The FHA Expert

Creative FHA financing -- No money out of pocket from the buyer!!! -- Part 1

Did someone say no money needed?  Yes, no money from the buyer.

There are several non-profit programs out there that allow for some type of assistance to the buyer. Nehemiah is one of the largest non-profit organizations that allows the seller to give money for the down payment and closing costs. 

This program is approved by FHA which is part of HUD. Nehemiah can basically get a consumer into their dream home with no money out of pocket. FHA states that you must have 3% of your own money into the deal. And FHA typically asks for 2.25% as your down payment, which is included in the 3% total. This means that you would need to pay an additional 3/4%. But FHA also allows you to receive a 100% gift that can be used for both your down payment and closing costs. This gift can come from either a family member and or a non-profit organization.

Nehemiah allows for the seller to contribute up to 6% of the purchase price which can be applied towards the buyer's down payment and closing costs as mentioned above. They charge a $499 flat fee for this service. This fee can be paid by the seller, buyer, or even the lender. You can also combine that 6% with the seller contributing another 6% as seller contribution.

What takes place is that the seller gives Nehemiah the money which turns around and gives that money to the buyer as a gift. These gift funds can be for first time home buyers and even repeat buyers. There is no income limitations or geographical restrictions. And the best thing is that you don't even have to repay the money, hence the reason why it's called a gift.

Overall, the only thing that needs to happen is to be approved by your lender for the FHA mortgage and for the seller to contribute the funds. And what is great about FHA is that they allow for 6% seller contribution. Another reason on how you can get into your dream home with no money out of your pocket. Between Nehemiah and the seller contribution,  you could be in that house with as little as zero money.

 

Part 2 is going to go into detail on how a FHA mortgage can work for you and for those with less than perfect credit.  And I was inspired by Thesa Chambers because of our conversation the other day to write this post.

 

Here is Part 2 : Understanding FHA financing....  Part 2 -- Creative Financing & no money down

Mortgage Banker vs Mortgage Broker -- What is the difference???

There has been a lot of talk recently about the difference between a mortgage banker and a mortgage broker. This talk is not just from realtors and consumers, but those in the mortgage industry. And if it seems a little confusing at times to the actual loan officer, just imagine what it might seem like to the average realtor or even the consumer.There are 2 main differences with a 3rd that will be explained later on within this post.

A Mortgage broker acts as an intermediary who sources mortgage loans on behalf of individuals or businesses. Traditionally, banks and other lending institutions have distributed their own products. (from Wikipedia)

A mortgage banker is one who originates, sells, and services mortgages in the secondary mortgage market. Using their own funds to close a loan. (from www.investorwords.com)

The diagram below represents a broker or a banker. It says if the borrower goes to a broker, the broker sends it to a wholesale lender before you can get your house. On the other hand, if you go to the banker, they use their own money. There will be some differences in what kinds of bankers there are that will be explained below.

 

 

 

                                                                        

In the diagram above, you have a borrower that can either go to a banker or a broker to buy or refinance their home. Here is part of the problem when someone might talk about a banker. Many of you think of a local bank who has someone that sits at the bank and can help you with your financing needs, hence they can be called a banker. They have checking & savings accounts, CD's, and other banking specialties.These are your local banks, large or small. But many of these banks don't have loan officers that know many of the programs out there or are not usually creative in saving you money. Some larger known banks would be Wachovia, Chase Manhattan, Commerce Bank (on the east coast) and Wells Fargo. These bankers are large, use their own money, and have experienced loan officers just as brokers. And it is true that brokers account for most of the mortgages that are originated. One main reason though is because it's cheaper to operate as a broker, but this doesn't necessarily  mean that they are cheaper or better. I'll explain why later.

They type of mortgage banker that I am talking about is one who uses their own money but who can sell to other lenders acting as a broker. This can be also known as a correspondent lender. What this banker can do is use their own money from a warehouse line and hold onto your mortgage for a month until they sell it on the secondary market. You have already been locked in with this lender who can then get a bulk price for volume which allows them to still give you very competitive pricing. And these same bankers have all the programs at their finger tips just as a broker does.

The other issue is that your traditional bankers mentioned above, for the most part, can act as a broker on certain types of deals in order to have access to all types of "less than perfect" credit loans. The reason being is that they don't want to service this type of mortgage because of it's risk, so they will act as a broker.And some actually do service these credit risk loans. Also, those that say a true banker can't give you the best deal, is slightly misleading the general public. Their pricing is just as competitive as the broker and can sometimes can be better depending on their volume. This is called units at which time, the more they do, the more they can drive down pricing for their clients.

