FHA flips and what you need to know

Click here to see the original waiver.

This means that buyers may use FHA financing to purchase a home that was previously purchased by the seller within the past 90 days.  Before this waiver an FHA purchaser was required to wait until the seller had owned the property for at least 90 days.

Summary of the waiver:

All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.  The lender is looking for the following:

Seller holds title to the property

LLC’s, corporations or trusts that are serving as sellers were established in accordance to the law

NO pattern of previous flipping as evidenced by multiple title transfer in the last 12 months (this is a big one to look out for)

Property was marketed open and fair

In cases where the sales price of the property is 20% or more above the seller’s acquisition cost, the waiver will only apply if the lender follows these criteria:

Justify the increase with supporting documentation and/or a second appraisal (2^nd appraisal cannot be paid for by the borrower)

A property inspection must be ordered by the lender and the inspector can’t have an interest in the property or relationship with the seller.  The cost can be passed onto the borrower at closing.

The property inspection will be reviewed by the Mortgage Underwriter and repairs may be requested.  (Underwriter is primarily looking for health and safety issues)

Please note that if the sales price of the property is less than 20% above the seller’s acquisition cost the above does not apply.

The Streamlined 203(k) system is meant to facilitate uncomplicated rehabilitation and/or improvements to a house for which plans, consultants, engineers and/or architects usually are not needed. The repair fees might be as much as $35,000 and there is no minimal requirement. (***Please note that there are also 203(k) loan programs accessible without a maximum repair expense quantity and extra improvements capabilities.)

The subsequent is a checklist of a number of the eligible improvements and/or repairs:

?•- Repair/Replacement/Upgrades of roofs, gutters, HVAC systems, plumbing, electrical systems and flooring
?•- Minor remodeling of kitchens and bathrooms
?•- Purchase and set up of appliances
?•- Painting – exterior and interior
?•- Weatherization including insulation, weather stripping, storm windows and doorways
?•- Window and door replacement and exterior wall re-siding
?•- Lead based paint stabilization and abatement of lead primarily based paint
?•- Repair/Replace/Addition of exterior decks, patios and porches
?•- Repair to existing swimming pools as much as $1,500
?•- Repair/Replacement of septic system and wells
?•- Accessibility improvements for persons with disabilities
?•- Finishing/remodeling of basements, not such as structural repairs

The actual expense with the renovation is based upon the contractors’ accepted contracts specifying the scope of work, cost of materials and labor and timeframe. All repairs must be finished by a contractor within six months of your closing date. Borrowers are required to have the necessary knowledge and experience to carry out any work without a contractor.

The purpose of this article is to articulate some of the most common benefits of utilizing a FHA loan to finance a home purchase in Phoenix.  The first bolded sentence is what many real estate professionals believe to be truth.

