FHA 203K Loans – Right for the Just Right Buyer

When it’s time to buy a house, many different types of loans are available, depending on your status: are you a first-time homebuyer, a California veteran, or planning to renovate? This week, I’ll highlight the pros and cons of a Federal Housing Administration (FHA) 203K loan.

The FHA 203K loan is appropriate for those with good credit (a minimum FICO score of 640), a stable job, enough money for a three-and-a-half percent down payment with some money left over, and a desire to renovate the home you purchase. The loan is intended to inspire buyers to purchase properties that require some work, and the amount of the loan can be based on the future value of the property (after the renovations are done). Eligible properties include owner-occupied, single-family homes or duplexes that are at least a year old. The FHA 203K loan is ideal for people who understand the challenges of home renovation and know a trustworthy contractor who is not a family member.

There are two versions of the FHA 203K loan, the streamline and the full, and they have slightly different requirements. Big thanks to Rick Costa at Bay Equity Home Loans for helping me get the details right. The primary differences between the two versions of the loan are that with the streamline loan, less money is available for renovations and the monies earmarked for renovations must be used as planned or else used to pay down the principal on the loan but will not reduce your monthly payment. With the full loan, money left over from renovations can be released to you for any purpose. Both loans offer a maximum of $373,750, and the buyer is responsible for finding a contractor, getting bids for the renovation, and overseeing the project(s). While the FHA 203K loan doesn’t specifically require at least three bids from contractors who have done renovations similar to yours, most lenders (and common sense) require it. The loan does mandate that renovations be at “arm’s length”—meaning the contractor must be licensed, bonded and insured, and cannot be a family member.

The streamline version of the loan has a maximum renovation fund of $35,000, including a 10 percent reserve for any unanticipated expenses uncovered during the renovation. This version of the loan is intended for lightweight renovations like paint, flooring, or window treatments—nothing structural.

The full version loan can include structural work. So, to be sure the whole cost of the renovations are included in loan, the buyer should request that the contractor include any permitting or other fees in his bid. The buyer can also request that pest and fungus work be funded by the loan.

While it is great to find a home loan that allows for the cost of renovations, this benefit comes with a price. First, the interest rate on this loan is typically about a quarter of a percent higher than the going rate. Also, the full version of the loan requires a detailed plan and drawings, a Housing and Urban Development (HUD) consultant to make sure you stick to your plan, and multiple appraisals. Not cheap and rarely quick.

The success of this process often hinges on a thorough and accurate scope of work from your contractor. If the renovation is small, say less than $10,000, I don’t recommend using 203B funds. A quarter-percent increase on the entire loan will take monthly payments up significantly, and that $10,000 for renovations will cost much more to pay back over the life of the loan. There are also the additional costs of inspections and the HUD consultant.  Unless you plan to go big, use a different source of money to fund renovations.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

What’s It All Mean? Real Estate Definitions

Real estate, like many industries, has a whole language of terms and definitions that make sense to those of us who live and breathe real estate, but that can leave homeowners in the dark. So I thought I’d shed a little light on the subject.

Licensed Real Estate Agent – someone licensed by the California Bureau of Real Estate to transact otherwise restricted business transactions, including the listing and selling of real estate, under the supervision of a broker

Realtor– licensed real estate professional who is a member of the National Association of Realtors, which requires adherence to a strict code of ethics

Licensed Real Estate Broker – someone licensed by the California Bureau of Real Estate to transact otherwise restricted business transactions, including the listing and selling of real estate and the brokering of real estate loans.

Single Family 1-4 – this is how we refer to the category of real estate that includes single-family homes, duplexes (2 living units), triplexes (3 living units), and four-plexes (you guessed it—4 living units)

Financial Institution – in this context, an organization in the business of making loans secured by real estate

Underwriting – process of determining whether to make a loan whereby a lender or his representative reviews a property and all of the borrower’s qualifications to purchase it

Conventional Loan an institutional loan usually secured by a single family 1-4

Conforming Loan usually a loan that meets specific underwriting requirements and includes a minimum of 20 percent down and (in this area) a maximum value of $417,000

Owner-Occupied – a single family 1-4 owner will occupy one of the units or anticipates occupying it within 12 months. This is a requirement for most loans.

Primary Residence – the owner-occupied unit where the owner spends 50 percent plus one day each year. Single-family, owner-occupied, primary residences typically secure the best loan terms

USDA, FHA, VA, CalVet – these are large government loan programs. The United States Department of Agriculture offers loans to families in rural areas who don’t make too much money; the Federal Housing Authority offers limited loans to those with good credit; the Veteran’s Administration offers loans to U.S. veterans, and CalVet offers loans to vets who want to purchase a home in California.

