Danny Salas

Archive for August 23rd, 2009

Understanding FHA – Why It’s King

Why FHA?

When considering buying a home, the number of loan options available, are not as rampant as they were a couple of years ago.  The most popular loan, in the past eighteen months, has been a loan through The Federal Housing Administration (FHA).  FHA loans enable a small down payment that can be a gift from a family member, flexible underwriting guidelines, and the home that’s being purchased, while needing to be in somewhat good shape, doesn’t have to have the clearances, like a termite clearance, as they used to require. 

Down Payment

Again; 3.5% is the minimum down payment required.  This may be a gift from a family member, or even a fiance. 

Seller Credits

Another great aspect of FHA loans is that they work similarly to conforming loans.  Generally, when a home buyer puts less than ten percent down, the seller is restricted from contributing more than three percent, of the sales price, towards a buyer’s closing costs.  However, if a home buyer puts more than ten percent down, the seller may credit the buyer six percent, of the sales price, towards the buyer’s costs.  FHA still allows the smaller 3.5% down payment, however, enables the seller to credit a full six percent of the price. 

Why Is My Impound Account So Expensive?

With FHA loans, it is required that a buyer set up an impound account through the bank.  An impound account is a fund account used as reserves to pay incremental fees, like taxes, homeowner’s insurance, and mortgage insurance, when they become due.  So, it’s important to understand that the impound account funds are not costs, they’re just recurring fees that will need to be paid throughout the life of homeownership, anyway. 

For example, taxes are due twice a year; April & November.  So, let’s take a borrower whose escrow is closing in September.  If the seller is current on their taxes, then they would have paid for the July through December Tax Bill, in April.  When a home buyer closes their escrow, they would owe the seller September through December.  Also, due to the fact that real estate interest is paid in arrears, the first borrower’s payment wouldn’t be due until November…when the 2nd tax installment is due.  So, if a borrower closes in September, the impound account would want four months, plus, the six month installment, plus one extra month, so that there are funds in the account at all time, and never short. 

Buyer’s Market

In a market like the one we’re in, currently, bear in mind that sellers need to sell.  Most of the transactions that I’m financing have some sort of credit from the seller, to the buyer.  Even foreclosed upon banks are crediting buyers.  And, quite a few have a full six percent seller credit.  Here’s how it can benefit the buyer.  Again, with FHA financing, the seller may pay six percent of the sales price.  So, closing costs generally run about 2.5% of the sales price.  Impounds can run from one to 2.5%  of the sales price.  This depends on when the escrow closes.  So, what do you do with the remaining credit amount, if the total closing cost and impound account only totals 4.5%?  Pay down the buyers interest rate!  That’s right, the remaining funds can be used to pay points to lower the interest, and therefore, monthly payment of the buyer. 

3.5% Down and Nothing Else

With the above mentioned example.  A buyer can move into a home, put only 3.5% down, have the seller pay their closing costs, their impound account, and their interest rate down to more comfortable monthly payment.  And, let’s say the buyer closes at the beginning of the month.  September, in this example.  Their first payment wouldn’t be due until November 1.  So, they would move into the home and not have a payment for the whole month of September and October.  Not to mention the $8,000 tax credit…

Credit Scores

FHA has a credit risk score requirement of 620 or greater.  However, there are still banks that will allow less than this.  very few of them, and they may run out of their ability to fund loans with scores lower than 620, in the very near future. 

Qualifying Ratios

I’m still getting approvals with front-end ratios up to 47%.  That would be forty-seven percent of a buyer’s gross income going toward their housing costs.  Principal and interest, taxes, and all insurances.  And, on some occassions, the back end ratio is still going up to 65%.  That would be sixty-five percent of the clients gross income going toward principal and interest, taxes, all insurances, and other monthly obligations.  Other monthly obligations might be items like a car payment, credit card debt, alimony or child support, and any other financial obligation that the bank will obtain information on. 

The Property Itself

In the old days, FHA required that a homebuyer receive a termite inspection and clearance.  A few years ago, FHA wanted to be as competative as conventional loans, and therefore, they changed their policy to match Fannie Mae and Freddie Mac’s.   Even if an agent writes into the purchase contract that an termite inspection will be ordered, a buyer and seller may change their minds, and write an addendum to the contract stating, “buyer and seller waive the right to a termite report and clearance.” 

Mortgage Insurance

Many years ago, you couldn’t buy a home, unless you had twenty percent down.  Then the insurance companies got involved and requested to the banks that they be able to insure a percentage of the loan amount, to enable buyers to put less than twenty percent down.  The monthly insurance payments were costly, however, it did enable more homebuyers to participate in the American Dream.  Then FHA stepped in and wanted to lower that monthly mortgage insurance payment, however, they still needed to cover their risk.  So, they split up the mortgage insurance into two parts.  One part would be financed into the loan amount, and the other part would be paid on a monthly basis.  Financing the portion in the loan amount would lower the monthly payment for the homebuyer, making the purchase more affordable. 

$8,000 Tax Credit

If you purchase your home and the escrow closes before November 30, 2009, you qualify for the $8,000 tax rebate from the federal government.  2008 Tax Form 5405 is an amendment to a first time home buyer’s 2008 returns.  So there is no waiting for filing your 2009 1040 tax returns.