Foreclosure and Short Sale Waiting Periods - New FHA Changes

"How long do I have to wait until I can buy a new home after..." - the question that begins with a heavy pause and usually ends with a heavy sigh.  However, there have been some great new programs that can help borrowers who have faced difficult financial times and are ready to buy a new home.

Let's start with the bad news - in 90% of the cases, you will need to put down a significant amount of money to get into a new home (20% +).  This is because the lenders are private lenders who definitely don't have access to mortgage insurance and they don't want to lend without a fallback option if the borrower goes belly up again. (the fallback option being to sell the home and recoup the money lent out.)

Here is the good news...if the 20% down is available, Homeowners Financial Group, USA, LLC, has a "Clean Slate" program designed for borrowers who need a little help.  Essentially, the only waiting period is they must be 6 months from the BK.  There is no waiting period for Short Sale or Foreclosure.

Now onto the new FHA "Back to Work - Extenuating Circumstances" program.  While, in my own personal opinion, this new Mortgagee Letter 2013-26 is about 2 years too late.  Perhaps when a borrower faces a difficult "economic event" in the future, they will be able to get into a home sooner rather than later.  The idea behind this mortgagee letter, aptly titled: Back to Work - Extenuating Circumstances, is that if a borrower can establish credit history for 12 months, they are potentially eligible for FHA financing. 

• This is important because FHA allows only 3.5% down payment and so the borrower who doesn't have the 20% down - could essentially get into a new home sooner.

Here are a couple key items to be aware of:

• 12 months must have passed since the short sale or foreclosure
• Must be able to document credit impairment, i.e loss of employment or significant loss of Household Income (20% or greater) - Prove the economic event that was the trigger for the short sale/foreclosure
• Additional layers of credit requirements
• Each borrower has to go through Housing Counseling

Those you can read directly from the Mortgagee Letter.  The letter gets even tougher because they really only consider those borrowers with stellar credit history who had this one time event.  They can't have a history of other delinquencies with housing, no other collections, no more than 1x30 day delinquency on any debt.  While this makes sense, most that have these economic events probably have had trouble with other credit lines as they worked through their difficult circumstance.  Furthering the complication - it all has to be proved!  That's right - the previous employer will need to show when the borrower was terminated and the loss of income will need to be proven as well (which is standard so this shouldn't be too difficult if there was in fact a loss in income).

It's not that the program won't work - it's just once again, the masses tout it as a great thing for borrowers and then we come to find that only a handful actually had this occur.  Some people definitely will benefit but too many people will have one thing that doesn't quite fit and it will be more heartache to that borrower. 

Ultimately, it's a good start for FHA.  When life circumstances that are unexpected hit families, they shouldn't be unnecessarily punished.  This will help those people who faced an economic event and had no option but to short sale or foreclose.  Let's just not get too excited - it's definitely not a "Get out of Jail Free" card.  If you choose to foreclosure or short sale strategically - well then, be ready to wait.

FHA Mortgage Insurance - What's all the fuss?

In the last post we discussed Mortgage Insurance - what it is and why it is needed?  We dealt specifically with the conventional loan requirements on Mortgage Insurance and hinted at FHA - the Federal Home Administration program.

How do they differ? 

• FHA - requires a two step process with Mortgage Insurance. 

• They have an Upfront Mortgage Insurance payment that is equal to 1.75% of the base loan amount.  This mortgage insurance can be added back to the loan amount so it isn't a cost out of the borrowers "immediate" pocket.  However, it changes the LTV on the loan from 96.5% to 98.25% - essentially leaving the borrower with very little equity.

• The 2nd part is the monthly MI.  Currently at 1.35% of the loan amount.  This is a monthly figure and is paid out every month to FHA for the use of the program.  Changes in June of 2013, which you can read on the Mortgagee Letter 2013-04 - HUD, state that the Mortgage Insurance will never be removed from the mortgage except by way of refinance to a conventional program or paying off the loan.

• Conventional - this allows for either an Upfront Mortgage Insurance amount to be paid 1x (cannot be financed in most cases - though it can be in some) or the monthly MI.  The monthly MI still automatically falls off when the borrower reaches the 78% threshold in LTV.  Fannie Mae requires the monthly be kept for a minimum of 2 years but after that the borrower could request that it be removed.

How does this impact the borrower?  - The long term borrowing costs for the FHA deal are quite a bit higher than the Conventional program now that the MIP is up to 1.35% for all FHA deals (with the minimum down payment) and that the MIP will never go away. 

FHA is still a viable option for first time home buyers, borrowers that are 3 years from a foreclosure, and for borrowers with limited asset resources.  However, if the borrower can use conventional financing, both short term and the long term advantages are beneficial.  (i.e. more equity in the property, less borrowing costs, and flexibility with removing the MI - which will save thousands in the long run.)

Mortgage Insurance - What's it for?

Everyone has heard of Mortgage Insurance, but it often is confused with Homeowners Insurance when people initially start the mortgage process.  Because of that I want to clarify a couple types of insurance and then speak to the main point of Mortgage Insurance; what it is and what it is for.

The main insurance that any borrower is going to need when buying a home is "Homeowners Insurance".  This insurance protects the borrower against damage to the home via fire, robbery, etc.  It is necessary, when there is a mortgage, to carry Homeowners Insurance as it protects the owner and the lender in the event of a catastrophy (like a fire) to recoup the loss. 

