You may remember that HUD increased monthly mortgage insurance premiums on FHA loans last year in an effort to shore up finances for the FHA insurance poll. Unfortunately, HUD is at it again. Beginning with FHA case numbers assigned after April 17, 2011 monthly mortgage insurance premiums will be going up .25% for 30 year mortgages and .50% for 15 year mortgages. HERE is a link to download the mortgagee letter in case you want to read the news directly from the source.
What does this mean for homebuyers? It means monthly payments will rise. On a hypothetical purchase of a home for $215,000 the total monthly “PITI+MI” payment would increase from $1,509 to $1,552; an increase of $43 per month.
To avoid this change homebuyers would have to be in contract to buy a home a couple days before April 17th so that the lender could register the loan with HUD prior to the change. The upfront mortgage insurance premium that gets financed into the loan amount would remain unchanged at 1.00%.
The Department of Housing and Urban Development released THIS STATEMENT last week announcing upcoming changes to the popular FHA loan program. The changes will take effect September 7thOctober 4th and are designed to increase mortgage insurance revenue to help stabilize the FHA insurance pool which makes FHA loans possible. Effectively, HUD is decreasing the upfront mortgage insurance premiums (currently 2.25%) by 125 basis points (1.00%) but increasing the monthly mortgage insurance by 35 basis points (from .50-.55% to .85%-.90%). The change will increase monthly payments and decrease affordability. Here is the impact per $100,000 in loan amount:
Current MI arrangement for >95% loan-to-value per $100,000
The Mortgage Banker’s Association is reporting that the FHA Reform Act of 2010 passed the US House of Representatives. This bill was drawn up in response to many of the solvency issues that the FHA began encountering late last year (see HERE). One of the most aggressive provisions of the bill is that it will allow the FHA to charge up to 1.55% in annual mortgage insurance premiums. This is up from the current maximum of .55%. How does this translate into dollars?
Currently, for a homebuyer that buys a home for $250,000 and puts the minimum 3.5% down that is required by FHA financing their monthly mortgage insurance premiums are $110.57. Their total principal, interest, property taxes, homeowner’s insurance, and mortgage insurance (PITI) is about $1,737.
With the proposed mortgage insurance the same homebuyer would have monthly mortgage insurance premiums of $311.61 (181% increase). Their projected PITI payment would be $1,938 (11.6% increase).
The bill has yet to become law but I suspect that it will. It’s unclear at this point how quickly the new provisions would be put in place. I’m curious to know how happy the private mortgage insurers are about this. The increase of mortgage insurance premiums should generate a lot more business for them.
For many people saving for a rainy day is hard enough as it is. Add on top of that all the other financial objectives a person is typically concerned with (i.e. retirement, college savings, paying down debt) saving for a down payment on a home can be difficult. Because of this I often have clients who are interested in accessing funds in their retirement accounts to come up with money for a down payment. In order to do this it’s important that homebuyers be educated on their options. Therefore, I have put together this post to summarize the important points of using 401K, IRA, and Roth IRA funds towards the purchase of a home.
One quick note that is generally applicable to all three sources. Typically funds derived from a retirement plan used towards the purchase of a home may only be used as a down payment and “usual or reasonable settlement costs” and may not be used to pay other debts in order to qualify for a new mortgage.
401K
Rules for each 401K plan are slightly different so homebuyers need to talk with their plan administrators to make sure they can use their 401K. Technically, a person cannot generally withdraw money from their 401K to use towards the purchase of a home. Instead most 401K plans will allow participants to borrow money from their 401K and pay it back with payroll deductions. For funds being used to purchase a home the repayment period can be longer than the normal required period of 5 years but check with the plan administrator to make sure the payments won’t be onerous .
The plan will usually assign an interest rate to the loan but because the participant is paying and receiving the interest the effective cost of borrowing is 0%. However, while the loan is outstanding keep in mind that it is not receiving investment returns so the true cost of tapping into a 401K is the “opportunity cost”. Homebuyers wishing to use their 401Ks should consider the impact this will have on their future ability to retire. Also, keep in mind that repayment of a 401K loan is made with after-tax dollars. Therefore, when that homeowner retires int he future they will effectively pay tax on the loan amount twice (once when they repaid the loan with after-tax dollars and again in retirement when they take a taxable distribution from the account).
