• The first post provided an overview of the program.
• The second post detailed FHA credit requirements
• The third post discussed the income and employment requirements.
• This post will discuss the down payment and asset requirements necessary to obtain an FHA home loan.

Minimum Down Payment
In today’s challenging market, this is probably the most attractive feature of the FHA home loan – the minimal down payment requirement.  The minimum allowable down payment is 3.5% of the purchase price.  This benefit is enhanced further by the flexibility allowed for the source of those down payment funds, as discussed below:

Reserve Requirements
Reserves are funds that a buyer has “left over” after purchasing the home.  Most conventional home loans require enough reserve funds to cover at least two months of mortgage payments including property taxes, insurance, mortgage insurance and home owner’s association (HOA) dues if required.

FHA financing does not have a reserve requirement if purchasing a 1 or 2 family property (a 3 or 4 family property requires at least three months of reserve funds).

Acceptable Sources of Funds

• Borrower’s depository funds – Funds owned by the Borrower in bank accounts, stocks and bonds, Certificates of deposit, retirement accounts such as 401k plans
• Gift funds – Can come from a wide variety of sources, including family members, a close friend with established close ties to the borrower, an employer or labor union, charitable or non-profit organization, government agency or a public entity such as a city through a homebuyer’s assistance program. A couple important caveats: the gift funds must be thoroughly documented and provide a clear paper-trail. Depending upon the source of the gift funds, such documentation will include a detailed “gift letter”, copies of cancelled checks and bank withdrawal slips or evidence of bank wire transfer. There must be reasonable evidence that the qualified donor has the financial ability to give the gift. As of October 1st, 2008, funds from certain non-profit organizations which are matched by donations from the home seller can no longer be gifted to the buyer
• Sale of existing home – proceeds from the sale of an existing home may be used to purchase a new home with FHA financing
• Sale of personal property – the sale of a car or other personal property is acceptable as long as the funds can be paper-trailed to the sale
• Cash or “mattress money” – this requires a written explanation describing the source of the cash, how it was accumulated and how long it took to accumulate. Such cash accumulation must make sense for the borrower, such as not having a checking or savings account or credit accounts.
• Commission from sale of property – acceptable if the borrower/buyer is a licensed real estate agent and entitled to a commission from the sale

Mortgage Insurance
A lesser appreciated, but very vital benefit of FHA financing, has to do with mortgage insurance, or MI. Until recently, it was generally easy to avoid having to pay for mortgage insurance when purchasing a home with less than 20% down payment. This was accomplished by getting a second mortgage to “piggy back” with an 80% first mortgage. Thus a qualified buyer could buy a home with little or no money down by obtaining two mortgages. In the reality of today’s markets such second mortgages are all but non-existant or exorbitantly priced.

The only remaining option for a homebuyer with less than 20% for a down payment is to pay for mortgage insurance. In certain areas such as California and Florida, most companies that provide such insurance have limited the maximum coverage to 90% (or less) of the purchase price. In addition, they have tightened their underwriting guidelines and it is indeed more difficult to actually qualify for the insurance.

Enter the FHA home loan. It is generally considered easier to qualify for MI under the FHA and it will go to 96.5% of the purchase price. In short there is a significant portion of the home-buying population who have no other option than FHA financing just for these two reasons alone.

In a Nutshell…
FHA financing may not necessarily be the best fit for everyone in the home-buying market. However, these hallmark features of the FHA home loan – minimal down payment and reserve requirements, flexible sources of funds and availability of mortgage insurance – are far and away the primary reasons that many home buyers, particularly younger first-time home buyers, seek FHA financing. It’s clear to see why.

For more information contact Paul Gonzales, Manager, Countywide Mortgage Inc (760) 746-7388 or paulforloans@aol.com

Prepare Your Home for Sale

home buyers tax credits still available.

If you are a home owner thinking of listing your home, now is the time to be ahead of the game and  do some things in advance to help the sale of your home move along smoothly.

Here are a few tips for you home sellers out there:
 1. Have a pre-sale home inspection. Be proactive by arranging for a pre-sale home inspection. An inspector will be able to give you a good indication of any trouble areas that will stand out to potential buyers, and you’ll be able to make repairs before open houses begin.

