self-help service that enables consumers and small business owners to build their credit scores through timely rent, mortgage, and other recurring bill payments.

"The PRBC Data Network enables users to build an historical credit file using multiple payment accounts such as rent, mortgage, mobile home, utilities, student loan, auto, insurance, phone, self-storage, etc... Users can build an accurate credit file with rent and other bill payments in real time when made online, by phone, credit or debit card, ACH (automated clearing house), or by other means that can send a date-stamped electronic "receipt" to PRBC.

"PRBC users can build historical credit files based on up to three years of prior payment records that can be manually verified by independent sources, like banks, REALTORS®, accountants, and credit counselors. But most importantly, for future payments, the PRBC Data Network enables consumers and small business owners to build an accurate credit file automatically.

"The results for consumers can be staggering. Without going into debt, a renter can prove they are ready, willing, and able to handle a big financial obligation, like repaying a mortgage. The PRBC Data Network will provide a greater number of loan applicants with an equal opportunity to access prime rate mortgages, auto loans, and other financial products...This is a significant development for borrowers and lenders alike because until now, credit reporting and scoring technologies have not been able to account for the timeliness of most rental, sub-prime loan, utilities, and other household or businessrelated bill payments as a measure of credit worthiness.

"The PRBC Data Network will accept...rental and other bill payment input from landlords, mortgage lenders, and other creditors who want to use the PRBC Data Network to report timely, as well as late payments, to reward their customers who pay on time, not just penalizing those who are late."

(Frances Flynn Thorsen is author of HUD Homes for Sale - A Complete Buyer's Guide and HUD Homes for Sale - Sales and Marketing Guide for Real Estate Agents.)

When there are credit discrepancies or other factors that place a cloud over a loan applicant's prospects to receive financing, a carefully crafted Letter of Explanation may make the difference between homeownership and continued rental tenancy. Real estate buyer agents can offer proactive help with this process.

Obtain a copy of the credit report from the lender and ask the buyer to write an explanation for each derogatory entry as well as for recent inquiries. Be sure that he includes the following components for each entry and issue the following advice:

1. Cite the entry or inquiry first with the creditor name, the amount of monies involved, and he date(s).
   
   
2. Explain the history of the problem. Don’t be timid about sharing the details of personal challenges.Be honest about the circumstances that led to your financial problems. If circumstances were beyond your control, give a brief history of the events leading to you inability to meet your financial obligations. Life impacting personal events and the emotions attached to them are important factors that an underwriter considers. On the other hand, if you were remiss in your obligations, and the problems were due to your own negligence, be candid and admit your mistake. Follow this admission with a statement that you understand the importance of establishing a good credit profile and emphasize that you now place a priority on paying your bills on time. Remember, this letter is written for HUMAN eyes, not for a computer.
   
   
3. Describe the steps you took to correct the problem. “I paid the amount owed,” or “I entered into a payment arrangement” are good starters, especially if you can provide documentation for your claims.
   
   
4. Close the letter with a paragraph that pulls it all together and describes a pattern of improved financial health habits. Project creditworthy loan performance and give the underwriter an “A” right here for approving your loan application! A sample letter appears on the following pages.
   
   
5. Supply documentation to buttress your narrative.

• Divorce matters can be documented with either divorce decree or separation agreement, court ordered documents for child support, tax documents for most recent year filing jointly, paperwork pertaining to arrearages in child support, and printout from domestic relations court showing either satisfactory child payment history or arrearages.
  
  
• Job Loss claims can be supported with layoff notice, Unemployment Office records, and other proofs of dismissal.
  
  
• Injury Resulting in Inability to Work can be shown with proof of Workman’s Compensation and letters from doctor or employer about the injury.
  
  
• Spousal Abuse can be documented with police reports, medical records, and Protection from Abuse orders from the court.
  
  
• Business Failure is best illustrated with tax returns for the most recent year or proof that the borrower is no longer self employed (i.e. current pay stub from employer).

SAMPLE LETTER OF EXPLANATION
FOR CREDIT CHALLENGED BUYERS

Re: FHA Mortgage Application

Dear Sir or Madam:

This letter provides explanations for each item listed in my credit report obtained in
connection with my mortgage application.

1. Unpaid Student Loan Collection Balance Due $1,224. Pennsylvania State University. Dated 11/02 and 04/04

These are duplicate items on the credit report. In May 2002, I graduated from Penn State. At this time I moved in with a friend at 123 Hamilton Ave. in State College because I was not able to find a job. I found a job four months later and moved into an apartment at 334 College Avenue.

My loan deferment period expired at that time and I commenced payments on a regular basis. I was under the impression that the loan that I received for prior education at Lock Haven University was included in these payments because I never received a bill from Lock Haven University.

