RESOURCE CENTER REAL ESTATE GLOSSARY RENTALS

Kari Lundin
Coldwell Banker Burnet
7550 France Avenue S
Edina, MN 55435
(612) 290-5998

One phrase we seem to be hearing a great deal in the media as of late is “the emperor has no clothes.” It’s funny to me that we’re not hearing “the sky is falling” with equal frequency.

 

According to Realty Times, the illogical restrictions imposed in late summer by Fannie Mae and Freddie Mac to limit the number of rental properties an investor can own on order to obtain new financing may be on their way out.

 

At the time, Fannie and Freddie believed that the more properties an investor owns, the higher the likelihood of default. So they reduced the maximum allowable number of units per investor from 10 to four.

 

In my opinion, it isn’t the seasoned investors who defaulted; it’s those who were new and didn’t have proper guidance when they bought their investment property. But panic by one often leads to the irrational thinking of many, so the restrictions were imposed.

 

Of course, this move only served to bumped many smaller investors out of Fannie and Freddie’s programs, forcing them to pursue hard money lenders or leave the market altogether.

 

Apparently at the National Association of Realtors convention in Orlando in November, James Lockhart, who runs the Federal Housing Finance Agency, spoke twice. Those in attendance pressed him on the issue. It was effective. In a letter sent to NAR President Charles McMillan, Lockhart shared one of the agencies is re-thinking the move. It seems they’ve realized investors may play an important role in the housing recovery.

 

Duh.

I’m beginning to think the economists charged with leading out of this economic abyss are like a bunch of little kids. Every day, they have a new idea; almost as if they’re making it up as they go along.

 

This morning, nearly every media outlet carried the news of a rumoured Treasury Department plan that would decrease mortgage rates on 30 year fixed loans for home buyers to as low as 4.5 percent.

 

In the plan, the Treasury would allegedly offer to buy securities that finance the newly issued home loans. These securities would be purchased primarily from Fannie Mae and Freddie Mac, which are the Government Sponsored Entities (GSEs) that buy most mortgages from U.S. lenders.

 

Of course, the plan would have to be paid for somehow. It is believed one possibility would be to issue bonds to the public at 3 percent interest, which would allow the government to turn a profit by buying securities that pay 4.5 percent.

 

There is no word as to whether this approach would be extended to refinances or investment properties.

 

Would this work? Well, last week, when interest rates on 30 year fixed conventional loans briefly dropped to 5.25 percent, the Mortgage Banker’s Association reported the applications for loans (both new and refinances) were up 112.1 percent; the largest jump on record.

 

Some economists are concerned just the rumour of low, long-term fixed interest rates may cause some prospective home buyers to postpone a purchase. That “wait and see” attitude would further slow an already sluggish economy.

 

While I believe this is a possibility, I am also well aware of the laws of supply and demand. Anyone think an abundant supply of mortgage money at 4.5 percent would stimulate the housing market? I do. And when demand increases, so too do prices.

 

If you’re a real estate investor looking for a property, you might want to hustle a little in order to save some cash. Yes, there are some incredible deals available right now; interest rates are dropping, and there’s a lot of inventory.

 

But that’s not necessarily why you should hustle. It seems our friends Fannie Mae and Freddie Mac (who purchase most loans from lenders) are offering one more. Due to market conditions, they’re about to increase their lender financing fees. For Freddie, these fees take effect November 7. For Fannie, it’s December 1.

 

These fees will impact all levels of investors; from those with low down payments to those with a great amount of equity. Investors who purchase and finance a property with 10-15 percent down will encounter a 3.75 point adverse market fee. In other words, you can count on additional costs of $3750 per $100,000 you spend.

 

Buyers who have a 20-25% down payment will realize a small savings. Their adverse market fee will be 3 points. And, even those with more than a 40 percent down payment will receive a 1 3/4 percent add-on.