Conclusion : In my opinion, the problem that I see is that brokers will make it sound like they are cheaper in both rate and cost because they have hundred's of lenders (wholesalers) that they can sell to.They will sometimes swear up and down about this. And you will have bankers that will swear that you aren't getting the best rate because brokers are a middle man. The funny thing is that the money comes from the same place when all said and done. It's priced through Wall Street in regards to pools of money.

So, what's all the hoopla? Each is vying for your business. Meaning that these are sales tactics at times. If you read this whole thing over and over, what is missed the most?  SERVICE - TRUST - KNOWLEDGE - COMMUNICATION This is what you should be looking for and not a bunch of broken promises. 

The honest difference? Besides what was mentioned in the last sentence? Brokers don't underwrite their own loans which means that they can't close their own loans. Now, there will be an argument that brokers can get loans done just as quickly because of their relationships with certain companies. Yes, this can be true at times, but is still a negative in my book. I am a banker that sells our loans on the secondary market which does not affect you, the consumer. So I have many lenders that I can sell to just as a broker. Best of both worlds.

Not only do we underwrite our own loans, but we also close them in-house, using are own money. What does this mean? I have more control. I can usually get things done quicker than the average broker  because I have someone in-house that underwrites and close these loans. And as stated, I have more control because of what I can approve in-house than a broker relying on an underwriter that is not part of their company.  But again, this is my opinion of almost 15 years in this industry.

The people that I would be most afraid of are those that advertise like this. (may it be in writing, over the phone, on the internet, or on their web site/profile page)

•  LOWEST RATES...EASIEST TERMS 100% loans also available. Close in 7 days or less. N0 out of pocket expense. Pre-Approval guaranteed in 24 HOURS. CALL NOW!!!

So, what is wrong with the above statement? Anyone that states lowest rates and other phrases such as ZERO expenses/costs and or the word guarantee. These are sales pitches. Again, this is what you want from your lender. SERVICE - TRUST - KNOWLEDGE - COMMUNICATION 

One last thing that you want to make sure your lender can handle is conventional, FHA, VA, and subprime types of loans. You don't want to be on the short end of the stick, depriving you of every program out there, depending on your financing needs. 

 

FHA Energy Efficient Mortgages – What are they

Saving money sounds like a great thing, right? In the news, we have been hearing more about hybrid automobiles, light bulbs that last longer, and how we can help sustain Earth as we know it. There is even more talk about green buildings, new or reconstructed, that will save you money because of rising energy prices. Basically help finding ways of making homes more energy efficient.

Information from HUD states that Congress started a pilot program in 1992 demonstrating the use of energy efficient mortgages, known as EEMs. The EEMs were first tried in 5 states and the program then expanded to all 50 states in 1995.

EEMs recognize that reduced utility expenses will allow a homeowner to pay a higher mortgage payment to cover the cost of the energy improvements that were financed into the mortgage. A main reason behind the EEMs program offers homeowner's who couldn't initially afford the cost of these energy saving improvements out of pocket, the chance to finance them. Thus cutting down on pollution and making the environment a better place to live.

 

Eligibility Requirements

• Properties that are eligible are One to Four unit existing and new construction properties.
• Borrowers are approved through the normal FHA guidelines for obtaining a mortgage.
• The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is greater of 5 percent of the property's value (not to exceed $8,000) or $4,000 – whichever is greater.
• To be eligible for this mortgage, the energy efficient-improvements must be cost effective, meaning that the total cost of improvements is less than the total present value of the energy saved.
• The cost of the energy improvements and the energy savings must be determined by a home energy rating report which is done by a home energy rating system (HERS) or energy consultant. The HERS report usually costs from $150 to $350 and can be paid by the seller, the buyer, or sometimes included into the mortgage.
• The energy improvements are installed after the loan closes. The money is placed into an escrow account and is released once an inspection verifies the improvements are completed and that the savings will be achieved.
• Because of this program, the final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements. Here is a list of the FHA max mortgage limits.

 

	Purchase of new home	Same home w/ energy improvements
Purchase Price / Refinance Value	$200,000	$205,340
Loan Amount  (97.75%) + w/MIP	$197,455	$202,726
Monthly Payment @ 7.00%   *	$1,313	$1,348
Monthly Energy Bills	$188	$104
The total monthly cost	$1,501	$1,452
Monthly Savings	-	$49

• Asterisk – Monthly payment does not include taxes or homeowners insurance.    As you can see, it's not a huge savings, but it does add up. Just in 1 year only you saved $588. 

