Archive for the 'Financing' Category

Comments Off on Fannie Changes Her Mind: Back Up to 10 Mortgages

individualityIn my efforts to cover the housing components of the ever-changing stimulus package, I left some important news unreported this week.

Fannie Mae changed positions on the number of mortgages a single investor can have on one to four unit properties. Until last August, both Fannie Mae and Freddie Mac would purchase up to ten mortgages from the same borrower.

That policy was changed last summer in an effort to curtail bad mortgages. Of course, this was laughable. Most  investors with that many properties are experienced professionals. They wouldn’t have purchased the Minneapolis duplex or fourplex in the first place if the numbers didn’t make sense.

Apparently Fannie Mae now understands this too. As Freddie Mac usually copies whatever Fannie does, look for similar news from them in the not too distant future.

Use FHA to Buy A Minneapolis Duplex With A Friend

said on January 30th, 2009 categorized under: Buying A Duplex, Financing

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One of the things I like most about my job is that I learn something every day. Case in point? A client recently posed a question I hadn’t previously considered: is it possible to buy a duplex with a friend and use an FHA loan?

The answer is yes, which may seem obvious. But, doing so does have its own unique challenges.

My clients saw buying a Minneapolis duplex together as way for each to have her own place, but be in a neighborhood they individually couldn’t afford.  

The only FHA restrictions, outside of the standard set used for single family homes, is the multi-family duplex has to have two distinctive entrances; no walking through one unit to get to the other.

Great idea, huh? Except for when it comes time to sell.

What if one person wants to and the other doesn’t?

Well, in real estate, there are two ways you can take title (ownership) of a property. The first is called joint tenancy. When two or more people own a property, and one passes away, this form of ownership allows the other to inherit the other person’s share of the property, without going to court. What’s more, this way of taking title requires that both or all owners agree in order for a property to be sold.

The second form of title is called tenants in common. Often referred to by the acronym TIC, this way of holding title allows each individual to will their interest in a property to whomever they chose. What’s more,  his or her share may be sold without the permission of the other owner(s).

Of course one owner selling when both parties are on a loan may trigger some alarms at the bank. Not to mention that owning property with friends can be challenging.

That’s why it’s critical that the buyers consult an attorney before they venture in together. It’s better to have negotiated out clauses and understandings of individual and joint responsibilities up front.

It not only helps when it comes time to sell, it may help you keep a friend.

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One of the challenges facing owners who occupy their duplexes is a common misconception about their home equity line.
 

While a home equity line was a terrific tool useful when it came time to making large repairs or improvements, what most people don’t realize is “home equity loan” is a pleasant term for a second mortgage.
 
What many homeowners don’t know is when it comes time to either sell or refinance the property, this loan has to be paid off. In other words, the amount you need to pay off your entire indebtedness on the duplex is the amount you owe on your mortgage AND your equity line.
 
While to some this may seem obvious, I have run into many people who hadn’t received the benefit of a clear explanation of this fact when they were granted the equity line. These owners are often surprised when it comes time to sell in today’s challenging market, that they owe more than they thought.
 
This presents a problem in that in all likelihood, they can no longer sell the home for the amount it was valued at when the line was granted, thereby resulting in a short sale (where you are short in the amount you owe the bank).
 
If you have a home equity line, and are thinking of selling, be sure to disclose this information to your Realtor. That way, your agent can position your property and work with both lenders for the best possible outcome.

 

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One of the many advantages for home buyers in today’s tumultuous housing market are the generous FHA loan caps for multi-family properties in the Twin Cities metro area.
 
Wait? You can get an FHA loan for an income property? You betcha (as they say around here).
 
While you and I may see a fourplex or a duplex as a multi-family home, the banking industry perceives any residential property with up to four units as a single family home. As a result, the FHA is willing to insure a loan on up to four units.
 
Why is this such a big advantage in today’s market? Well, FHA loans require as little as 3.5 percent of the purchase price as a down payment, while financing for investors presently commands 20 percent down and one to two points in fees at closing.
 
For example, in any of the major Twin Cities counties, the FHA will lend up to $407,800 on a duplex. On a $400,000 property, an investor will need to have a down payment of $80,000, as well as another $7000-8000 in fees in addition to the traditional three percent in closing costs. An owner occupant, on the other hand, can purchase the same property with a down payment of $14,000 and three percent in closing costs.
 
It’s important to note here that while the FHA no longer allows sellers to gift the down payment to a buyer, other parties, like parents, can. However, the seller may still contribute closing costs.
 
FHA loan amounts in the Twin Cities are limited to the following amounts:
 
        One Family – $318,550
        Two Family – $407,800
        Three Family – $492,950
        Four Family – $612,600
 
Of course, there is no limit to the amount you can use as a down payment.
 
Advantage: buyers.

Comments Off on Find Money in the Bedrooms of Your Minneapolis Duplex

 
I spent much of the weekend showing duplexes. Nothing unusual in that really. But what was noteworthy about these excursions is I was once again reminded of the importance of bedrooms.
 