1. Phoenix FHA mortgage interest rates are higher than conventional. With tiered FICO pricing on conventional loans, FHA loan rates can actually be lower than conventional. The minimum FICO score required on a conforming loan before the borrower has to pay more points or a higher rate is 740. Using FHA financing, a 660 FICO score gives the buyer the same interest rate as someone with an 800 FICO score.
2. Phoenix FHA loans are more expensive for the seller than a conventional loan. While this was true before 2006, this is no longer correct with FHA loans. Prior to Mortgagee Letter 2006-04, there were substantial costs involved that the buyer was not allowed to pay. Now, the only cost the buyer cannot pay is a $75 tax service fee (fee may vary from lender to lender – AmeriFirst Financial does not have this fee). This makes a FHA loan much more attractive to Phoenix sellers.
3. Phoenix FHA loans require more paperwork. In prior years dating back to 2000 and before, FHA loans required much more paperwork and documentation than conventional loans. Now, there are only about seven additional application documents, when compared to a conventional home loan, which a buyer needs to sign.
4. Mortgage Insurance cannot be removed on a FHA loan. When a homebuyer obtains a 15-year fixed FHA loan with 10% down payment, FHA requires NO mortgage insurance (MI). However, if MI is obtained, it must be held for at least 60 months.
5. Phoenix FHA loans take too long to close. Today’s conventional loans have many of the same fraud detection requirements similar to FHA.  Most banks require 4506-T’s for all borrowers, a verification of deposit and employment, and Social Security verification through Rapid Reporting.  In house underwriting makes closing a FHA loan fast and efficient. David and his team can process FHA home mortgage loans in less than 30 days, and sometimes in little as 12 days.
6. Phoenix FHA loans don’t benefit the buyer. FHA is the only loan with less than 5% down (3.5% down payment) in Arizona. MI is reasonable when compared to lower down payment conventional loans. Underwriting requirements are less strict on debt to income ratios and reserves.  Buyers can also use non-occupying coborrowers to help qualify, as long as they are relatives.  All of these things benefit buyers. There are VA, USDA and HomePath home loans that offer a lower down payment, but those are only applicable to Veterans and property specific homes.
7. You need money to close as a buyer. All down payment and closing cost funds can be gifted by an acceptable source. The buyer can actually close without having any of their own money into the purchase.
8. Phoenix FHA loans don’t benefit the seller. This is probably the most significant myth still active in today’s market. In truth, a 3.5% down payment with less than perfect credit and minimal cash reserves is a HUGE benefit to sellers in Phoenix.  
9. Conventional Financing is better than a FHA loan. In today’s market, conventional loans are much harder to close and the MI is more difficult to obtain. In my opinion, FHA is the best loan out there today for a buyer with a low down payment.
10. Buyers don’t understand FHA loans. It is very easy for even the most unsophisticated person to understand the numerous benefits of FHA. In years of the past, it is true that some FHA calculations were complex. This is no longer reality.
11. The Government gets involved in the FHA loan process. AmeriFirst Financinal, and many other mortgage bankers, control the entire process from application to funding.  AmeriFirst can complete the transaction quickly and meet timelines with zero interference from the Government.

Your Realtor is very sharp and has many years of experience selling homes in Avondale, AZ. You make it through the inspection period with no items needing repair. Your Realtor gives your lender the go ahead to order the appraisal. The FHA appraiser returns the completed appraisal with a value equal to the sales price. You’re feeling terrific because you’ve just locked in an incredibly low interest rate of 4.25%, which is fixed for 30 years, on an FHA home loan.

Everything seems to be moving along smoothly, until you get a call from your Loan Officer. He sounds concerned and you immediately begin to panic. The lender has declined your loan because the house has a shared well for water, which is connected to more than four homes. You don’t understand why your loan was declined? Your Realtor doesn’t understand either; he has sold many homes in this area without a problem, which were also financed.

The reason some lenders cannot finance a home with a shared well connected to more than 4 homes, is that it doesn’t fall within the standard FHA loan guidelines. Prior to 2007, many of the homes in Avondale, AZ were financed with conventional financing. Therefore, very few Realtors and Loan Officers ever experienced a problem with this specific circumstance. Self-admitted, many industry professionals need to educate and enhance their knowledge of FHA guidelines. It is possible for this home to be financed under FHA guidelines; however, it will require some additional documentation, more work from everyone and probably a few sleepless nights. Hopefully, you are working with educated professionals that will be able to alleviate many of those restless nights and extra stress!

This was an actual scenario we experienced with one of our referrals. Luckily, we were able to fund this client’s loan after he received a loan denial from another lender. Although in order for this loan to work, there are a few specific requirements that need to be met. If you’re currently considering purchasing a home with a shared well connection to more than 4 homes and need some assistance, please contact The Krushinsky Team at 602-456-2195.

The following policy change was announced from U.S. Bank Home Mortgage, specifically relating to the Correspondent Lending Division’s Underwriting policy for all loan products including FHA, VA and Conventional loans.

Collections, Charge-Offs, Judgments, Garnishments and Liens:

Delinquent credit must be paid off at or prior to closing. This includes taxes, judgments, collections, charged-off accounts, tax liens, mechanics’ liens, and liens that have the potential to affect US Bank’s lien position or diminish the borrower’s equity.