2. Organize and clean. Pare down clutter and pack up your least-used items, such as large blenders and other kitchen tools, out-of-season clothes, toys, and exercise equipment. Store items off-site or in boxes neatly arranged in the garage or basement. Clean the windows, carpets, walls, lighting fixtures, and baseboards to make the house shine.

3. Get replacement estimates. Do you have big-ticket items that are worn our or will need to be replaced soon, such your roof or carpeting? Get estimates on how much it would cost to replace them, even if you don’t plan to do it yourself. The figures will help buyers determine if they can afford the home, and will be handy when negotiations begin.

4. Find your warranties. Gather up the warranties, guarantees, and user manuals for the furnace, washer and dryer, dishwasher, and any other items that will remain with the house.

5. Spruce up the curb appeal. Pretend you’re a buyer and stand outside of your home. As you approach the front door, what is your impression of the property? Do the lawn and bushes look neatly manicured? Is the address clearly visible? Are pretty flowers or plants framing the entrance? Is the walkway free from cracks and impediments.

Content courtesy of Realtor.

IF YOU ARE THINKING OF SELLING YOUR HOME CALL PAM AND JOANNA TO FIND OUT WHAT WE WILL DO TO SELL YOUR HOME.

Pam Parton:  760-580-1615            Joanna Woolley: 760-580-1630

Whats the deadline?

 To qualify, first time and repeat buyers must have a binding written contract by April 30 2010 and close escrow by July 1st 2010.

How Much Money is Available?

The maximum allowable credit for first-time home buyers is $8,000. The maximum for repeat home buyers, also referred to in the legislation as “long time-residents”, is $6500.

What Properties are Eligible?

The Extended Home Buyers Tax Credit may be applied to primary residences, including single-family homes, condos, townhomes, and co-ops.

How do Buyers get the Benefit?

Home Buyers can apply the credit to their 2009 tax return, filed on or before April 15th 2010; or apply the credit on their 2010 return, filed on or before April 15, 2011.

Who Qualifies?

To qualify as a first-time home buyer, the purchaser or his or her spouse may not have owned a residence during the last three years prior to the purchase. To qualify as a repeat buyer, current home owners must have used the home being sold or vacated as a principal residence for five consecutive years within the last eight years.

Are There Income Limits?

The new law raises the income limits for people who purchase homes after Nov. 6 2009. The full credit will be available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000 – or $225,000 and $245,000 for joint filers – are eligible for a reduced credit. Those with higher incomes do not qualify.

content by courtesy of Realtor.org

Call Pam or Joanna TODAY if you have an interest in purchasing a home in San Diego County.

Pam Parton:  760-580-1615                               Joanna Woolley: 760-580-1630

Income Documentation
For employees this is quite straightforward.  Copies of the most recent paystubs covering at least one month and W2s for the previous two years are required.  Complete Federal income tax returns for the previous two years may be required as well.

For self-employed people signed copies of personal tax returns for the previous two years are required.  If the business is a legal entity such as an “S” or “C” corporation, partnership or other legal entity then two years of business tax returns are also required.  A signed year-to-date Profit and Loss statement (P&L) will be needed to complete the income documentation.  FHA guidelines state that 25% or more ownership in a business is considered self-employment.

Types of Income for Employed People
The lender will review the paystubs together with the W2s and tax returns to establish a baseline amount of income as well as stability of the income.  In general, if base income is increasing they will likely be able to use the current income amounts.  On the other hand, income that is declining over the past two years will result in an averaging of the income.  A significant decline in base income will require a written explanation.

• Overtime – to be counted it must have been relatively constant for the past two years as well as currently.  There must be the prospect that it will continue and the employer will be required to state that it is likely to do so on a written Verification of Employment.  If used it will be averaged over time and added to the base income
• Bonuses – the rules are similar to considering overtime.
• Commissions – will be averaged over the prior two years and must demonstrate reasonable stability; tax returns will be reviewed and unreimbursed business expenses will be deducted from the income
• Child support, alimony and spousal maintenance – such income can be included provided that it can be shown to continue for at least the next three years.  It must be documented by a divorce decree, court order or separation agreement and actual receipt of the income documented by cancelled checks, bank statements or other positive means.
• Retirement income – Pension and Social Security income is acceptable and must be documented by award letters, IRS form 1099s and current “pay advices” (stubs).  Again, there must be the prospect of continuing for at least the next three years
• Insurance and government income – workman’s compensation, long-term disability or other similar income must be documented and expected to continue for at least three years

Self-Employed Income
Income and expenses will be analyzed from the past two years tax returns and current P&L.  The earnings will be averaged over this time period.  Income that appears stable or increasing will be considered, whereas declining earnings may not be considered acceptable.