Typically the maximum a person can borrow from their 401K is the lesser of $50,000 or 50% of their vested balance. If the vested balance is less than $20,000 then sometimes they can borrow up to the vested balance or $10,000 whichever is greater.
It’s important to note that a person does not have to be a first-time homebuyer to use 401K funds. It’s also important to note that because the homebuyer will pay back the 401K loan with payroll deductions then it is generally not possible to access funds in a 401K with a previous employer. The homebuyer must currently be working for the plan sponsor. This also creates a significant risk because if the employee is terminated during the repayment period on the loan and cannot pay back the remaining balance the amount will be treated as a non-qualified distribution and be subject to ordinary income tax plus a 10% penalty.
Please note that some 401K plans do allow “hardship” withdrawals for participants who qualify as a first-time homebuyer. However, these distributions are taxable so unless cash-flow is a major concern often times a loan will make more sense.
IRA
IRAs are different from 401Ks in that a person is able to take distributions instead of having to take out a loan. The question then becomes whether or not the distribution will be a deemed a “qualified” or “non-qualified” distribution. A “qualified” distribution IS NOT subject to a 10% penalty while a “non-qualified distribution” is subject to a 10% penalty.
In order for a distribution to be qualified the homebuyer must be a first-time homebuyer which the IRS defines as a person who has not owned real estate in the previous 24 months. The $10,000 cap is a lifetime limit so once a person has utilized the $10,000 they may not use it again.
So long as the contributions to the IRA were tax deductible for the homebuyer then the distribution will be taxed as ordinary income. If the distribution does not meet the criteria of being a “qualified” distribution then it will also be subject to a 10% penalty. Since the homebuyer will typically incur income tax liability for an IRA distribution it’s important they account for that when budgeting out their money from the time of distribution to the following April 15th when taxes are due.
Roth IRA
The rules for Roth IRA distributions used towards the purchase of a home are similar to the aforementioned traditional IRA guidelines in that it is only available for those who meet the IRS’s definition of a first-time homebuyer and is only available up to $10,000. However, there are a couple key differences.
One key difference is that for a distribution to be “qualified” it may not be made inside a 5-taxable-year period which begins January 1st of the taxable year for which the very first contribution was made to any Roth IRA the homebuyer owns. In other words, for a first-time homebuyer who wishes to take a “qualified” distribution from their Roth IRA account anytime in 2010 must have made their very first Roth IRA contribution (to any Roth account) no later than the 2005 tax year.
The other key difference is taxation. Because Roth IRA contributions are not tax deductible at the time of contribution “qualified” distributions are not treated as taxable income. However, if the distribution is not deemed to be “qualified” then it will be subject to a 10% penalty and depending on the contributions made and distribution taken may also have income tax implications.
I hope this summary enables homebuyers out there to make better decisions with their money. Please remember that I am not a tax professional and tax code is subject to change. It is best to discuss your options with a knowledgeable professional when you are close to make such a decision. It is also important to consider the impact that the decision will have on your ability meet your retirement accumulation goals.
Two days ago HUD announced changes to the popular FHA loan program. The changes are designed to “strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for undeserved communities.“
If you’ll recall last September FHA announced that their capital reserves (used to insure FHA mortgages) fell below mandated levels. These changes are designed to raise more money to boost those reserves and tighten their underwriting requirements so that the loans they are insuring are less risky.
These changes take effect for loan applications after April 5th, 2010. I’ve underlined what I think are the most relevant changes for consumers and real estate professionals to be aware of:
Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
The first step will be to raise the up-front MIP by 50 bps to 2.25% (it is currently 1.75%) and request legislative authority to increase the maximum annual MIP that the FHA can charge.
If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP (this will increase monthly payments).
This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
Update the combination of FICO scores and down payments for new borrowers.