 

To add an even greater sense of urgency, some of the companies who insure low down payment mortgages plan to cease underwriting investment property loans altogether. This will serve to effectively cut off many low down payment, high leverage deals; no matter where the property is located. 

 

I had a panic attack the other day when a co-worker informed me she just had clients get turned down for a loan because “FHA is no longer letting you count 75 percent of a property’s rental income toward qualifying for the loan”.

 

Gulp. That would nearly destroy the owner-occupied duplex market.

 

So I did some digging.

 

Turns out that yes, FHA did change its rules on using the rental income to qualify; on your purchase of a second home. According to HUD, FHA has seen an increasing number of homeowners choosing to vacate their existing homes and purchase a new one. This may be due to a number of reasons: a shorter commute, growing family, or simply a terrific opportunity.

 

If the homeowner isn’t able to sell the house or qualify for two mortgages on her own, she has a problem. Many are choosing to solve this by renting their first home out in order to cover the mortgage, which seems like a reasonable enough solution.

 

The problem is the FHA is concerned that in order to qualify for the second property, the homeowner may provide the bank with misleading facts as to the rental market value of their original home. Were this the case, the home may not demand enough rent to cover the mortgage payment and consequently, end up as another foreclosure.

 

Of course, there are always exceptions. In order to obtain a mortgage for a second property, the homeowner must be able to: qualify for both properties on her own, be relocating with an employer to an area not within a reasonable commuting distance, or have at least 25 percent equity in the first property.

 

The thinking with the latter is clearly that the homeowner has more to lose, and the FHA may prevent a “buy and bail”. What’s that? It’s when someone buys a more affordable house with the intention of no longer making payments on the first. Oh? And by the way? If you’re thinking of doing this, it is considered mortgage fraud, which is cause for legal action.

 

So can you still use 75 percent of the rental income of a duplex to help you qualify to buy the property? Absolutely! It pays to check the facts.

 

 

 I’m mad at President Bush. It isn’t the first time. But never before have I actually agreed with the guy and been mad at him.

I think this time he’s telling the truth. So why am I mad? Because he didn’t explain to all of us exactly what’s going on in our economy.

 

I’ve spent the last week answering people’s questions, listening to all the talking media heads, reading and cobbling together any piece of information I can decipher to help me understand. And I think I get it. So I’m going to try to explain.

 

Once upon a time, not so long ago, we Americans went a little house crazy. Nothing terribly unique there. After all, home ownership is the American Dream. At the same time, in an effort to stimulate the economy, the Federal Reserve kept interest rates low. While this did not directly impact rates on home loans, it did mean the banks were making less money elsewhere. So, they did what any business does when its profit margin is slim (see WalMart); they concentrated on volume.

 

Meanwhile, many of the restrictions on lending; either to each other or us were eased. So, the banks were able to offer us more exotic types of loans: loans with no money down, interest only loans, stated income loans, 80-10-10 loans which didn’t require mortgage insurance, and adjustable rate mortgages (ARM). And in many cases, mortgage insurance was no longer required for borrowers with little equity in a property; making the purchase even more affordable.

 

 

We liked houses. With low interest rates, and no longer having to scrimp and save for a down payment. Many of us who didn’t think we could afford a house suddenly discovered we could. So we went shopping. Read the rest of this entry »

Spoken by Kari Lundin | Discussion: 2 Comments »

Will the Bailout Help You With Your Minneapolis Duplex?

September 29th, 2008 categories: Financing

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Is There Light at the End of the Tunnel for Seller Funded Down Payments?

September 12th, 2008 categories: Financing

There’s reason for a bit of cautious optimism in Washington. On Tuesday, the House Financial Services Committee, which is chaired by Rep. Barney Frank, will review HR 6694. The bill would allow the Federal Housing Administration to continue to allow the use of seller-funded down-payment assistance on FHA-backed loans through non-profit agencies like Genesis, Ameridream and Nehemiah.