In 2005 I received a note from a former roommate at Lock Haven that contained unopened mail that she kept for me. There were bills from Lock Haven University totaling $3,200. I immediately sent them $1,000 and additional monies in the following months. I will pay this loan in full before closing.

2. Late Payments Dated 10/02, 11/02, and 12/02 and 04/03 with Current Student Loan Balance $14,224

When I moved in September 2002 I inadvertently missed a payment on my student loan. Each of the payments I made in the following months was logged as 30 days late. I caught up as soon as it was brought to my attention.

In March 2003 my brother suffered an injury at work and was unable to make his rent and some other obligations. I tried to help him meet some of those expenses, and missed one or my own as a result. I brought my account up to date shortly thereafter and have paid this bill on time each month ever since.

3. Late Payments Dated 01/02, 03/03, 04/03, and 05/03 With Credit Card Bank. Current Balance Zero

In January 2002 there was a charge that appeared on my credit card bill that I did not authorize. I did not pay the bill because I did not order the product. That amount was removed from my bill the following month. From a period of March through May 2003 I made large payments to bring my student loan up to date (see above) and I was short of funds as a result. I should have balanced my payments so that nothing else suffered. I know that paying my bills is important for my future and for the future of my family.

4. Late Payments Dated 02/00 – 05/00 With Universal Bank Group. Current Balance Zero

I believe tha t this is a mistake on the credit report. I have never had an account with this bank I am disputing the entry with the credit reporting agency.

5. Late Payments With US LEC

I always contested this bill. US LEC was charging me for services associated with my web services that I did not use. These charges were attached to legitimate charges and when I became aware of the fact that I had already paid for these services for two years I tried to persuade them that it was unfair to charge me for services I did not use. They did not agree and in the end I paid the $325 bill to restore my credit and then I cancelled my account with them.

6. Why Five Banks Checked My Credit in the Last Three Months

I spoke with several lenders in the last three months to compare rates and terms to find a mortgage.

I appreciate the opportunity to share information about the circumstances leading to some entries on my credit report. My credit rating is very important to me and I am striving to meet all of my financial obligations in a responsible manner. I am excited about owning my own house and I look forward to building a strong relationship with you as a lender. You will see that I will make all of my payments on time and I promise that you will be happy that you approved this loan.

Yours truly,

Fiona Murphy


(This blog post is an excerpt from the author's book, HUD Homes for Sale - A Complete Buyer's Guide.)

Qualifying Number And Comfort Zone Number

uyers must have their financing ducks in a row before placing an offer on a bank owned property or a HUD Home. Selecting a good lender is an integral part of the loan process. A lender will take a careful look at a buyer’s financial circumstances and tell him how much mortgage he is qualified to receive. This is important to know and it is an important number to weigh against another number that is even MORE important, the maximum monthly mortgage amount that the buyer is comfortable with.

What is the buyer paying in rent or toward another mortgage right now? Is that a comfortable number? What is the difference between the lender’s Qualifying Number and the buyer’s Comfort Zone Number?  If the Comfort Zone Number is lower than the Qualifying Number, see how that number translates into a mortgage amount and use that number as a cap on a mortgage.

After determining the maximum mortgage amount, work according to a strict guideline in terms of the buyer’s price caps. Don’t even show properties that exceed that level. Don’t even be tempted. There are two dangers in looking at properties with price tags that exceed a buyer’s Comfort Zone Number:

1. He may want to extend his financial reach. Buyers should be careful not to stretch their resources so much that they will be “house poor,” devoting too many monthly dollars to housing expenses. Counsel them to not sacrifice too much in other areas of your life to meet a high monthly mortgage obligation. Many people make this mistake. That is a primary reason there are so many foreclosures and HUD Homes for sale.
   
   
2. More expensive houses have more to offer than less expensive houses in terms of location and amenities. Lesser-priced houses may pale by comparison with higher priced properties. Offer this advice: “Be kind to yourself. Keep your sights focused on a price range that you can afford right from the beginning. You will avoid having to ‘scale down’ a search and ‘settling’ for less than you want. Keep your stress level low.” Trends to maximize purchasing power leave homeowners with debt loads that add a measure of stress to their lives that stifles the ability to enjoy the fruits and the joy of homeownership.

NOTE: Not all lenders finance HUD homes. The best lender to work with in these circumstances is one who has a proven track record of financing foreclosures and HUD Homes.

The best way to determine this is to ask point blank: “How many foreclosures and HUD homes have you financed in the last two years?”

If a lender is not up to speed on processing HUD Home loans there can be processing delays that extend past the 45-day deadline for settling the property, and the buyer may incur additional costs for contract extensions. The contract may be extended for 15 days for a per diem fee; HUD may cancel the contract after that if the paperwork is not completed.

(Frances Flynn Thorsen is author of HUD Homes for Sale - A Complete Buyer's Guide and HUD Homes for Sale - Sales and Marketing Guide for Real Estate Agents.)