 

Along with the FHA-backed loans for these EEMS, the VA (Veterans Administration) and FNMA / FHLMC also back these types of programs with their own guidelines.

To get a better idea of these types of loan programs, please consult with an Expert on all of your Mortgage Financing Options.

 

Department of Energy (DOE) and HUD established a joint response to energy efficient housing. 

  

FHA Mortgages..... Are they that bad or is it a bad RUMOR????

Do you ever not have enough ammunition when heading into battle? Never!! For some of you, I been in the mortgage industry for over 14 1/2 years. To me, that’s a lot of miles per se.

 

I consider myself well versed when it comes to FHA mortgages and I guess you could say an expert on them. But this is not the only thing that I do. I can actually do just about every kind of mortgage that is out there. Am I an expert on every single one of them? No, there are just too many out there. To be more specific, there are over a few hundred different types of loans that one could obtain, depending on how you break them down. Some of us have our own niches. But for the most part, I can determine my clients specific needs and make sure that they are placed in the best possible mortgage program.

 

The reason for this post is education and awareness. What I want to talk about today is that when you call a mortgage company offering home loans for purchase and refinances, not only should they be interviewing you, but you should be interviewing them. FHA loans have been talked about in the negative manor in the last several years. Your fate should not be tossed aside just because a specific lender doesn't have a certain program like FHA. Why is FHA such a great program for so many?

• High LTV's (loan to value) -- 97.75% -- Your mortgage amount compared to the value of the property.
• Less than perfect credit  --  FHA Credit  --  Understanding what works
• Same rates as conventional loans
• Higher qualifying ratios 31%/43% -- Typical ratios for conventional are 28%/36% (yes, because of delegated underwriting, we have seen much higher ratios for both FHA and conventional)

Why have FHA loan programs not been used more than they should have in recent years? Let's take a looksy.

• Not every lender can do FHA loans.  Why not?  It costs money to be FHA approved. And there is more to it depending if that lender is fully approved or not. Meaning do they broker the loan out to be underwritten or do they underwrite it themselves. We underwrite our own FHA loans in-house. This is important because I have full control on what we decide.
• Subprime loans took over the market in the last 4 years. Why? They were sometimes easier for the lender but they cost the client more in rate and fees.
• FNMA (conventional) has come out with the my community home loan. It allows for 100% financing and those that have less than perfect credit with higher qualifying ratios. Great. But your rate is usually higher and the underwriting is done online. It can only be approved through a system. An underwriter can't override the decision, unlike FHA.
• Even loan officers that have FHA at their disposal are not familiar with the guidelines. Many think it's a pain in the arse, so they put you into the next best loan program.
• FNMA even has the FNMA Flex program which can be a great program. But what happens if you don't fit this program?

I am not trying to sell anyone here. My goal again is to educate the consumer. Do you want a loan officer to hang up the phone on you and call you a sucker to one of their co-workers just because you didn't know any better?

If you seek out an FHA loan or ask a lender if they are approved, just don't take them for their word. Some people are just sales people and will tell you whatever you want to hear. You can check on them through a web site provided by HUD. 

Here is that link :  Are you an approved FHA lender?

 

Summary : Don't sell yourself short. Should you have trust and confidence in your loan officer because this is one of your biggest financial decisions ever? YES. But not everyone will be looking out for your best interests. Many broken promises down the road happen. Why? They just wanted to get you into the front door. 

Remember, there are a lot of good loan officers and lenders out there. Just don't believe everyone when selling low interest rate mortgage rates and no closing costs. Don't be a shopper that shops themselves right out of the market.

FHA Credit -- Understanding what works

Piecing together your credit can sometimes be confusing. That's why you should always seek a qualified loan officer that is a FHA Expert.

In all honesty, credit is not as difficult as it may seem and FHA has made it easier for you to qualify for your dream home. There are just some important facts that the average consumer needs to know.

Several key facts :

• You don't need credit scores. No minimum credit scores.
     

• Non-traditional credit can be used.

• Very flexible on credit issues when it comes to collections, charge-offs, judgment, and even liens.

What an underwriter looks for usually is good established credit in the last 12 months. This is not written in stone, but definitely helps. The beauty about FHA loans is the fact that your credit could be less than perfect less than 12 months while purchasing a house. It comes down to the reasons why and a make sense approach. We understand that things happen in life. But they do need to be documented.

