Chris Thomas

New qualifications rules go into effect for certain types of Fannie Mae loans on October 1, 2009. For 5-year ARMs and loans with temporary interest rate buydowns, the borrower will need to qualify for the loan based on the greater of the note rate or the fully-indexed rate. Here's what that means:

• A 5-year ARM (adjustable rate mortgage) has a fixed rate for the first 5 years, and then the rate can go up or down (it is designed to go up, so don't pay attention to anyone who tells you it will go down). The interest rate for the first 5 years is generally a little bit cheaper than it would be if you got a 30-year fixed rate mortgage. In the past, you could qualify for the 5-year ARM based on the lower, starting interest rate. The assumption was that when the rate went up in five years, the house would be worth more money and you could just refinance into a new mortgage, rather than paying the higher rate. Now, you must qualify based on the fully-indexed rate, which means you have to qualify based on the higher rate.
• A mortgage with a temporary interest rate buydown is a loan that has a lower rate for the first 1, 2, or 3 years. It works like this: if the rate for a 30-year fixed rate loan is 6%, you can buy the rate down to 3% for the first year, 4% for the second year, and 5% for the third year. After that, the rate would be the normal 6% for the life of the loan. It is expensive to buy the rate down, so not many people use this type of loan, with the exception of builders. Because builders have so much profit potential, they are able to pay for the buydown, allowing them to advertise those low interest rates you see for new construction. Many people ran into trouble with these loans because they qualified for the loans based on the lower, initial interest rate. When the rate kept getting higher every year, they couldn't afford the new payments. To prevent this from happening in the future, you now have to qualify based on the higher, long-term rate.

Both of these changes make a lot of sense, even though they may prevent some people from qualifying for as large a loan as they would like. Ignoring the fact that rates can go up and values can go down is still the standard way of thinking. Fannie Mae seems determined to change that way of thinking. Ask anyone who is stuck in an ARM they can't refinance out of, and I'm sure they would agree.

One of the most common questions we get asked is "What is the property tax credit and how is it calculated?"

Property taxes are paid in arrears, meaning the property taxes for this year are paid to the county next year. If you bought a house on July 15, 2009, then the property taxes for all of 2009 will be due in 2010. But wait! You only lived in the house from July 15, 2009 until the end of the year - why should you have to pay the taxes for all of 2009? Well, you don't. That's where the property tax credit comes in.

At the closing, the seller will pay you one day's worth of property taxes from January 1 until the last day that he owned it - July 14. That's 6 1/2 months of taxes that get moved from the seller's account into the buyer's account.

It doesn't matter when you close on your house - you will only pay property taxes for the time you owned it. As the year goes on, the property tax credit gets larger. For example, if you close on a house on January 2, you will only get 1 day of taxes from the seller. If you close on December 31, you will get an entire year of taxes from the seller (less the one day you lived in it - December 31). This is important to know because the most money you are allowed to get back at closing is the amount of money you paid as an earnest money deposit. If you paid only $1,000 in earnest money, but you are owed $3,000 for the property tax credit, the most you could get back as cash at the closing is $1,000. The remaining $2,000 would be taken off the closing costs you owe. However, if the seller is paying all your closing costs for you, then the seller would get to keep that $2,000. To take full advantage of the property tax credit, you would need to ask for $2,000 less in seller-paid closing costs. Just one more reason why you should always use a mortgage broker who knows what they're doing before signing a sales contract for a house.

Want to get the scoop on all the changes to the FHA condo approval process? Following is the HUD announcement for a conference call.

FHA will be holding an industry conference call on "FHA Mortgagee Letter 2009-19, Condominium Approval Process - Single Family" on Wednesday, July 1, 2009 at 3:00 pm Eastern Standard Time (EST). (That's 1:00 pm Mountain Time.) The conference call will feature a brief overview of the mortgagee letter, followed by an open question and answer session.