Minimum Length of Employment
Stable employment in the same general field of work or business for two or more years is considered minimum.  Going from being an employee to self-employed, even in the same line of work, gets special scrutiny.  A person who has been self-employed for at least one year AND has at least two previous years of employed experience in the same field may be considered.  Formal training or education in the same line of work during the prior two years may be considered in lieu of employed experience.

The next post in this series will discuss the financial assets and down payment requirements for obtaining FHA financing.

For more information contact Paul Gonzales, Manager, Countywide Mortgage Inc (760) 746-7388 or paulforloans@aol.com

Home Prices Rise

Home sale prices in Southern California showed new energy in January, bouncing 8.6% from the same month one year earlier — a period when the market was inundated with steeply discounted bank-owned properties.

 Compared with a very strong December, the median fell 6.1% to $271,500 in January, ending eight consecutive months of price appreciation or stability in the Southland, MDA DataQuick, a San Diego real estate research firm, quoted Tuesday.

The month-to-month decline was likely in part to the higher percentage of cheaper Inland Empire homes that sold in January compared with December as buyers in pricier areas stopped searching during the holidays and investors and first-time buyers made up a larger share of shoppers.

Results from the first two months of the year don’t always provide an indication of what will happen for the rest of the year.

 Many experts fear the market will suffer after the government ends programs which have helped the market on the road to recovery.

The Federal Reserve plans next month to end a $1.25-trillion program that has helped keep interest rates at rock-bottom levels by purchasing mortgage bonds from Fannie Mae and Freddie Mac.

The Federal Housing Administration, which has backed mortgages for many first-time buyers, is expected to tighten its lending rules later this year. An extended federal tax credit of up to $8,000 for first-time home buyers and up to $6,500 for some current homeowners will expire April 30.

Some analysts expect the market to get another boost as the tax incentive expiration nears. But as the federal measures unwind, the housing market will be burdened by high job losses and foreclosures.

“Beyond the spring, everything will depend on what is going to happen with those delinquencies. Are they going to turn into foreclosures or notices of default? And what are the banks going to do with them once they have them?” said Gerd-Ulf Krueger, principal economist at Housingecon.com. “There will be very significant pressure on the banks to behave reasonably . . . and then it is anybody’s guess what happens after the midterm election.”

Many real estate agents and experts are hoping for an early spring shopping season, given the tax credit and low interest rates, but say a lack of new foreclosures has slowed the sales pace. A total of 15,361 homes sold in Southern California in January, an increase of only 0.9% over the same month a year earlier when the market for lower-end, bank-owned properties began to take off, DataQuick said.

We are definitely noticing the lack of inventory out there for our buyers at this time. All the good deals are just being snapped up instantly by the investors.

Sales dropped 31.2% in January compared with December. A decline between those two months is normal; on average, sales have fallen 28.4% in that period every year since DataQuick statistics began.

The number of foreclosures as a percentage of the resale market ticked up slightly in January. Foreclosure resales made up 42.1% of all sales of previously owned homes in Southern California, up from 39.6% in December but down from 56.4% in January 2009.

Home Equity

Trading Home Equity for Cash

Would-be borrowers still find most home mortgages tough to get in this semifrozen credit environment. A major exception is reverse mortgages for homeowners over age 62. These mortgages represented a growing market for the past decade. Even in the recession of 2009, the number of reverse mortgages grew 4 percent over the previous fiscal year.

Banks, brokers and savings and loans are happy to approve reverse mortgages because the Federal Housing Administration insures them; thus, lenders will be repaid even if the value of the house falls below the balance of the loan. And many consumers find reverse mortgages simpler to qualify for, because eligibility primarily involves borrowers’ age, home value and equity — not their income or credit history.