Great assets of a FHA mortgage and the credit requirements :

• A Chapter 7 bankruptcy (liquidation) needs to be 2 years old from date of discharge. Less than 2 years depending on extenuating circumstances.
     

• A Ch 13 can be 12 months out of bankruptcy while in repayment (not discharged), as long as you can show 12 months of payments on time.
     

• Usually want to see reestablished credit with no lates after a bankruptcy. But the best part of this is that the underwriter at his or her discretion can overturn the time frame of a bankruptcy depending on if the circumstances were out of your control.

                    -- Death in the family

                    -- Loss of job(s)

                    -- Sometimes divorce --  not always, depending on the circumstances.

• Consumer Credit Counseling -- sometimes viewed the same way as a Ch. 13 bankruptcy, guidelines are similar. The lender needs to see a 12-month payment history from the credit-counseling agency showing satisfactory payments and a letter from agency saying that the loan will not adversely affect the applicant's ability to repay current debts.

• Foreclosure -- Generally 3 years must have passed. But the catch here is, we don't use the date when you went into foreclosure. It's 3 years from the date that the house was sold after it went into foreclosure. This is on HUD insured loans. There are extenuating circumstances and exceptions that can be made.

• Delinquency or Default on Federal debt -- This seems to be overlooked by many loan officers. You can not obtain a FHA loan if delinquent or obligated on any type of federal lien. ie. school loans, etc.  The account would need to be brought current, paid, or otherwise satisfied. And a payment plan is satisfactory as long as it's in writing and that you have established some payments on time.

What happens if I have no credit at all?

We call this non-traditional credit. Here is a list of things that we could use. But we would need some type of proof.  And we usually want to show a 12 month payment history on letterhead from that agency, store, or company.

• car insurance -- showing your monthly or quarterly payment, how long, never late, how much a month.    
• utility bills
• cell phone bill
• repayment of loans or past debt -- doctor bills, collection accounts, etc etc
• store accounts and so much more....  anything that can be documented to show a credit history on paper

Unique credit traits of a FHA loan that conventional loans don't offer : 

• At the discretion of the underwriter, collection accounts and medical collections can be opened. More times or none though, collections outside of medical usually have to be paid off.
• Many say that if you have a lien show up on credit, that it needs to be paid in full. It depends on the type of lien and if it doesn't show up on title. Example : If you have car repo that is now a lien on your credit, as long as you have a repayment agreement and have made at least 6 months of payments on time, this is acceptable.
     

 

Summary :  FHA loans can be manually underwritten even if it comes back as a refer. As long as we can determine decent credit risk, several things can be overlooked. But we would need compensating factors. 2 months reserves is usually a big one. There are others.

 

FHA vs Conventional loan debate -- Will the real TRUTH please stand up!!!

Ever heard of that phrase, compare apples to apples?  I am a big advocate on this. So many times in the mortgage business and life in general do I hear and see people preach about a certain thing. Making you feel like they are 110% correct. Not knowing any better, unless you were well versed about this particular topic or did your research, that this information is actually false.

So, how do you relate to information that the public can read, but might be misleading, once the true facts are revealed. What if someone called one of your family members an idiot? You wouldn't take too kindly to this. For those that know me, I don't take too kindly to it or appreciate it either. And I consider my clients like family.  And because I am so passionate in helping people obtain their dream when it comes to financing their home, I like to make sure that we are all on the same playing field. And my prime reason for this is giving the consumer full transparency into lending and what's behind the scenes.

Here is the post in question. Agents Recommend FHA and VA Mortgages Much Too Often...Don't and Here's Why Before I dissect a part of this, I want to remind you that the author of this post, Rob Blake, is a true professional by heart. His expertise and knowledge in some areas has helped homeowners of the past. But I disagree on his tone in regards to Conventional vs FHA mortgages. He backs up the new conventional programs that have come out in the last several years and talks down to FHA financing. Most noticeably, he likes the my community home buying program. It's a conventional loan that allows you to finance 100% of the purchase price. But wait, I can do this with FHA also. Please read :  Creative FHA financing -- No money out of pocket from the buyer!!!  -- Part 1

Rob Blake makes this statement : Plus it's a good primer to remind you of the real uselessness of these programs now that we have other more competitive programs in the marketplace.