Documentation of the satisfaction of these liabilities, along with verification that there were funds sufficient to satisfy these obligations, must be included in the underwriting file.

Per the US Bank memo, this policy will be effective Monday, October 4, 2010, for all loans submitted for underwriting to a USBHM Underwriting Center, for MI Contact Underwriting and loans submitted for purchase by their Delegated Correspondents.

All collection accounts (including medical collections) and charged-off accounts do not have to be paid off at or prior to closing if the total balance of all accounts combined is $1,000 or less. No minimum monthly payment has to be included in monthly debt unless one has been set up and the borrower has been paying a set amount.

Collection accounts or charged-off accounts that exceed the above $1,000 limit in combined balances do not have to be paid off at or prior to closing, provided all of the following are documented:

1. A strong credit profile
2. Meaningful financial reserves
3. Evidence that the accounts pose no threat to our first mortgage lien

This announcement is not industry wide, but specifically relates to loans delivered to US Bank Home Mortgage through Correspondent Lending. US Bank Home Mortgage is known as one of the more conservative residential lenders, sometimes coming out with guideline changes up to 6 months before other lenders. This memo also doesn’t insinuate that all lenders will change the guidelines they use to underwrite, rather with the tightening of the market, there is possiblility. However, if this does become more prevalent your clients will become frustrated that they didn’t have adequate time to prepare additional cash reserves, you will have to cancel your Phoenix home purchase contracts and your real estate career will suck.

I’ve personally seen a borrower’s credit report reflect a 700+ credit rating after having a foreclosure less than 6 months prior. Unfortunately, this person was told by a mortgage lender that they would qualify for a home loan. Once the file was sent to an underwriter, their loan application was denied. Even though this borrower had a great credit score, they were unable to obtain a mortgage loan because of their previous mortgage disposition or disposition of property. The guidelines for a FHA loan require a 3 year seasoning period after a foreclosure before utilizing FHA financing to purchase a new home.

So what is disposition of the mortgage? Per the IRS, the disposition of a property or mortgage includes the following transactions:

• You sell property for cash or other property.
• You exchange property for other property.
• You receive money as a tenant for the cancellation of a lease.
• You receive money for granting the exclusive use of a copyright throughout its life in a particular medium.
• You transfer property to satisfy a debt.
• You abandon property.
• Your bank or other financial institution forecloses on your mortgage or repossesses your property.
• Your property is damaged, destroyed, or stolen, and you receive property or money in payment.
• Your property is condemned, or disposed of under the threat of condemnation, and you receive property or money in payment.

While underwriting a file, an underwriter looks for reasons the loan may be ineligible to finance. If there are multiple late payments on a mortgage loan, the underwriter will probably request a letter of explanation as to why there were late payments. A short sale transaction isn’t always reported with full disclosure on the credit report. A veteran Mortgage Loan Officer will probably notice the lates and request a reasonable explanation. However, if you’re working with someone who lacks experience that merely runs the file through Automated Underwriting and assumes the borrower qualifies – your transaction will fall apart. The reason being once the underwriter asks about the disposition of the property and finds out it was sold for less than owed, the borrower will have to wait the required time period to purchase.

Be careful, as this will be more common in the next few years. Working with trusted professionals benefits everyone involved.

Many experienced real estate agents in the Phoenix metropolitan are have a general understanding of the mortgage approval process, but there are a few important details that frequently get overlooked which may cause your loan to be delayed or denied when you’re buying your new home.

New Federal and State regulation, updated disclosure policies, appraisal guidelines, interest rate pricing premiums, credit score, secondary investor approval guideline layering, property type, HOA insurance requirements, title and property flipping rules are just a few of the many recent changes that can have a major impact on a borrower’s home loan financing.

With today’s volatile lending environment, it’s extremely important for home buyers to get a full loan approval, which clearly defines all contingencies that pertain to each unique home buyer’s scenario, prior to spending time searching for a new home with a real estate professional.