Earlier this year, moreover, Congress substantially raised the F.H.A.’s maximum loan limit to $625,500 (the amount a borrower actually receives depends on age and the home value but cannot exceed that amount). And it has extended that higher limit through 2010. The agency also set tougher standards for those who provide the mandatory credit counseling — usually by phone — for applicants.

Roughly 80 percent of heads of household over 65 are homeowners, federal data from 2007 show. For seniors who want to remain in their homes, reverse mortgages can provide a lump sum, monthly checks, a line of credit, or a combination of these. The loan is repaid when they die or move and the house is sold. In the interim, borrowers use the money for various purposes. They pay off their first mortgages and therefore no longer face those monthly payments. They pay down other kinds of debt. They invest in their houses or in other assets. They acquire a nest egg for emergencies or money for their everyday expenses.

“A lot of people are paying for home modifications,” said Barbara Hillard, a reverse mortgage specialist with M&T Bank in Montgomery County, Md. “They want to age in place, so they’re getting ramps, stair lifts, a bathroom downstairs so everything’s on one floor, curbless showers. They’re preparing their homes for their long-term care.”
But reverse mortgages probably should come with big red “handle with care” warnings. The F.H.A. insurance makes them more expensive than conventional mortgages from a bank, so they are probably not suitable for short-term uses; ordinary consumer loans, for those who can get them, may prove cheaper. Some lenders have used aggressive sales tactics or misleading marketing strategies to sell these products to people who aren’t good candidates for higher debt. And that is what reverse mortgages are: deferred debt, yes, but more debt, which could leave elders with little equity in their houses in later years, when they may need it more.

“People should consider the long-term consequences, not just their immediate needs,” said Barb Stucki, vice president of the home equity initiative at the National Council on Aging. “It’s not free money. If you use your house as an A.T.M., you could jeopardize not only your financial situation, but your ability to continue to live in the house.”

Still, the reverse mortgage can be a useful tool, especially for older people who are house-rich, or house-kind-of-rich, but cash-poor.

A good starting point for families wondering whether this loan makes sense for their older members is the council’s online brochure, “Use Your Home to Stay at Home.”

The council has a nationwide network of F.H.A.-approved reverse mortgage counsellors (required for every applicant) who are happy to include adult children in their counseling calls. Those counselors are available free to low-income older people but charge $125 to others — but only if they decide to proceed with the loan.

The Department of Housing and Urban Development also can help you find other approved counselors in your area.

Content courtesy of New York Times author Paula Span.

A View From Every Room

Truly a work of art!  Amazingly unique and exquisite at every turn.  The finest quality materials and attention to detail have been used in the constuction of this seller built South Western Style home. 

Gourmet Dream Kitchen

From the El Dorado Stone Arched hallwyas to the Gourmet kitchen with Red Dragon Granite countertops and stained glass Knotty Alder wood cabinets

South Western Style Masterpiece

The features of this property rival some of the finest Rancho Santa Fe estates.  Fabulous outdoor entertaining areas, including outdoor game room, Salt water, Solar heated pool and spa, fire pit, pavillion, built in BBQ center on upper patio, media room on lower level of home, and oh…did I mention those drop dead gorgeous views? 

Views from the front

This is a home to be experienced, words and even pictures do not do it justice.  It is truly a remarkable masterpiece ready and waiting for a lucky new owner.

 Click Here to enjoy the full VIRTUAL TOUR

For more information or to schedule a private viewing of this special property,
CALL
Pam and Joanna
760-580-1615 or 760-580-1630

Traditional Credit History
This describes the typical credit history that most people tend to establish over time.  As consumers utilize credit in its many forms (credit cards, car loans, student loans, mortgages etc.) detailed histories of how they have managed their credit responsibilities are collected by at least three credit bureaus.  In addition, each bureau also computes a composite credit score commonly known as your FICO score (stands for Fair Isaac Corporation, the company that created the current credit-scoring models).

The FHA lender will review the FICO scores as well as the details of the individual’s credit history to determine how well a Borrower has managed credit in the past.  NOTE: You may obtain a free credit report once each year, from each of the three major bureaus (Equifax, Experian and Transunion) by going to www.annualcreditreport.com.  There are many websites where you can obtain your FICO scores, usually for a fee.  One popular site is www.myfico.com.

