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What is Proof of Funds?
What Proof of Funds will actually work and which ones won't?
Just about every REO Home, Bank Owned Property, Foreclosed Home, Short Sale, etc. will require some proof of a Buyers ability to perform.
This blog post is as much of a set of questions as answers for your tips and suggestions on how to overcome this potential road block to a deal.
Before we get going. I know what a basic proof of funds letter from a bank or credit union looks like.
But what if you don't have a bank?
My Dilema:
I have a buyer we will call him Joe.
He is an older guy and he doesn't really like banks. He works on more of a true cash basis (nothing illegal), Joe just doesn't have a bank account or keep any money in it.
Joe does own several properties, residential rentals and a couple pieces of commercial dirt with a few minor improvements on it.
Joe has lots of friends. Lots of Joe's friends want his dirt. Lots of Joe's friends want to lend him money and secure it with this dirt. He explained to me that he would quit claim the dirt to his friend and not record it and then if he paid his friend would give it back, otherwise his friend would go file it.
I explained that this is kind of like going all in with a pair of 2s in your hand playing Texas Hold-em and that the proper way would be a NOTE and a Deed of Trust.
Joe doesn't want to do that, he want to do it his way. So I said fine, do it your way, just be aware you are risking your entire piece of dirt for potentially pennies on the dollar and based strictly on trust and a hand shake.
Joe put an offer in on a Bank Repossession (REO property in Montrose Colorado) the other day and told me to write the offer up CASH close in 5 days or as soon as he gets proof of clear title. No further inspection, appraisal, etc. No bother countering, final and best offer. (BTW I like this approach, of final and best offer, with people but it doesn't prove too effective with banks in my experiences.)
I told him I would write it up for closing in 10 days because no bank will move fast enough to close in 5. I based every date my date table x days after MEC (Mutual Execution of Contract).
We submitted an offer about 15% below the asking price and said the deal was CASH we would put $15,000 (his number not mine, they were only asking for $1,500) down as earnest money and we would put up the rest of the CASH to the Title companies trust account for proof of funds, prior to close.
The banks computer immediately kicked the offer back and said they need proof of funds within 24 hours or they will cancel the offer.
I called Joe and told him and he went on about how ridiculous it was and I said listen "if you want to play with banks you have to play their way." I also explained the banks have been burned many times before and told someone had cash when they didn't and that is why they ask for it.
I suggested that he should just get the cash and put it into an account that he could have a bank or other financial institution issue a proof of funds letter... The typical means.
He said No. If I pull that money out of my sources, then it will cost me a months interest. Here is what we will do. Joe is buying the home for his son Tom. He said I will write the letter and "be the bank" for my son Tom.
I said that sounds good, but they will likely just come back and ask you for proof of funds and we will be back here again. I said, "But we will try it". We typed up a letter that basically said he was the father of the buyer and going to provide the cash for the purchase and he was going to get this cash from his "private money lenders" and his various assets. But to them and for this purchase it would be cash and we could produce said cash and place in the Title Companies Trust Account for verification within 24 hours of MEC.
Unfortunately we didn't get to see if it worked. The bank (or their computer) countered back a mere $2,500 below the asking price after they just told the listing agent to take and advertise they were taking any reasonable offer.
What has been your experience of acceptable proof of funds?
Have you successfully used "private money" proof of funds letters?
Thanks for any tips or suggestions you might have.
Chris Ormsbee
(970) 209-0252
Montrose Gold Team
C21 Action Realty, 1245 E Main St. Montrose, CO 81401
www.c21actionrealty.com/cormsbee
What's HUD and What's a HUD Home?
What is HUD?
It might be a short texting acronym for How yoU Doing.
It is actually The Department of Housing and Urban Development.
Check them out yourself here: www.hud.gov
What exactly is a HUD Home?
HUD is a government agency. The Department of Housing and Urban Development. They back up FHA Loans and when these default, HUD can end up liquidating the assets on the open market or through other channels. They also promote home ownership, so they can offer first time home buyers some good options through their various program. In addition in these tough times they are heading up the government directives like "Making Home Affordable" program.
Learn more about Making Home Affordable here: http://www.makinghomeaffordable.gov/
According to their web site:
"HUD's mission is to increase homeownership, support community development and increase access to affordable housing free from discrimination. To fulfill this mission, HUD will embrace high standards of ethics, management and accountability and forge new partnerships--particularly with faith-based and community organizations--that leverage resources and improve HUD's ability to be effective on the community level. "
So what does this mean to you?