GSEs – Government-Sponsored Entities are institutions that buy loans from loan originators on the secondary market with the goal of providing lower housing costs and better access to financing. The big players are referred to as Fannie Mae, Freddie Mac and Ginnie Mae. They are actually the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Association (FHLMA), and the Government National Mortgage Association (GNMA)—which is actually part of the US Department of Housing and Urban Development.

Pre-qualified a loan representative has given you the likelihood of loan approval based on information you’ve supplied.

Pre-approved – a loan representative has reviewed documentation, verified income and employment, confirmed the source of funds for the down payment and closing costs, reviewed credit, and made all determinations to arrive at a monthly payment for which you qualify; leaving only the property and its value in question.

Debt-to-Income Ratio – compares overall debt to income. Front-end ratio: the ultimate loan payment divided by net income. Back-end ratio: all debt expense (car loans, credit cards, any other recurring debt) divided by income. A lender will use both to determine the loan amount you qualify for.

Escrow – neutral, third-party depository where the buyer, seller and lender place money and/or appropriate executed documents. When all escrow conditions are met, the escrow holder (usually the title company) will record the documents and distribute them and the funds to the appropriate parties.

Funded – usually means the lender has deposited net loan proceeds into the escrow account.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com.  If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

 

Here are a few answers to common real estate questions

How Can I Put Zero Cash Down And Still Buy a House?

Sometimes people make enough money to pay a monthly mortgage payment, but just can’t seem to save up a down payment. If that’s the case, there’s still hope. Both the United States Department of Agriculture (USDA) and Federal Housing Authority (FHA) provide home loans with little or no down payment required.

Is it weird that the Agriculture Department is one of the biggest lenders? Kind of. Is it another sign of government inefficiency that two federal programs compete? I’d say yes, but that’s just my Libertarian side jumping in.

So, to figure out if you qualify for a no-down-payment loan, make an appointment with a mortgage broker with all your financial information: income, employment history (length on the job and in the industry), credit information, available cash for a down payment, closing costs, reserves, and a potential co-signer or guarantor for a loan.

Under the right circumstances, you may be able to get a loan with zero out of pocket. This happens when you combine a low-down-payment loan with credits from the seller for non-recurring closing costs, cases where the purchase price is high enough to offer credit back toward the buyer (up to 6 percent), and that money is used as the cash requirement at closing.

What’s Mortgage Insurance?

Mortgage insurance is insurance that can help reduce the amount of a down payment by providing security that the monthly mortgage payment will be made. There are two types: MMI and PMI (mutual mortgage insurance and private mortgage insurance) – they behave the same way.

What’s an Escrow Account?

An escrow account is where money goes as it’s being exchanged between buyer and seller. It includes five elements:

  1. Interest
  2. Principal
  3. Mortgage insurance
  4. Impound for property taxes (the pint of blood we all must donate to our local government)
  5. Impound for insurance

Impounds are used by a lender to accumulate money to pay property taxes and insurance (like a savings account controlled by the lender for the sole purpose of paying the property tax and insurance).

Should I Get Pre-Approved for a Loan?

One of my first real estate columns covered this topic in some detail, but the quick answer is: yes, get pre-qualified. Better yet, get pre-approved. Sometimes people confuse having a good credit score with getting pre-approved. While it helps, many other factors are involved in a lender’s decision regarding a loan:

  1. Total income
  2. Length of time on the job and in the industry
  3. Debt-to-income ratio
  4. A more detailed credit review than just a FICO credit rating.

Once a loan broker reviews all this material, they will consider providing a pre-qualification or pre-approval letter, depending on the source of the information. Your heartfelt promise isn’t as secure as documents proving your credit worthiness. In a situation where multiple buyers are making offers on the same property, the one who is pre-approved will often be chosen.

What are the Differences Between a 15- and 30- Mortgage?

Apart from the obvious—15 years—the term (length) of the loan affects the rate. The pre-approval letter will determine the monthly payment the bank will approve. The amount of the loan will vary based on that amount. A variable rate loan will start with a rate that is lower than a fixed rate would be, so you’ll qualify for a bigger loan. With a 15-year loan, the rate will be lower but the payment will be higher (short term means less risk to the lender, thus the lower rate, but paying off the cost of the loan in 15 years instead of 30 means each payment will be higher).

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Would You Like Free Money? Consider a Reverse Mortgage

Would you like to receive a check from the bank to supplement your income after you turn 55 years old? If you own your own home, the equity in your home can become a source of income, and you don’t have to have any other income sources to qualify.