To participate in the FHA condo conference call on July 1, 2009 at 3:00 pm EST, please dial: (866) 207-0413 and provide to the operator the conference ID #17834469.

Please note: FHA Mortgagee Letter 2009-19 represents the implementation of legislative changes established under the Housing and Economic Recovery Act of 2008. We do plan to hold another call to discuss the market-related problems you may be experiencing in condo developments. On both this week's call and the future call, we welcome your comments and / or recommendations for programmatic changes that you would like for FHA to consider to address these problems.

You can obtain a copy of "FHA Mortgagee Letter 2009-19, Condominium Approval Process - Single Family" in advance of the conference call by visiting: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

I just read one of the featured posts about how bad lenders are. At the time I read it, there were 176 comments. I made it through about 20 of them and noticed a distinct theme: Realtors are having a really hard time getting deals closed because the lenders keep messing the financing up.

Here's the solution to that. Use a lender who knows what he's doing. Here's how to tell if a loan officer knows what he's doing:

• Ask him what the rate is. If he tells you without seeing the borrower's credit report, knowing the loan-to-value ratio, the debt-to-income ratio, the type of property, the loan size, the occupancy type, and a number of other things - he's no good. He just doesn't know how to do his job very well.
• Ask him what the closing costs mean and who gets them. Not the dollar amounts, but what the fees actually mean. Does he tell you the origination fee goes to him, or does he tell you something else? Does he tell you discount points come in round numbers - 1%, 2%, etc., or does he tell you the truth? Ask what the tax related service fee is. Ask him what MERS stands for. Ask him how the property tax credit is calculated, why there are 3 months of insurance collected to start an escrow account, and what the state tax rate on mortgages is.
• Ask him to explain all the disclosures to you in plain English - without looking at them and reading them.
• Ask if he charges an application fee, and why he feels it necessary to charge a fee to prevent your buyers from shopping around.
• Ask if he attends 100% of his closings in person. If he says he's too busy marketing himself for that, ask him why he thinks an opportunity to be with a seller, a buyer, a closer, and two Realtors is not worth his marketing time. Or is he just afraid of not knowing the answer if someone asks a question at the closing?
• Ask if he's approved to sell FHA, VA, USDA, and all the down payment assistance loans. If he's not, ask him why he thinks he can represent your buyer correctly if he can't sell them every type of loan.
• Ask him if he runs every loan through an automated underwriting system before sending you a pre-approval letter. If he doesn't, ask him how he knows your buyer is pre-approved.
• Ask him if he has ever read the Fannie Mae, Freddie Mac, FHA, and VA underwriting guidelines. Does he even know where to find them?
• Ask him if he knows a conventional loan gets underwritten twice - once by the lender and once by the mortgage insurance company. Ask if he knows the underwriting guidelines are different for each of them.

The solution to the problems that Realtors have does not rest with the lenders. It rests with the Realtors themselves. The mortgage industry has changed and it's not going back to the way it was. No longer can you rely on the mortgage broker who gives you the tastiest donuts. Now you need someone who actually knows how to do his job. Get on board, folks. Complaining about something you have complete control over is a horrible way to run your business. Turning your sole source of income over to someone who doesn't know how to do his job is just stupid.

FHA loans are great loans. However, if you're thinking of FHA financing for a condo, there are some important things to keep in mind. All condo projects must be approved by HUD, but don't assume that if a project has already been approved, you are good to go for an FHA loan. There is also a review process that FHA requires when someone applies for an FHA loan in an approved project. Here are some of the things that are checked:

• A single investor cannot own more than 10% of the units.

• The number of units that are in arrears (more than 30 days past due) on their HOA fees is limited to 15% of the total units.

• 50% of the units must be sold or pre-sold (a sales contract and loan approval will prove it is a valid pre-sale).

• At least 50% of the units must be owner-occupied (second homes can count as owner-occupied if they are not vacation homes and if the owners spend less than 50% of their time living there).

There are other restrictions as well, but these are the biggies.