Well HUD works with FHA, The Federal Housing Authority, which is actually a part of HUD itself. When someone defaults on their FHA guaranteed Loan or Mortgage, then the house can end up going back to HUD to liquidate if it hasn't been successfully sold previously by the bank or the home owner in a short sale.
If a house is very upside down, it may be destined to go back to HUD's liquidation department, because FHA has minimums they are allowed to take in a Short Sale. These minimums are based on the original purchase price, appraisal and loan amount. So if a house was way over-priced a couple years ago or has really declined in value, no buyer will be willing to pay what FHA is required by law to take as a minimum amount. Then the home goes back to HUD to liquidate, they have the leeway to go below these minimums and meet the markets price.
HUD uses MCB - Michaelson, Connor and Boul, for the State of Colorado and in Montrose as a REO asset management and liquidation company.
MCB handles all liquidations for HUD in a region of the United States including Colorado. http://www.mcbreo.com/st_comain.htm
According to their website, MCB covers the following states for HUD:
HUD hires one Real Estate agent for a very large multi-county region, they get a small amount of money for listing each of the properties in the MLS.
For the Montrose Colorado area this agent is Marilyn Hammar. Please don't call her. She just puts the listings into the MLS for the Government. She doesn't do photos, she doesn't inspect the properties, she doesn't have knowledge of them beyond what she is provided...
Here is a link to a list of all the local listing Brokers for MCB REO in Colorado. Use these names for your local agent to easily search (by agent) all the HUD homes in an area...
http://www.mcbreo.com/colorado/collb.htm
In cold regions and seasons, HUD will typically have the homes winterized and secured with a standard key that is the same for all HUD homes in an area. This allows any agent to show the home (as long as they have a HUD key in their office).
A Real Estate office and its Broker Owner (here at Century 21 Action Realty in Montrose Colorado, that is Ninah Hunter - www.c21actionrealty.com ) must be registered with the company responsible for liquidating HUD assets in your region in order to make offers on properties.
Registration is not hard but does require some paperwork. Once a company is registered any of the employed agents or brokers can submit HUD offers on behalf of their buyers.
Sometimes HUD properties will be featured in auctions, online or offline. Here in Colorado MCB allows electronic bidding online.
Just like with Bank Owned properties don't expect HUD to fix a lot of things for you. You are better off documenting the need and reducing your offer price and then taking care of these things yourself.
HUD/FHA do offer a "K" Loan (a smaller streamlined version of their 203K Rehabilitation Loan). The "K" Loan allows a buyer to finance in and escrow the repair costs for the home. The repairs must be cosmetic and not structural in nature and are limited to $35,000.
The FHA 203K Loan will handle structural repairs but it is a lot more paperwork.
The "K" Loan is perfect for repainting, replacing carpet, tile or linoleum, etc.
The 203K Loan grown up version can be used on a complete gut and remodel, an addition, etc.
Both the "K" Loan and the 203K Loan lend based on the "after repaired appraised value", then the draws for repairs or improvements are handled like a construction loan. Here is a link to the governments page about these loan programs. Check them out if you are a buyer, a Realtor, or even an owner stuck with a property in need of a lot of rehabilitation.
http://www.hud.gov/offices/hsg/sfh/203k/203kmenu.cfm
So what are you waiting for go out and buy a HUD home today... Just kidding, but it sounded good.
If you are in the market already for a house and you are looking for something that might need a little work, a HUD home is a great place to look...
But a Realtor is really the best place to start, because they will have HUD homes, REOs, short sales, desperate sellers (divorce, illness, death), retail secondary market, new construction, etc. They allow you the best shot at looking at the whole market. But it never hurts to look around a bit on your own.
Check out my websites for properties, homes and information about the Montrose Colorado area.
www.COrmsbee.c21actionrealty.com
Hope this helped you get a better understanding of what a HUD Home is and how you might go about looking at one.
If you want to buy or sell a home in Western Colorado, especially in Montrose and the surrounding areas, give me a call.
My name is Chris Ormsbee and I can be reached on my Cell phone at (970) 209-0252.
Are there FHA Changes on the Horizon?
Sounds like changes to FHA are inevitable and probably good, but also probably somewhat painful for Realtors.
Here is an excerpt of an email I got from a local Mortgage Banker. Chris Reichman. You know hes a good guy cause his first name is Chris. Just kidding but he really is a good guy.