Another type of insurance that is sometimes required is Flood Insurance.  This insurance protects against a flood.  The lender will require this, if during the home loan process, the lender discovers through the Flood Certificatet that the home is located in a flood zone.  Note:  Not all homeowners policies protect against flooding, so this is why the lender requires it if the home is in a flood zone.

The insurance in question - Mortgage Insurance.  Since you have a homeowners policy, and a flood policy (if required), why the need for extra insurance.  To start - not all loans require mortgage insurance.  Any loan that results in an equity position of 20% or more, does not require Mortgage Insurance.  (Essentially, if you buy a home with 20% down or more, 99% of the time the MI will not be necessary - the 1% of the time is if you are using FHA, but that is a story for a different day).

Let's say that the down payment is less than 20%, what happens next.  The lender will require Mortgage Insurance. 

• Mortgage Insurance is a policy can be defined as follows: An insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage. 

Basically, the lender takes out an insurance policy (that the borrower pays for through monthly or single installments) to protect against the risk of default.  But the lender doesn't want to pay for the policy, so the borrower puts less money down and then makes monthly payments to cover the cost of the insurance.  Historically, when the value of the home gets to 78% LTV based on the Amortization schedule, the mortgage insurance policy is satisfied and the borrower no longer has to pay the monthly premium.  - This is the standard way people use MI.  There are other types of MI (Single Premium, Lender Paid, etc) but we will save those for a different post.

Quick Review:

• Mortgage Insurance - protects lender against default when borrower puts less than 20% down towards the purchase
• Borrower pays mortgage insurance monthly as part of the monthly payment
• Once loan reaches 78% LTV based on the Amortization schedule MI automatically is removed (unless FHA loan - then continues for the life of the loan)
• Can get MI up to 97% of LTV on a purchase (so 3% down payment required)

Is Mortgage Insurance a good option?  -- In short, yes.  When borrowers don't have the full liquidity to put 20% down, but can afford the monthly mortgage payment (including the MI), then Mortgage Insurance can help them begin their purchase process sooner rather than later.

I will explain the difference with FHA mortgage insurance in a different post later this week.

I am buying my first home - Now What?

The joy's of buying your first home are sometimes overwhelmed by the frustrations of buying your first home.  But with the right team of people, working for you, the process can be worked through without too much headache.

The basic steps:

1. Find the right Realtor - This point cannot be overlooked.  There are bad realtors.  It's a fact.  There are realtors that care only about their needs and don't understand the needs of the buyer.  There are realtors that don't know the market or care to understand the trends, future outlook, etc.  Then - there are also very good realtors.  Realtors who understand the market, understand the buyers needs, and work to make it a transaction that is smooth for the buyer.  Choose the agent that fights for the best purchase price, best conditions and has things fixed based on the home inspection.   Find that Realtor.
2. Find the right Loan Officer - Okay - so I am a bit biased on this account.  But this is for sure the most important aspect of any transaction.  (Unless of course you have the $250K in cash to purchase your home free and clear.)  The financing is what makes the close possible.  Without the loan, then the reality of homeownership is a harsh non-reality.   The loan officer that listens, communicates, and works hard for the homeowner, is going to be the best asset to the transaction.  They will ensure that you know what each step will look like, they will do the work upfront to head off any future concerns for an UW and they are well versed in the industry to help should any trouble arise. 
3. Choose the Right Loan Program - How do you know what the best loan program is?  It's all going to depend on the needs of you, the buyer.  Do you have a good amount of money to use for the down payment?  Do you need assistance with closing costs or do you have the cash to pay for those?  Do you have excellent credit or is your credit lacking in some areas?  Do you plan to stay in the home long term?  Do you have a monthly payment amount that you want to stay within or are you looking to be qualified for the most amount possible?  Do you have gift funds from family members?   The questions are plentiful, and I could go on and on with the list, but you can see that the answers to these questions may define what you choose to do.

  Here is a quick overview of the most common choices for first time homebuyers:

1. FHA Financing - This program allows the borrower many benefits, including low down payment options (as little as 3.5% of the purchase price), pricing incentives to offset the closing costs via the lender or requested from the seller, gifts allowed for the entire down payment.
2. Conventional 5%  - This program allows for slightly more in down payment and requires that the 5% come from the borrower's own funds.  It has a lower mortgage insurance payment amount as well as no upfront Mortgage Insurance premium.  (The Mortgage Insurance can also be removed with this loan vs. FHA where the Mortgage Insurance will be on the loan for the entire life of the loan or until you refinance.)
3. Other Options - There are other programs that allow for grants, lower down payment, etc, but these are very property and borrower specific.  Depending on the borrower's situation, these options can be explored.  However, if the borrower has the ability to do either FHA or Conventional, they usually find these ancillary options are really not that favorable for them in the long run.

There really isn't a best loan program for a first time homebuyer and if the lender tells you there is...then run the other direction.  They aren't evaluating your needs and finding what will work best for you, they are pigeonholing you into something that may not be the best long term.  Remember, finding the right home and getting the right financing all starts with the right Real Estate Agent and the Right Loan Officer.  Make sure you do that work first and the joys of buying your first home will completely negate any potential negativity.