Here is my problem with Rob's statements. He tells us that the use of the DPA (down payment assistance) programs  with FHA loans are negative. You need to bump the sales price in order to make this work. Yes, this does happen. It's called abuse. And then Rob makes the statement : The 100% conventional loan programs also don’t leave the new home owner in an “upside down” position like the FHA program. The FHA client is only upside down if there is fraud involved. The fraud would be raising a sales price to an amount of a home that is not the true value of that home. But the same could be said for the conventional loan. How is this? Well, if the buyer needs seller assistance for their closing costs, the seller has been known to raise the purchase price also so these costs don't come out of their pocket per se. Ouch. Could this mean that the buyer will be "upside down" on the conventional loan also? YES.

So, let's put aside all fraud and anything else that you might assume. Let's compare the apples to apples of real numbers. If the FHA loan is done correctly with the assistance of the DPA program, compared to the my community loan program, which would be better.  Yes, FHA has a one time mortgage insurance premium of 1.5% that usually gets added to the loan amount. But, the my community program's rate is usually 1/2% higher than the FHA rate. On a $250,000 purchase, comparing both loans, the FHA payment will be about $80 less than the my community loan. This is taking into affect that we are using the Down Payment Assistance program to help the buyer make this just like the 100% conventional program. Making all monies the same.

Now, Rob Blake goes on to say that FHA will be abolished because Congress wants this to happen. His main reason is because FHA loans are down considerably in the last few years. Rob is 110% correct with this. But let's take a look why.

• more lenders utilized subprime loans because they were easier for the lender to get done. (people, FHA usually requires more work on the lenders part, not the borrowers part)  
• after the subprime demise, FNMA (freddie mae) & FHLMC (freddie mac)have developed better LTV loans, up to 100% financing.  
• your average loan officer only knows conventional and subprime
• it costs lenders money yearly to do FHA loans. You have to be FHA approved which is not cheap upfront. So, this means that not all lenders are FHA approved.
• you can get an answer at a press of a button for conventional loans. It's called DU or LP. Terms for automated underwriting systems. But wait, FHA has the same type of system. The problem with this is that if the results come back as referred in regards to the conventional deal on a my community deal, it's dead. An underwriter can't override this. Now, if it comes back with a referred on a FHA mortgage, an underwriter can override this as long as it meets FHA's guidelines. But this is a lot more work for the loan officer. But you don't get charged extra for this, as long as they are giving you a good deal upfront.

So, let's take a look at Rob and his experience. Rob is very knowledgeable when it comes to these types of conventional mortgages. He knows his programs and can give good advice on this. But what does it take to be a Colorado Broker? You don't need much of a set up to broker conventional loans. Minimal licensing and minimal money. If a lender can't do FHA loans, are you getting the chance to utilize any or all loans that could be at your disposal?  NO!!

In regards to FHA, it takes more knowledge and more money to be able to offer this type of financing to your clients. What sets me apart from so many other mortgage lenders is that I am a full service lender. I can do conventional, FHA, VA, and subprime.  And just for the fact that my company underwrites all of our FHA loans. It allows me to have full control. Comparing myself to so many that might just push you into one type of loan and talk negative about FHA, means that they usually can't do FHA loans.

 

Summary : I am going to repeat myself here. If a lender can't do FHA loans, are you getting the chance to utilize any or all loans that could be at your disposal?  NO!!  If this is the case then, are you missing out on a better rate? Just Maybe....

 

 

FHA -- Non-Occupant Co-Borrowers

FHA will allow a co-signer that is not living in the house unlike conventional loans in which the borrower still needs to meet certain qualifying ratios even if they have a co-signer. This can be great for first time homebuyers. One thing that so many get confused no matter what type of loan they are applying for is that a co-signer with good credit can't overcome the bad credit of the primary borrower. Meaning that the co-signer with good credit can't get you a better priced loan.

On FHA loans, 100% of the co-signer's income can be used no matter how much money the borrower makes. This also can help the borrower to achieve the maximum fha loan limits depending on what county that they are buying in. Each county has different mortgage amounts. And by having this co-signer, this can help those borrowers that might have some income that they can't prove, knowing that they can still make the higher mortgage payment.  One thing to keep in mind though is that the co-signer's debt is also used in this equation. If their debt is extremely high, this co-signer might not help the situation.

Key Reminder : The co-signer can not currently have a FHA loan in their name. For some more information on this topic, please go to http://www.hud.gov/offices/hsg/sfh/ref/sfhp2-03.cfm