Here is a list of a few of the most important topics your Phoenix real estate agent should keep in mind while showing you homes:

Caution – Agents Beware:

Property Type –

High-Rise, Condo, Town House, Single Family Residence, Dome Home or Shoe House… all have specific lending guidelines that can influence down payment, credit score and mortgage insurance requirements.

Residence Type –

Need to sell one home before moving into another? Is a property considered a second home if it’s in the same city? What if I’m buying a home for my children to live in, it is still considered an investment property?

These are just a few of several possible residence related questions that should be addressed by your real estate agent and mortgage professional at the initial loan application.

Rates / Locks –

Mortgage Rates are typically locked for a 30 day period. Rates also have adjustments for property/residence type, credit score and down payment. Most of these could have a big impact on your monthly payment. An increased monthly payment could also have an adverse affect on your loan approval.

A 1% increase in rate could be the difference between getting an approval or denial.

Headline News / Employment –

Underwriters are human and watch the news just like you. Borrowers who work in a volatile industry during hard economic times may have to jump through a few extra hoops to prove that their employment and income is secure.

Job changes, periods of unemployment or property location in relation to the subject property are other things to consider that may cause a speed bump in the approval process.

Title / Property Flip –

A Flip is considered a property that has been purchased by an investor and quickly sold to a new buyer within a 30-90 day period. Generally, an investor will do a little rehab work, fresh paint, landscaping…. and try to re-sell the property for a profit.

While it seems like a perfectly fair transaction, many lenders have strict guidelines in place that prevent borrowers from obtaining financing on properties that have a previous owner with less than 90 days of documented ownership.

These rules change frequently, and are specific to particular property types, so make sure your agent is aware of any changes in title in the last 90 days.

Homeowner’s Association Insurance –

Some lenders require Condos and Townhome communities to have sufficient insurance and reserves coverage pertaining to specific ratios on units that are owner occupied vs rented.

It may also take a few weeks and cost up to $300 to receive an HOA Certification, so make sure your Due-Diligence period is set accordingly in the purchase contract.

Appraisal Ordering Procedures –

Appraisal ordering guidelines are changing quite frequently as regulators implement many new consumer protection laws created to prevent future foreclosure epidemics.

Unfortunately, some of the new appraisal regulations have proven to slow the home buying process down, as well as confuse lenders about the true estimate of neighborhood values.

VA, FHA and Conventional loan programs all have separate appraisal ordering policies, so make sure your agent is aware of which loan you’re approved for so that they document any anticipated delays in the purchase contract.

For example, if an appraisal takes three weeks and the average time for an approval is two weeks, then it probably isn’t smart to write a purchase contract with a four week close of escrow.

Let’s take a trip back in time and describe why the availability to finance a home with the $100 Down Payment HUD Home Program arose.  During the housing boom, many of the homes in Phoenix were financed with Conventional loans.  Prior to the run-up in home prices, many first-time homebuyers used FHA loans to purchase housing.  Once home prices started rising at unsustainable levels; homeowners began to refinance their FHA loans into Conventional loans to pull cash out, remove mortgage insurance, and lower their monthly obligations.  Once these homes, now with Conventional financing, went into foreclosure, the banks began to sell their inventory at a discounted price.  At the beginning of 2007, many of the new homebuyers were forced to use a FHA loan due to inability to finance their purchases with Conventional mortgages in Phoenix.  These homebuyers were unknowingly still buying homes at inflated home prices.  Sadly, many of these homes purchased in 2007 and 2008 with FHA loans are currently going into foreclosure.  In most cases, the current values of these homes are significantly less than what is owed.  The $100 Down Payment HUD Home Program is a result of a FHA borrower foreclosing and HUD repossessing the home that is now for sale.    

So Who Qualifies? 

 Now that you’ve been able to determine you may be able to qualify, here is an outline of the next steps you need to take.

Step 1 — Get pre-qualified for the $100 downpayment HUD Homes Program

Step 2 – Choose search area and type of home (i.e. North Phoenix - 3 bedroom, 2 bath with 1,500 square feet or more)

Step 3 – Create a login and password at our customized database to search homes

Step 4 – Contact us to match you with one of our Realtor partners that can assist you with viewing the homes you are intrested in.  Please note, not all Realtors are trained and educated for HUD homes.  It’s very important to work with one of our preferred partners that has experience with HUD homes.