I know it sounds too good to be true, and I’d be lying if I said there were no strings attached; however, you can borrow against the equity in your home and use the money however you see fit, whether you want to go on a fabulous vacation or simply have a higher standard of living.

This is all possible because of something called a reverse mortgage. The bank gives you a loan based on the value of the equity in your home and how long you’re likely to live. As long as you remain in your home, you never have to pay the loan back, even if you live to be 110 years old. You can receive the payment from the bank either in a lump sum or as a monthly payment.

With a regular mortgage, you—the homeowner—pay the lender every month. Some of the payment goes toward reducing the principal (the loan amount) and some goes toward interest (the cost of borrowing the money). Each month, you have a little more equity in the home (you’ve paid off more of the loan’s principal).

In a reverse mortgage, the bank sends the homeowner a check and reduces the equity the homeowner has in the property. If a person lives so long that the amount owed is more than the home’s value, the homeowner can stay in the home and the Federal Housing Administration will cover any loss to the lender.

The amount you can get is based on the value of the home and the age of both the owners. The rates are a little higher than for a traditional mortgage, but not too much. To explain how the loan is calculated, let’s say a house is worth $350,000.00 and both owners are 60 years old the lender will make a one_time lump sum payment of $   or a monthly payment of $   . If the payments are to be monthly they will go on until the last owner passes away or moves out of the home. This means the borrower(s) never have to pay the loan themselves. Ultimately the house will be sold but not while the owners still live in it.

You’ll want to consider your heirs in all this, because you are using up part of your wealth rather than passing it on to them. When you pass away, to retain the house, your heirs will need to repay the reverse mortgage loan either by selling the home, refinancing the loan, or paying the loan with cash they have on hand. However, your heirs are not on title and have no obligation to pay off the loan. If the loan exceeds the value of the house, the heirs can simply let the lender take possession and sell the house. This will not cause any negative impact on the heirs’ credit standing.

In addition remember, while you live in the house you must keep insurance and taxes current and reasonably maintain the property.

If you’re wondering about the tax implications of this whole endeavor, don’t worry. The interest on the loan isn’t deductible until the loan is paid. In other words, as long as you live in your home and benefit from the reverse mortgage income, you’re good.

Reverse mortgages can be essential in allowing retirees to remain financially independent, even with no income and bad credit. Since the retiree won’t ever have to make any payments, the only qualifying criterion is the equity in their home.

Next time I’ll write about as-is properties. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

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Buying Versus Renting

Like I mentioned last week, the market continues to be good for buyers. It’s so good, in fact, that I thought I’d dedicate a column to explaining why renters should consider buying right now. While I know numbers can turn a lot of people off, I think it’s important to use an example so you really know what I’m talking about.

Let’s say you’re a first time homebuyer who’d like to purchase a $200,000 home. You don’t have money for a down payment, but you have a job and good credit. Here’s how this could work:

Estimated monthly expenses

Loan                        $ 950

Taxes                      $ 200

Insurance              $   75

$1225/month

 

“But what about other expenses?” you ask. “If I own my home, I can’t call a landlord to fix things.” That’s true. At some point, you’ll need to paint your home inside and out, put a new roof on, replace the water heater, etc. So, let’s estimate about 1.5 percent of the purchase price for upkeep each year (about $250), since that’s usually about what it costs.

But wait, there’s good news to balance the maintenance expense. You get to write off some of the mortgage payment. Let’s say your household income puts you in the 25 percent tax bracket. Some of your mortgage payment is tax deductible: about $867 ($667 is the interest on your loan and it’s deductible, as is the $200 homeowner’s tax). So, multiply $667 by 25 percent, and you will get back about $217 per month.

Mortgage payment                $1225

Maintenance/upkeep          $  250

Tax benefits                            $ -217

$1258/month

 

So, like with anything in life, restrictions apply, but they aren’t too bad. First, you need to have good credit (a credit score in the mid 600s). Next, you need reportable income. It’s time to claim that babysitting money or those waitressing tips as income, because if your income isn’t reportable, you’ll have a tough time getting a loan. For this particular loan that I’ve used as an example, there are minimum and maximum income restrictions based on formulas that have to do with the number of people in your household, the number of children you have, and other factors. The final requirement is job stability. You need to have been in your job for at least a year, and it needs to appear that you will remain in that job for the foreseeable future.

Owning your own home has benefits that go beyond financial. Pounding a nail wherever you want doesn’t require anyone else’s permission. Where to plant trees is your choice. Choosing which paint color to use is your spouse’s choice. And, your elbow grease benefits YOU. If you think you might be able to purchase a home, and you’d like to learn more, call your local real estate agent and they can help you figure it out.

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