My Florida Home Builder

A few years ago, during the real estate boom, an unforeseen problem began occurring regularly that created quite a problem for mortgage lenders when they had to foreclose on a home. Everybody who had ever stayed up late watching TV suddenly wanted to become a real estate investor. A “house flipper”.

There is such a thing as a legitimate “house flipper”. This type of investor uses their own money and credit to buy up foreclosures and other distressed real estate, repair the property and then sell it at a profit. This provides an important function in the economy. Unfortunately, the investors flooding the market over the last couple of years never quite matched that description. These master television trained real estate investors would make an offer on a property even though they had no financing of their own. Then they would go in and sweep it up and mop a little. At the same time, they would find some poor uninformed dreamer who didn’t really understand what was going on, agree to pay all the loan closing costs and down payment assistance, and get them preapproved for an FHA loan. They would then set up back to back closings so they could buy the property and sell it to the new buyer at the same time without ever having put up a dime of their own money. They would frequently sell the home at double the price they paid originally.

These “sellers” would offer prospective purchasers such enormously easy terms in the middle of a seller’s market that folks would be lining up fighting to see who could pay the highest price. After this practice had been rolling along for a few years, many of these new home owners started defaulting on their mortgages, thus forcing HUD to pay off the mortgages with money from the FHA insurance fund. The HUD homes advertised all over the place come from these foreclosures. When HUD tried to sell these houses, however, the trouble started. HUD found that the appraisals used to get these loans approved were seriously over inflated, causing huge losses when selling the properties. This endangered the entire FHA program.

Thus several years ago, HUD implemented their “anti-flipping” rule. Now any house that had changed owners within the previous 90 days was absolutely ineligible for any FHA financing. The goal of this rule was to make sure that homes were being sold by legitimate investors who were taking the time to actually bring the property value up before selling it and making a killing.

Of course in HUD’s usual inimitable governmental style they overlooked one tiny factor that created a big problem in the marketplace. They failed to create an exemption for homes that had been foreclosed upon and were being sold by the lender. This excluded a large segment of the potential buyers from the picture and caused lenders to take a big hit in the prices foreclosed property would bring. So in 2006, HUD amended the rule to exclude homes being sold by government sponsored enterprises and federally chartered financial institutions. However, they left the rule in place for all other sellers.

Now we arrive at the present. The subprime market has crashed. Foreclosures are setting records every month. Thousands and thousands are losing their homes. But at least, we think, many potential new first time home buyers can now take advantage of this drop in home prices while FHA interest rates are low.

Working with a real estate agent and mortgage lender who are savvy about the rules, these knowledgeable eager new buyers go out into the market and the first question they ask as they look at these foreclosures is whether the owner fits into the financial institution exception. The agent representing the lender says in good faith that, of course, this home is still owned by the bank and the bank is exempt from the rule. They work out their contract, get all the signatures in the right place, get their loan application paperwork signed and in process and everything looks rosy. Just before closing the title examination results are faxed over and at first glance everything looks fine - until the loan processor notices that the owner named on the title policy doesn’t exactly match. So a call is placed to the attorney’s or title company’s office only to find out that now a subsidiary of the foreclosing lender owns the property. The lender always uses this subsidiary to manage its real estate owned after foreclosure.

These subsidiaries of the lenders often obtain title to the property many months after completion of the original foreclosure. The trouble is, they are not exempt from the anti flipping rule and have usually owned the property a month or less. No one in the lender’s office, or the attorney’s office every tried to mislead the buyer, but now that buyer who must move out of an apartment in a few days, must wait 60 more days to close on and move into their new house.

Loan officers must be sure to warn real estate agents and potential new home owners, about this rule. Be sure that everyone goes far above and beyond the call of duty asking questions about the chain of title of the home before setting any dates on the sales contract. This situation doesn’t cause much difficulty if caught at the beginning and planned for, but can be absolutely devastating if this detail is missed.

You cannot turn on the news without seeing a new headline trumpeting the meltdown of the mortgage industry. Obtaining a conventional mortgage is becoming more difficult by the minute. Qualification guidelines are arguably tighter than they have ever been.

This meltdown is occurring at the same time a record number of adjustable rate mortgages are set to begin their rate adjustments. Because these ARMs usually had initial teaser rates that were artificially low, if you have an adjustable rate mortgage there is a near 100% chance that your rate will be going up. Most of the time, this first rate adjustment will be several percentage points. It is not uncommon right now for a mortgage that has had an interest rate in the low 5’s to be adjusting up to the 8 or 8.5 percent range! If you have a subprime loan, this increase may be from 6.5 percent to 9.5 percent or more! Borrowers who are unprepared for this will have their mortgage end up as part of the delinquency rate statistics talked about on the evening news.