Bedrooms?
 
Yes. I had two separate buyers. Both were looking to owner occupy a duplex, both planning on using FHA financing, interested in southwest Minneapolis, and concerned as much or more about their portion of the payment as the amount of the entire mortgage payment itself.
 
One buyer was looking in the $300,000 range. The other in the low to mid $200s. As luck would have it, I found properties for each just six blocks apart from one another; same vintage, and many of the same amenities.
 
The two duplexes were priced $75,000 apart; one at $325,000 and the other near the $250,000 point. As always, I did an investment analysis worksheet for each, then carried my calculations one step further to arrive at the share each owner would be responsible for after rental income from the other unit.
 
I was surprised when I realized the more expensive property would cost my client just $100 more per month than my other client would pay for the less expensive property. And that amount was due exclusively to the difference in property taxes. Meanwhile, the $300,000 plus property was almost 400 square feet bigger per unit, with bigger kitchens and fireplaces.
 
Why was it so inexpensive to buy so much more?

Five Red Flags to FHA Financing Your Minneapolis Duplex

said on January 9th, 2009 categorized under: Financing

Comments Off on Five Red Flags to FHA Financing Your Minneapolis Duplex

There was a time not long ago that a property had to be nearly perfect upon purchase in order to pass the strict inspection involved in an FHA

First, let me explain: the inspection during the appraisal process should not be confused with a home inspection. The FHA simply has its appraisers make certain a property meets certain minimum criteria before it will agree to back the loan.

Like most things in today’s real estate market, the FHA has had to change with the times. According to Vikki Boedekker at Burnet Home Loans, “FHA appraisal guidelines have relaxed while conventional guidelines have tightened up so the net result is that there are few differences on a practical level.” The key issues are: safety, habitability, structural integrity and marketability. The definitions of those things, she adds, “have gotten broader or more open to ‘common sense’ interpretation.”

While the FHA standards are extensive, five common maintenance items to be on the lookout for are:

  1. Flaking paint on properties built prior to 1978, or evidence of rotting surfaces.
  2. Electrical Service – while 60 amp service may be acceptable in smaller properties, larger homes may require an electrical certification or upgrade. Of course, any electrical wiring done by anyone other than a licensed professional may also be a red flag.
  3. Roofing- at least 10 percent of the roof should be exposed for inspection. If the roof is flat, it may warrant special attention.
  4. Plumbing – minor leaks are no longer required to be repaired unless there is evidence of significant damage as a result of the leak.
  5. Crawl Space – unvented crawl spaces are often a red flag.

The good news is FHA lender-mandated repairs totaling less than $5000 are no longer required to be completed prior to closing. And, of course, it’s virtually impossible to paint the exterior of any duplex in a Minnesota winter.

Of course, these relaxed standards are especially beneficial with the plentiful supply of foreclosed properties on the market. Many would actually sail through FHA appraisals. For a complete list of the FHA’s valuation conditions, click here.

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Realty Times reports today that President Charles McMillon of the National Association of Realtors has written a letter to HUD Secretary Steve Preston asking that FHA’s 203(k) rehabilitation loan be made available to investors.
The 203(k) loan program is one in which the FHA issues a mortgage and rehabilitation loan at the same time, in an amount for up to 110 percent of the properties rehabilitated value.
McMillon contends that allowing rehabbers access to the program would help absorb and restore the backlog of dilapidated or vandalized foreclosure properties currently flooding the market.
HUD may be a little reluctant to do so, given they placed a moratorium on investor participation in the program in the 1990s due to several fraudulent incidents involving the program became public. To assuage Preston’s concerns, McMillan proposed investor access to the program be temporary.
Of course, with less than a month until the Obama administration takes office, it’s unlikely we’ll see any HUD action during the remainder of President Bush’s tenure. However, as Shaun Donovan, Obama’s nominee for HUD secretary, has extensive experience with housing restoration.
The proposal warrants consideration. Much of the housing stock on the market, while priced at first-time home buyer prices, is beyond the rehabilitation skills of all but professionals.

News Flash: Interest Rates Drop!

said on December 18th, 2008 categorized under: Financing

Comments Off on News Flash: Interest Rates Drop!

Today’s interest rates on a 30-year, fixed rate, conventional mortgage are 4.75 percent. My understanding is by buyinig points, the loan can be reduced to 4.25 percent.

FHA stands at 5 percent interest, fixed, for 30 years.

Of course, you need to have a downpayment or equity, a job and good credit. But this is the best rates have been in years.

Needless to say, it’s a great time to buy or refinance.

Comments Off on Oops! Fannie and Freddie Reconsidering Limits on Numbers of Minneapolis Duplexes

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.

And Then We Could Buy A Minneapolis Duplex at 4.5 Percent!

said on December 4th, 2008 categorized under: Financing

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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.