Chris' message:
Hello all. As many of you might be aware the Federal Housing Authority (FHA) loan program has been under a great deal of scrutiny from congress lately due to losses sustained over the past few years. The congressionally mandated 2% insurance reserve that the agency is required to keep on hand has dwindled to around .53%. We have been watching closely as the FHA interacts with congress to develop certain reforms to the current FHA loan package. This is impactful for us since the FHA loan program is heavily utilized, particularly for first time / younger home buyers. Although the official announcement has not come out yet, we have learned of some of the expected changes that will be taking effect this year. Definitely nothing too alarming here...just want to keep you all in the loop. Some of the highlights to watch for are listed below. Please feel free to call me if you have any questions at all. Thank you.
The good news...the general down payment (at least for the time being) will remain 3.5%. It had been proposed to raise the minimum down payment to 5%. As of now that is not going to happen.
Chris Reichmann
Mortgage Banker
Republic Mortgage
909 South Townsend Avenue, Suite A
Montrose, CO 81401
Office: (970) 249-1615
Fax: (970) 240-7931
Mobile: (970) 417-7677
Thanks Chris for the email and the info.
Hope this helps you keep on top of the change...
Chris Ormsbee
www.C21ActionRealty.com/cormsbee
HUD Waives 90 Day Hold Period required for FHA Loans.
HUD realizes that the 90 day hold period "Seasoning" requirement for an FHA Loan is hurting buyers, especially first time home buyers more than the investors and rehab flippers (that they thought were getting rich by preying on the helpless homeowner (BTW some were))...
David H Stevens the Assistant Secretary for Housing - Federal Housing Commissioner Signed a a 1 year waiver into effect on January 15, 2010
Check out the actual text here...
http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf
My Summary of the Waiver:
For just about anyone with Arms Length Transaction and Fair Marketing Effort.
If More Than 20% Increase from Acquisition to Flip Price - then need Justification and or documented rehab, Second Appraisal and Inspected to meet FHA and HUD Standards.
Does not apply to the Home Equity Conversion Program.
The Brief 90 Day Hold Policy History:
June 7, 2006 - Waiver that let Government Agencies, Revitalization Efforts, Non Profits, Relocation Companies and Disaster Areas have an exemption from the 90 day rule.
Foreclosing have a waiver to dispose of assets.
June 8 2008 - Waiver exempting 90 day Hold for sales of REO properties acquired by Mortgagees
My two cents for what its worth.
May 15, 2009 - Extension of REO Mortgagee Waiver to May 10, 2010 (sounds like an REO liquidation deadline or another extension will come and I believe this Waiver will cover them till at least Feb 1, 2011.
Sep 14, 2009 - Waiver granted exempting sales of properties that had been previously foreclosed or abandoned by for-profit or non-profits in HUD's Neighborhood Stabilization Program (NSP).
January 15, 2010 - This Waiver granted, effective February 1, 2010, exempting just about everyone.
Basically the Department of Housing and Urban Development has realized that with the flood of foreclosure properties on market, their 90 day seasoning or anti-flipping rule is hurting short sale efforts and first time home buyers and other buyers that could otherwise buy affordable housing that has been bought up and rehabbed or at least inspected and certified to be HUD approved and a few other things... that it is OK to flip that house out to a buyer with an FHA HUD Guaranteed Loan.
This should aid re-absorption of these homes to first time home buyers as opposed to landlord/investors or other investors who are planning to ride it back up and sell the homes for a profit after the market rebounds, after renting them for a few years, even if it is at a loss. There is no doubt in my mind that the houses caught in this mess are best made into homes for first time and other home buyers, the people of the United States of America that need the lower down payment required by FHA, than from a conventional mortgage.
If the average home costs $200,000 in an area FHA requires 3.5 percent down which would be $7,000. The 10 or 20% required for some conventional loans would be $20,000 to $40,000. Everyone can see how this prevents or at least dissuades home ownership. Even if someone has the $20,000-$40,000, I contend they are better off going with a smaller down payment and keeping a reserve emergency fund, rather than completely depleting their savings and moving into a new home.
Don't get me wrong, I am not anti-investor, but I think an investor play here is to be or finance/partner with the "rehab guy" swoop in, bail out the troubled home owner, clean the place up a bit, maybe carpet/paint/minor repair and flip it to a new home owner... now they can qualify with an FHA loan 3% down. If your a long or longer term investor, I think the play is to do the above but then to finance the houses for the buyer (that can't even qualify for an FHA loan - like me), with no shorter than a 5 year balloon - give em a chance to perform... and lending should return to more of a normal state by then to where they will hopefully have a little equity to refinance and pay you off.