If you do not fit into the new tighter conventional mortgage guidelines because of credit problems or because your home’s value has not risen as quickly as you planned, there may be a very good option if your loan amount is below $346,250 in more populated Georgia counties and $271,050 in more rural Georgia counties. That solution is to use an FHA loan.

FHA loans allow borrowers to refinance even with higher ratios of debt in relationship to total income. FHA loans allow you to qualify for a mortgage even if you have experienced past credit problems just as long as there is a good explanation for the problems and the problems have been cured or a new mortgage will help cure them. FHA loans also allow a loan amount can go as high as 97% of the value of your home when necessary.

If you live in Georgia and your current mortgage is an adjustable rate mortgage with an imminent rate increase, don’t give up. Contact a Georgia HUD approved FHA lender and find out if the FHA option is available in your situation. You will certainly be glad you did.

If you would like to buy a home, but you have past credit problems, recent FHA loan program changes may give you an answer to your problems. FHA has been backing mortgages for a long time, but guidelines have been revised substantially over the last few years. Changed so much that the real estate broker or home owner you are trying to negotiate with probably will not know the requirements of the program.

“FHA” is short for Federal Housing Administration. The Federal Housing Administration is a part of the huge Housing and Urban Development or “HUD” bureaucracy. You have probably seen HUD homes advertised for sale. HUD homes are foreclosures which were insured by the FHA mortgage program.

The FHA program was set up in 1934 with the adoption of the National Housing Act. FHA’s mission is to provide credit and a chance for home ownership to borrowers who may have past credit problems, or a thin credit history, or a higher than average percentage of their total income going out for bills.

The FHA program accomplishes this goal by providing insurance which will pay off the loan if the borrower defaults. Because of the guarantee of FHA mortgage insurance, the lender can take more risk approving mortgages for borrowers who don’t fit into conventional loan programs.

FHA insured mortgage guidelines were designed to accommodate the situations faced by first time home buyers, but any borrower without an outstanding FHA loan guarantee is eligible to use FHA to purchase or refinance. The standard FHA program is not for purchasing non-owner occupied investment property.

Many experienced real estate brokers and home sellers have heard horror stories about FHA’s excessive red tape and are therefore reluctant to recommend that buyers use an FHA loan. At one time, FHA regulations were much restrictive and resulted in higher fees for home sellers. Processing times on FHA loans often delayed the sale of the property while fighting with underwriters over silly bureaucratic issues. However, today these issues are almost completely resolved.

If your real estate agent, or potential home seller, is balking at accepting your purchase offer with FHA financing, here are 8 reasons they should reconsider:

1. Easy down payment requirements. Typically 3% or less of the property sales price and this can be entirely comprised of gift funds from a family member or an approved not-profit foundation.

2. Seller-paid contributions of up to 6% of the purchase price can be applied to closing costs and prepaid expenses. You can negotiate terms and conditions which will require bringing absolutely no money to the closing!

3. FHA requires no financial reserves at the time of loan approval. A borrower with no savings, and no money in checking will still meet the requirements.

4. Recent FHA appraisal reform eliminated the need for minor cosmetic repairs to the property before closing. The program now allows ”as is” appraisals and no longer requires automatic inspections for termite, well or septic. These conditions were part of the red tape that aggravated sellers and agents so much in the past.

5. There is no official minimum credit score. HUD provides an automated underwriting system named FHA Total Scorecard. Borrowers approved by this system are not required to write credit explanations, pay off old collections, or remain below an arbitrary debt to income ratio.

6. If the automated underwriting system does not approve your loan, the underwriter is given discretion to use common sense in the decision to approve the loan manually. The underwriter often is not given such discretion on conventional loans.

8. No prepayment penalties. Many loans for borrowers with credit problems have significant penalties for paying the loan off within the first 3-5 years. These penalties prevent refinancing for a lower rate or for debt consolidation. FHA loans have no prepayment penalties. As a matter of fact, FHA loans allow for a program called streamlined refinancing. As long as you make your mortgage payments on time, you can refinance if rates go down without having to produce all of your qualifying documentation again.

FHA insured mortgages greatly benefit both buyers and home sellers. There would be many fewer potential buyers for the seller’s home without FHA. This program allows borrowers with past credit difficulties and no cash out of pockett to be given the same low fixed mortgage rates as the best perfect credit borrowers.