Derogatory Credit
You knew we would get there eventually.  Derogatory, or negative, credit are the dents and dings that people can incur in their financial lives.  Here is a breakdown of how FHA lenders consider such items:

• all derogatory items within the last 24 months require a written and signed letter of explanation
• “minor” derogatory remarks older that 24 months do not require explanation
• all “major” derogs require written explanation, regardless of age (the FHA lender determines what is minor vs. major)
• collections are considered major derogs and must be explained; most FHA lenders will require them to be paid off
• judgments must likewise be paid off unless a verifiable repayment plan is in force and all payments have been made to-date
• a foreclosure must be at least 3 years old, but may be less than that for certain documented extenuating circumstances beyond the Borrower’s control (I.e. serious illness, death of a wage-earner).  Divorce will not normally be considered.
• Chapter 7 bankruptcy discharge must be at least 2 years old with no new derogatory credit issues after the discharge; may be less than 2 years with acceptable extenuating circumstances.  Less than 12 months not allowed
• Chapter 13 and/or Consumer Credit Counseling allowed with at least a 12-month history of on-time payments; permission of the bankruptcy court or counseling agency is required

Non-Traditional or Alternative Credit
The FHA allows for Borrowers without traditional credit histories to document their bill-paying behavior by showing on-time payment of other types of consumer bills such as rents, utility bills and car insurance.  Such documentation cannot be used to enhance an existing traditional credit report or offset other derogatory credit

A Final Word On Credit
As you can see, the FHA has certain minimum standards and requirements, yet also allows FHA-approved lenders a certain degree of discretion in some areas.  It is up to the lender’s underwriter to render a final decision on the creditworthiness of a particular Borrower.  Some lenders may add additional requirements as well, but can never ignore or toss out FHA guidelines.  Click here to go to the FHA’s consumer website.

The next post in this series, to be posted shortly, will discuss income and employment requirements for obtaining FHA financing.

For more information contact Paul Gonzales, Manager, Countywide Mortgage Inc (760) 746-7388 Ext. 315  or paulforloans@aol.com

New Rules For Home Loan Modifications

Those seeking to ease their mortgage terms must now document their finances before a trial modification will be approved. Loan servicers must adopt the policy by June 1st 2010.

Taking borrowers at their word for how much they earn was a major cause of the mortgage meltdown. That practice may also be why an Obama administration program has struggled to convert temporary home loan modifications into permanent ones.

The government said last week that it would overhaul the program by requiring homeowners to document their incomes before trial modifications are granted. Borrowers previously could have their interest rates lowered and the terms of their loans extended on a trial basis without providing pay stubs or other financial documents.

Banks and other mortgage service providers were supposed to collect those documents during a three-month trial period, with the home loan modification becoming permanent if the home borrower made three reduced monthly payments and submitted the required paperwork. But the program yielded few permanent home loan modifications.

Last year, servicers extended nearly 1.2 million offers of trial modifications — but just 66,465 troubled home loans were modified permanently.

Loan servicers said large numbers of homeowners failed to turn in the proper documents, and homeowners complained that the banks were unreasonable and lost paperwork.

The new procedure, to be adopted by servicers by June 1, would require three documents upfront: a formal application including a description of the hardship created by the home mortgage; proof of income, which would mean at least two pay stubs or the most recent profit and loss statement for self-employed borrowers; and a form authorizing the Internal Revenue Service to release tax data to the servicer.

Under the plan, servicers will be required to respond within 10 days to an initial request for a modification. Once documents are provided, the servicer will have one month to tell homeowners whether they qualify for a trial modification.

If a homeowner makes three payments at the modified rate, the modification will automatically be made permanent.

In an attempt to address a large backlog of incomplete modifications, the Treasury Department said it would allow servicers some discretion in making loans permanent if only minor paperwork was missing.

Phyllis Caldwell, chief of the department’s Homeownership Preservation Office, said in a statement that the shift in policy “represents our commitment to more efficiently move qualified homeowners into permanent modifications.”

Some lending groups and banks praised the changes, which they said would reduce the high volume of attempted modifications that end in disappointment for borrowers.