In a tough economy, few first time home buyers have saved the 3.5 percent required for a down payment in order to qualify for an FHA loan. First time home buyers will be the engine that leads the train of any housing recovery, so it would seem at this dark hour the prudent thing to do would be to give them not only a $7500 tax credit, but help in qualifying for the loan in the first place.

The department of Housing and Urban Development (HUD), argues that these programs artificially inflate home prices and ultimately increase the risk of the loan going into default. In 2007, the default rate for seller-funded loans was 28 percent; three times the rate of conventional FHA loans. As a result, these programs are presently scheduled to end on October 1, when the recently passed Housing Bill takes effect.

To compensate for the increased risk, HR 6694’s bi-partisan team of sponsors, Rep. Al Green [D- TX], Rep. Christopher Shays [R - CT], Rep. Maxine Waters [D- CA] and  Rep. Gary Miller [R- CA], drafted the bill to allow HUD to implement risk-based pricing on FHA insurance premiums. In other words, much like more conventional loans, the better your credit score down payment, the better your interest rate. If you have a lower credit score and little to no down payment, it would be reflected in a higher interest rate on the loan.

Two of Minnesota’s representatives sit on the committee; Rep. Michelle Bachmann [R] and Rep. Keith Ellison [D]. Be sure to write or call their offices and express your support for the bill. Believe it or not, they do listen. It is an election year after all.

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Twin Cities Duplex Buyers Impacted by Housing Bill

August 1st, 2008 categories: Buying A Duplex, Financing

The Housing and Economic Recovery Act passed by Congress and signed into law by President Bush on Wednesday is a mixed bag for first time home and duplex buyers.

The most dramatic and immediate impact will be felt by those who needed to avail themselves to down payment assistance programs like Ameridream, Nehemiah and Futures. These programs allowed sellers to make contributions toward a buyer’s down payment, with that contribution folded into the buyer’s loan. Essentially, it was an FHA version of a no money down loan which helped millions of first time home buyers.

Why did Congress do this? Well, the thinking was since most of these transactions involved inflating the purchase price of the property by three percent, then obtaining financing in that revised amount, property values were artificially inflated. This, theoretically anyway, helped create the crisis we are in now.

On a personal note, this has not been my experience.

Most first time homeowners in the Twin Cities are uncomfortable buying a home or a duplex in which their payments are greater than the equivalent of a $150,000 mortgage. Three percent of $150,000 is $4500. Buying a $150,000 house for $154,500 isn’t the kind of grossly inflated pricing that has caused this crisis. Most appraisals fall in a range anyway, and an honest appraiser will be frank as to the property’s true value.

After October 1, 2008, no one with a financial interest in the sale of a property may contribute toward a down payment. It does not, however, prohibit buyers to receive assistance from other programs provided by nonprofit agencies or gifts from family members. In other words, until the smoke clears, no raising the purchase price by three percent for the down payment. The buyer will need to have that money saved.

However…

The new requirements for an FHA loan will raise the required down payment for all borrowers (FHA loans are available to all buyers, not just those purchasing a home for the first time) from three to 3.5 percent.

Historically, FHA loans have been capped at an amount roughly equivalent to the median home price of an area. The bill makes permanent the temporary FHA loan limits which were increased earlier in the crisis. These loan limits are the greater of $271,050 or 115 percent of the local median home price, which cannot be greater than $625,000. This should help more owners and buyers take advantage of FHA loans, which typically are easier to qualify for and at a lower interest rate than a jumbo loan.

A bit of good news in the bill is it contains a Homebuyer Tax Credit of $7500 which would be available for first time buyers who purchase a home between April 8, 2008 and June 20, 2009. This credit is repayable over 15 years.

Of course, the hope is that this helps stimulate the lower end of the market, the momentum of which would help pull the rest of the housing train forward.

Spoken by Kari Lundin | Discussion: 1 Comment »

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