I know there are pundits out there that think that "risky borrowing" has led us here... I disagree, that was a component of course, but it always exists and has existed. Without risk there is no reward!
I suppose you could even use the Alan Greenspan term of "irrational exuberance". But from where I was sitting in Montrose Colorado, it was the drying up of the money supply that killed the construction and job base of our town. From what I understand this mess was caused "more by" the Banks "irrationally exuberant" bets on derivatives (a highly leveraged and speculative investment - essentially a hedged bet on interest rates and currencies from what I understand (an option on a futures contract)). This coupled with some investment bank's unscrupulous "packaging" of loans to make them look less risky then they were so they could be sold off as A or B paper when they were really C. The market was essentially "manipulated" by banks so they would have bigger profits. Were they risk takers? Yes. Was it "irrationally exuberant"? In my opinion Yes at best irresponsible and criminal.
Were the small contractors and builders of Montrose Colorado risk takers, yes, of course, but they were calculated seemingly smart risks they were taking... We didn't have whole subdivisions of 50 or more spec homes built to sell to no one. In Montrose, we had small family men and women that worked in the construction trades slowly cranking out one house at a time for the next family that wanted to move to a beautiful place in Western Colorado with Great Upstream Water as I like to call it. To some extent they, these people moving to Montrose slowed down, but often they just couldn't get a loan or couldn't sell their house, but they wanted to come. These small builders only need one house not to sell for a year or so and they can go under... They use the profit from one home to obtain the loan for the next home. Risk takers? Yes. Irrationally Exuberant? No.
Regardless of who's fault it is we need to figure out how to re-build America and the USA... Create jobs and put people back in homes, rather than on the street or in apartments. For us Realtors of the world we need to figure out how to increase the number of transactions (currently lacking the buyer component of the equation...)
I realize not everyone can own a home... If I didn't own a home already, I as a Realtor couldn't buy or own a home right now, because I don't have a W-2-ed steady paycheck and job... I live commission to commission and the banks and lenders consider that risky... Can't say I disagree, but I have never defaulted on a single loan in 46 years and don't plan to start... Due to complicated and lengthy tax returns, I have used the "evil liars loan" stated-loan programs of yesteryear for my last three real estate loans. So for those of you that are screaming here we go again, wave two... I think you are wrong.
The banks and AIG should have been left to fail and this mess would of cleared faster than it will with all the bank and insurance company bail outs... (Know why AIG was going down, an otherwise extremely profitable "Insurance Company"... because they were insuring the Bank's Derivative Bets that went bad... and then they couldn't pay up, if they didn't pay, the bank failed.) How they (AIG) were ever convinced to risk their butts for the Banks behalf without making them jump through the hoops and pay the "actuarialized safe house bet" premiums, that we would all have to for any kind of insurance is beyond me, but it happened.
So what do we do... blame and punish the average guy, who might have been framing houses, dry up the money supply and essentially freeze lending and tighten up credit so none of these people can get jobs or loans and then they will lose there houses and the press will blame their loss on their risky borrowing and over-zealous budgeting and income expectations.
I ask you this? Who's job is stable today? I dare you to name more than 10 that are essentially guaranteed (I can't even think of 10 at the moment...) I mean think of it, lawsuits, mergers, bankruptcies, bank failures, government cuts, city job cuts due to reduced tax base, etc. There is little that is safe other than being self employed in something with a relatively stable demand, but even then you are constantly battling off change, the big guy and the government itself...
There are no guarantees, there are just challenges and opportunities.
This "Hud Waiver" is a welcome change and I believe it will provide opportunity and greatly help many people from new families, to old ones starting over or upgrading homes, etc. It will even help investors, and contractors that go into rehabbing properties rather than building homes...
Chris Ormsbee
Century 21 Action Realty
The Montrose Gold Team
www.C21ActionRealty.com/COrmsbee
PS - Share this news with your fellow Realtors, so they can educate their buyers and investors about the change. Plus you might seem "smart" to them... Feel free to reblog as well. Thanks for reading my long worded rant - news blast.
You will save time and money using, my experience & knowledge in your next Real Estate transaction. I sell Homes, Commercial and Land. I am part of the Montrose Gold Team. You get a 2 for 1!
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