The changes should help borrowers better understand the process and their chance of getting a loan modified, said Kevin Waetke, a spokesman for Wells Fargo & Co., the second-largest loan servicer. Wells Fargo will adopt the new procedures March 1, he said.

John Taylor, president of the National Community Reinvestment Coalition, called the changes mere “tweaks” and said lenders should cut loan balances to avoid losing even more money on foreclosures. The government, Taylor said, should use its control of Fannie Mae and Freddie Mac to start writing down the principal on mortgages owned or insured by them “and demand that the private sector do the same.”

The program, launched last spring, was designed to provide billions of dollars in subsidies to encourage lenders to forestall foreclosures by reducing mortgage payments to 31% of the borrowers’ household income. The goal was to offer modifications to 3 million to 4 million Americans.

To obtain the subsidies, servicers must take a series of steps to reach an affordable payment: reduce the interest rate, extend the loan’s term to 40 years and suspend payments on part of the amount owed. A permanent reduction of the loan balance is optional.

But the servicers also must calculate whether the lender or current owner of the loan will come out ahead by doing the modification or by foreclosing. If the loan owner comes out ahead with a modification, the servicer is required to make it. By documenting the borrowers’ financial situation before offering a trial modification, servicers can make this calculation upfront and inform borrowers whether they qualify.

“Increasing the number of borrowers receiving permanent modifications . . . is critical to our efforts to preserve affordable and sustainable homeownership,” said William Apgar, a Harvard University housing expert on leave to help the Department of Housing and Urban Development deal with the foreclosure crisis.

Courtesy of the New York Times

This post will be the first of four brief articles

Established in 1934, the Federal Housing Administration, as stated on its website “….  has served as an economic backstop working hand-in-hand with lenders to provide consumers with access to safe and affordable loans, even during times of tremendous market volatility as with the current subprime situation“.

This post will describe some highlights of the most common type of FHA financing, known as the Section 203(b) loan.

Subsequent posts will detail credit requirements; income and employment;  and finally assets, down payment and cash required to close.

Maximum Loan Amount

The current limit is the same as it was in 2009, varies county-by-county and is the lesser of 125% of the median house price in a given area, or the following amounts:

• Single family unit – $729,750
• Two family unit  – $934,200
• Three family unit  – $1,129,250
• Four family unit   – $1,403,400

Property Types Allowed

As noted above, FHA financing is available for single-family homes, condos and PUDs as well as 2 to 4 family properties provided that they are owner-occupied.  Second homes and investment properties are not allowed.  Condominiums must be FHA approved and HUD recently made it somewhat easier for a lender to initiate the approval process if necessary.

Other Notable Features

• Can be used to purchase or refinance a primary residence
• Minimum allowable down payment is 3.5% of the purchase price (for homebuyers with FICO scores below 580 the minimum down payment will be 10%)
• Down payment can be gifted
• For now the “Upfront Mortgage Insurance Premium” (UFMIP) is 1.75% of the purchase price; however this will be increased to 2.25% April 5, 2010.  FHA still allows this premium to be rolled (financed) into the loan
• Seller can credit up to 6% of the purchase price to closing costs (HUD plans to lower the maximum amount of Seller credit to 3% later this year, the date to be announced)
• No financial reserves required for 1 or 2 units, 3 months reserves for 3 to 4 unit properties
• Allows non-occupant co-borrowers (for example, Mom and Dad can be on the loan to help qualify, even though they will live elsewhere)
• Allows cashout refinancing to 95% of value ($417,000 maximum; 85% over $417,000)
• No prepayment penalties
• A borrower can have only one FHA loan at a time (fairly obvious since these are strictly owner-occupied loans and a person cannot have two “primary” residences.  Exceptions: you are relocating, selling your home to purchase a new home, or a divorce situation
• U.S. citizenship is not required:  the borrower must have a valid Social Security Number, hold Permanent Resident Alien status or be eligible to work in the United States and hold the appropriate work visas.

Watch for the next article in this series to be posted very shortly which will detail the credit requirements for obtaining an FHA home loan.

for more information contact Paul Gonzales, Manager, Countywide Mortgage Inc   (760) 746-7388  or  paulforloans@aol.com