Step 5 — Submit an offer, get acceptance and go through the loan process.

Step 6 — Close on your purchase using an FHA-insured loan.

It can be a very simple process but the first step is to get pre-qualified.

Your Realtor is very sharp and has well over twelve years of experience selling high-end homes in Arizona.  You make it through the inspection period with no items needing repair.  Your Realtor gives your lender the go ahead to order the appraisal.  The FHA appraiser returns the completed appraisal with a value equal to the sales price.  You’re feeling terrific because you’ve just locked in an incredibly low interest rate of 4.875%, which is fixed for 30 years, on an FHA home loan.

Everything seems to be moving along smoothly, until you get a call from your Loan Officer.  She sounds concerned and you immediately begin to panic.  She tells you that the lender has turned down your loan because the house has a shared well for water, which is connected to more than four homes.  You don’t understand why your loan was declined?  Your Realtor doesn’t understand either; he has sold many homes in this area without a problem, which were also financed.   

The reason some lenders cannot finance a home with a shared well connected to more than 4 homes, is that it doesn’t fall within the standard FHA loan guidelines.  Prior to 2007, many of the homes in Arizona were financed with conventional financing.   Therefore, very few Realtors and Loan Officers ever experienced a problem with this specific circumstance.  Self-admitted, many industry professionals need to educate and enhance their knowledge of FHA guidelines.  It is possible for this home to be financed under FHA guidelines; however, it will require some additional documentation, more work from everyone involved, and maybe even a few sleepless nights.  Hopefully, you are working with educated professionals that will be able to alleviate many of those restless nights and extra stress!

This was an actual scenario we experienced with one of our referrals.  Luckily, we were able to fund this client’s loan after he received a loan denial from another lender.  Although in order for this loan to work, there are a few specific requirements that need to be met.  Please contact David to find out exactly what is required.

 • Do I have two years of steady employment, preferably with the same employer?  In most cases, school may be considered part of your employment history. 

• Can I document my last two years’ income with tax returns, W-2′s, or 1099′s?

• Does my credit report have less than two thirty day late payments in last two years? Also, do I have a credit score?

• If you had a Chapter 7 Bankruptcy, has it been discharged for at least two years and has good credit been re-established?

• If you have had a foreclosure or short sale, has it been finalized for at least three years and has good credit been re-established?

• Will my new mortgage payment not exceed 45% of my gross income and debts combined.

If you have answered “yes” to all of the above qualifications, than you are probably a good candidate for an FHA home loan.  Below is a helpful list detailing some important FHA Guidelines and steps to getting prequalified.

Documents Needed - Please click here for a list of items we will need in order to submit your loan.

Income - When you are qualifying for a loan, we will use your gross income.  That means all the money you earn before taxes, including overtime, commissions, dividends and any other sources –as long as you can show a steady two year history for these sources.  You can calculate your monthly housing payment by clicking here.

Credit - If you are unaware of your credit score, you can contact us today to pull your credit history. Most lenders require FHA borrowers to have at least a 620 or better mid-FICO score in order to be approved.  FHA will also allow some minor past credit issues, as long as the borrower can provide a “reasonable” letter of explanation for the situation.  If you have a Federal Tax Lien, which currently has a repayment agreement, you do not have to pay it off in full provided you are able to qualify with the monthly payment stated within the repayment agreement.  State Tax Liens typically must be paid in full prior to closing your FHA loan.

Bank Accounts - FHA will allow for a homebuyer to receive the down payment for the purchase of a home as a “Gift” (meaning you do not have to pay it back), from a close family relative or a non-profit organization. When receiving a “Gift”, you must provide the complete paper trail of the funds being gifted to you.  Such as the donors bank statements, withdrawal slips and deposit information.

These are not all of the requirements, but a good starting point.  We highly recommend getting prequalified for an FHA mortgage through a qualified mortgage professional.