New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
Reduce allowable seller concessions from 6% to 3% (this will make it more difficult for first-time homebuyers to buy-down their rate and/ or require they have more cash to close)
The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
Increase enforcement on FHA lenders
Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches
There are a few things to know about standard FHA loans.
*Minimum down payment requirement: Currently homebuyers who use FHA mortgage financing to buy a home can put as little as 3.5% down and borrow the remaining amount.
*Down payment may be gifted: FHA is one of the few programs that allows the entire down payment to be gifted from a family member even if the down payment is less than 20%.
*Seller may pay settlement charges: Currently the seller may pay up to 6% of the sales price towards a homebuyers settlement charges.
*Higher debt-to-income qualifying ratios: FHA is a little less restrictive than conventional financing when it comes to approving an application on the basis of an applicant’s debt-to-income ratio (DTI=sum of proposed housing payment + other monthly obligations/ gross qualifying income).
*Mortgage Insurance: The one major downside of FHA loans is that the associated mortgage insurance is expensive. Currently purchasers who utilize a FHA loan to buy a home finance an upfront mortgage insurance premium (UFMIP) equal to 1.75 % (as of April 1, 2012) of the base loan amount and still pay a monthly premium that is equal to .1000-.1042% (as of April 1, 2012) of the base loan amount depending on the down payment. For example, a FHA $200,000 purchase with a 3.5% down payment would carry an UFMIP of $3,378 and monthly premiums of $201.04. A homeowner with a FHA loan must keep the mortgage insurance for at least 5 years. After that time they will be eligible to have the mortgage insurance canceled once the loan balance drops below 78% of the initial purchase price (or initial appraisal if it was less).
*Loan are assumable: One of the coolest features about a FHA loan is that it is assumable. This means that when a FHA loan holder goes to sell their property they can sell the home with the mortgage on it so long as the buyer qualifies for the existing mortgage. This is a very attractive feature given the current level of interest rates. FHA borrowers are encouraged to read the small print closely because having another party assume your mortgage may not release them of personal liability.
It is likely that some of these features will change with time so please confirm this information with a mortgage originator when applying for a FHA mortgage.
By some estimates as many as 35-40% of homes sold in the Portland-Metro area thus far in 2009 have been bank-owned or short sales. Often times these sales involve distressed property because the sellers lack financial motivation to provide basic maintenance to the home.
Looking ahead I don’t expect this pattern to change as we head into 2010. Although reliable data isn’t widely available it is assumed that banks are sitting on hundreds if not thousands of additional homes and foreclosure rates remain high. This guarantees a steady supply of distressed property on market over the next couple years.
Buying distressed property can create substantial opportunity because with a few repairs and cosmetic touch ups homebuyers can realize immediate equity appreciation.
Unfortunately buying distressed property is problematic. Often times conventional lenders will not approve loans secured by property with “below average” condition and the banks and cash-strapped sellers who own the home are generally unwilling to invest in repairs.
However, the FHA’s 203K streamline program is a great solution. This program enables borrowers to finance the purchase (or refinance) of a home and the cost of its rehabilitation through a single mortgage.
Here are a few bullet points about the FHA 203K streamline loan:
*Eligible properties: Existing homes that have been completed for at least one year (no new construction).
*Down Payment: Homebuyers must have at least 3.5% for their down payment. The 3.5% is based on the initial purchase price. This may come from a gift from a qualifying family member.
*Maximum Loan Amount: The maximum mortgage loan amount may not exceed 110% of the after-improved value of the home.
*Maximum Rehabilitation Amounts: The maximum amount for repairs and improvements is $35,000 (this must include a 10% contingency reserve). The homebuyer may combine the $35,000 streamline maximum with an $8,000 energy efficiency provision for a maximum of $43,000. There is no minimum amount.
*Eligible Improvements: This program is intended to facilitate uncomplicated & cosmetic rehabilitation and/ or improvements. Therefore, structural repairs and changes, luxury items (i.e. hot tub), and additions are not allowed. Examples of what are acceptable are roof repair/ replacement, window repair/ replacement, and weatherization.