Congress enacted the Real Estate Settlement and Procedures Act (RESPA) to protect consumers from “… unnecessary high settlement charges caused by certain abusive practices that have developed in some areas of the country.”

For the first time in more than 30 years, the U.S. Department of Housing and Urban Development recently issued long-anticipated mortgage reforms that will help consumers to shop for the lowest cost mortgage and avoid costly and potentially harmful loan offers. HUD will require, for the first time ever, that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. HUD estimates its new regulation will save consumers nearly $700 at the closing table.

In announcing HUD's final changes to the regulatory requirements of the Real Estate Settlement Procedures Act (RESPA), HUD Secretary Steve Preston said that changes in the housing market and increases in home foreclosures demands action.

"It has been a long road but today we can finally announce a better way to buy homes in America," said Preston. "Consumers need and deserve to know what they're getting themselves into before they sign on the dotted line. After carefully considering the concerns of consumers and the different businesses in the housing sector, we have developed an approach that empowers the average family to shop for the most appropriate loan to meet their needs."

• Prohibited Fees. It is illegal under RESPA for anyone to pay or receive a fee, kickback or anything of value because they agree to refer settlement service business to a particular person or organization. For example, a mortgage lender may not pay a real estate broker $250 for referring a buyer to the lender. It is also illegal for anyone to accept a fee or part of a fee for services if that person has not actually performed settlement services for the fee. For example, a lender may not add to a third party's fee, such as an appraisal fee, and keep the difference.
  
  
• Permitted Payments. RESPA does not prevent title companies, mortgage brokers, appraisers, attorneys, settlement/closing agents and others, who actually perform a service in connection with the mortgage loan or the settlement, from being paid for the reasonable value of their work.
  
  
• Penalties. It is a crime for someone to pay or receive an illegal referral fee. The penalty can be a fine, imprisonment or both. You may be entitled to recover three times the amount of the charge for any settlement service by bringing a private lawsuit. If you are successful, the court may also award you court costs and your attorney's fees.

(This blog post is an excerpt from the author's book, HUD Homes for Sale - A Complete Buyer's Guide

.)

The Streamline(K)

This is a relatively new loan product that FHA rolled out in 2005. It is intended to assist homeowners with basic repairs costing up to $35,000. (There is no minimum repair cost threshold.) It is designed to be an easy-to-use program for uncomplicated rehabilitation and/or improvements for which plans, consultants, engineers, and/or architects are not required. (More complex improvements are handled with the FHA 203(k) program that is described in the next section.)

Use of the Streamline (K) program is limited to properties with the following work category items:

• Repair/replacement roofs, gutters and downspouts
• Repair/replacement/upgrade of existing HVAC systems
• Repair/replacement/upgrade of plumbing and electrical systems
• Repair/replacement of existing flooring
• Minor remodeling, such as kitchens, which does not involve structural repairs
• Exterior and interior painting
• Weatherization: including storm windows and doors, insulation, weather stripping, etc.
• Appliances - when at least $3,000 of basic home repairs are involved.
• Appliances may include freestanding ranges, refrigerators, washers/dryers, dishwashers and microwaves and may not exceed $2,000 in total cost.
• Improvements for accessibility for persons with disabilities

When a borrower applies for a Streamline(K) mortgage based on repairs identified in a pre-purchase home inspection, he must offer the FHA appraiser information regarding planned repairs and a copy of the pre-purchase home inspection. He must confirm that the repair is necessary and may be accomplished without the need for a fee consultant, work write-up, plans or exhibits. Additionally, the appraiser must note any health and safety deficiency that the proposed repair plan does not address.

Repairs must comply with all local codes and ordinances and the borrower and/or contractor must obtain all required permits prior to the commencement of work.

FHA 203(k) Repair Program

FHA 203(k) program is designed to handle more robust rehabilitation needs costing at least $5,000 that may include the following types of work:

• Major rehabilitation or major remodeling, such as the relocation of a loadbearing wall;
• New construction (including room additions);
• Repair of structural damage;
• Repairs requiring detailed drawings or architectural exhibits;
• Any environmental mitigations including modifications involving disturbance of painted surfaces in pre-1978 properties or any lead based paint abatement;
• Landscaping or similar site amenity improvements;
• Any repair or improvement requiring a work schedule longer than six months; or rehabilitation activities that require more than two payments per specialized contractor.

HUD Homes For Sale that qualify for FHA 203(k) financing are noted on the HUD property details on the M&M Contractor web site.

NOTE: Not all FHA lenders are approved to offer 203(k) financing. Interest rates may be higher for 203(k) financing than it is for less complicated financing that does not include a repair cost component.

(This blog post is an excerpt from the author's book, HUD Homes for Sale - A Complete Buyer's Guide.)