*Eligible Expenses: Eligible expenses are material, labor, overhead, and construction profit, plus expenses related to the rehabiliation such as permits, fees, inspection fees, licenses, and lien protection fees.
*Contractor or Self-Improvement: In most circumstances self-improvement is not permitted. Therefore, homebuyers must hire a qualifying contractor.
*Qualifying for the loan: In general, the qualifying factors for the streamline 203K is the same as the standard 203B loans.
*Transaction process: Homebuyer is pre-approved for 203K loan, finds home and reaches agreement with seller (be sure to have FHA Amendatory Clause and Real Estate Certification signed with purchase agreement), homebuyer must hire licensed/ bonded contractor to get estimates on repairs, loan application along with HUD form 92700 is submitted to lender, appraisal is completed, loan is approved and funded, rehabilitation amount is funded into escrow account, 50% initial disbursement is made to contractors, contractors complete work, final inspection may be required, and final payment is made to contractors. Because of the additional paperwork and underwriting requirements associated with the rehabilitation work we recommend 60 day closing schedules.
*Interest rates and closing costs: Because of the limited supply of wholesale 203K loan offerings and because of the recommended extended close times the interest rate for a 203K loan will be about .125%-.375% higher than the standard FHA loan. A homebuyer can also expect an additional $500 in closing costs because of more extensive appraisal and additional administration requirements.
This post is meant to provide a concise summary of the 203K loan program. Please contact me directly for further information and necessary paperwork.
I was recently asked by a real estate professional about FHA’s anti-flipping rule. Since I did some digging on the subject I thought I would post what I found because I suspect many others are coming across similar circumstances.
HUD say's "FLIP OFF!"
What is the anti-flipping rule?
It prevents homebuyers from obtaining FHA financing when they write an offer to buy a home within 90 days of the seller obtaining ownership. In other words, if Bill buys a home today and immediately puts it back on the market tomorrow a homebuyer using FHA financing would not be able to write an offer to buy it until 90 days has gone by. There are a few exceptions including when ownership has transferred via foreclosure or via the distribution of an estate.
Why does FHA have this rule?
FHA originally put this rule into place to prevent fraudulent property flippers, lenders, and appraisers from churning a property and cashing-out nonexistent equity. These schemes actually took place during the boom years and ended up costing FHA millions.
What else does a homebuyer need to know?
The anti-flipping rule doesn’t totally prevent the usage of FHA financing to acquire a legitimately “flipped” home. The homebuyer must wait until the 91st day of the seller’s ownership to write an offer to buy the home. Furthermore, if a sale takes place within the first year of a seller’s ownership a FHA underwriter is likely to require 2 appraisals no matter what the circumstance. If the seller has improved the property and is selling the home at a premium from the price they paid then the FHA underwriter will also likely request seller-provided documentation to justify the increase in the homes value (i.e. receipts from contractors for services and materials).
The Washington Post published this article stating that FHA is expected to announce changes to the popular FHA loan program tomorrow in an effort to shore up the agencies finances. The objective of the changes is designed to have homebuyers put more “skin in the game” so that walking away from their home is less attractive. Here is a summary of the proposed changes the article makes comments on (please note that the article is only speculating on changes):
*Higher minimum down payment requirements. Currently the FHA program only requires a 3.5% down payment. The article speculates that they may raise this amount to 5%.
*Limit seller concessions. Currently the FHA program allows the seller to pay up to 6% of the sales price towards the buyer’s settlement charges. According to the article FHA may reduce this amount to 3%.
*Higher mortgage insurance premiums. Currently homebuyers who take out a FHA loan putting the minimum 3.5% must finance an upfront mortgage insurance premium equal to 1.75% of the base loan amount AND pay monthly mortgage insurance premiums equal to .55% of the base loan amount.
*Higher credit scores. This proposed change is irrelevant because virtually all lenders already impose overlays that meet the new credit score requirements.
*Lastly, Lenders who work directly with FHA would have to have higher net worth’s to support possible fraud charges. Currently the minimum is $250,000 and under the proposed changes the minimum net worth would be $2.5 million.
