Dan Hartman

102 days.

That's all the time that is left to take advantage of the unprecendented opportunity the first-time homebuyer tax credit represents. With that in mind, it's more important than ever to understand the expectations one should have going into the home buying process, especially when using government financing programs, such as the USDA Guaranteed Rural Housing program. This program is perfect for home buyers whose income has prevented them from saving for a big down payment, however, if you aren't adequately prepared starting the process, you may be unable to close on time. The program provides 100% financing for homes priced up to $280,600. Here's where to start.

Your Income

The USDA mortgage program is income restricted. This means that if you earn too much money, you may not be eligible for the program. The idea behind this restriction is that families earning more should be able to save for a down payment on a conventional or FHA mortgage, and do no require the extra assistance available with the USDA program. In New London county, family income is limited to $95,450 for families with 1-4 household members, and to $126,000 for families with 5-8 members, however, there is more to these figures than you might think.

First, the USDA program looks at the income of all household members, not just those who will be borrowers on the loan. I recently looked at a sceario where a husband and wife wished to purchase a home together, but the wife was ineligible to be a borrower due to a recent chapter 7 bankruptcy. For other mortgage programs, I wouldn't even ask for her income documentation, but because we were considering a USDA mortgage, I had to. The guaranteed rural housing program uses the income of all household members to determine program eligibility, but looks only at the borrower's income for mortgage qualification and for debt-to-income ratios. One of my colleagues recently had to change a loan from USDA to FHA when the borrower got married (surprise!) during the process, thereby increasing her household income beyond the area limit.

There is a brighter side to this income limit, too. USDA does offer several exemptions to this limit, meaning that borrowers can reduce their income for qualifying purposes in some instances. Borrowers with children, and specifically, with childcare expenses, can deduct those expenses from income when calculating qualifying income.

Your Savings

USDA mortgages offer 0% down payment financing because they are specifically designed with low-income buyers in mind. This means that they look very closely at availability of funds in savings, and they expect a full disclosure of those amounts. It also means that those buyers who have accumulated money in savings may not be allowed to use the USDA program. For this purpose, money in checking, savings, CDs and money market accounts is considered available for down payment. Money in IRAs, 401(k)s and other retirement accounts is usually not considered. If you have more than 5% of the purchase price of the home in savings, you may be asked to make a down payment or forced to use a different loan program, like FHA.

That said, just because this is a 100% financing program reserved for buyers with little savings doesn't mean you can buy a home with NO money whatsoever. Even if you get a seller concession for closing costs, or if the home appraises higher than the purchase price and you roll closing costs into the loan, you will still need money for a home inspection, appraisal, and your first year's homeowner's insurance. Also, bear in mind that few sellers will take their homes off of the market for you without a deposit, so you will need money in that regard, too. At a minimum, you should have at least $2-3000 set aside before starting the process.

The Home You Buy

Beyond your qualifications, the property you purchase must also be qualified. USDA financing limits properties based on their location, their condition, and their type. One relief with USDA mortgages is that they are exempt from the Home Valuation Code of Conduct (HVCC) that is causing so many challenges for other mortgage types.

In New London County, much of the county is eligible for USDA financing, however several are not. The USDA Guaranteed Rural Housing program is intended to support ownership of properties in more rural areas, hence its name. With this intent in mind, USDA restricts the program from use in Norwich, Taftville, New London, Groton, Stonington, and a few other communities in New London County. Unfortunately, if you're hoping to purchase in one of these communities, you will have to select another loan option.

Properties purchased with USDA guaranteed funds, must also provide a safe housing option for their purchasers. Properties in disrepair are generally ineligible for funancing with USDA guaranteed funds, as are properties with external environmental concerns, such as proximity to a gas station, a chemical plant, or high tension wires, for example. Help is available for some properties needing repairs, though, as it is possible to borrow extra money to repair concerns, so long as the property is worth at least the amount of money borrowed. Properties with peeling paint, plumbing or heating repairs, or other updates needed may still qualify if a plan is presented to address the problems.

USDA financing is also limited based on property type. The Guaranteed Rural Housing program may only be used to purchase single family homes and condominiums. USDA does offer financing for 2-, 3- and 4-family homes through its Direct financing program administrered by its Norwich office.

Finding the Right Loan

Ultimately, the USDA mortgage program is a very safe program with provides excellent opportunities for many buyers, but it isn't for everyone. It's credit history requirements are comparable to FHA requirements, meaning that buyers unqualified for FHA financing due to poor credit history will also be unable to get USDA financing. For the right buyer, though, it presents a great oportunity to get a home now and take advantage of the unprecedented opportunity represented by the $8000 tax credit.

It is important to remember that the clock is ticking. Bearing in mind that it takes between 30-45 days to close a mortgage, and an additional 30-45 days or more to find the right house, there is no time like NOW to get the process started by setting an appointment with your mortgage advisor. If you haven't started already, you have very little time left!

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and can be reached by commenting on this post, or by phone at (401) 263-8655. Dan also serves as an Adjunct Professor of Finance at Roger Williams University and the University of New Haven.

Washington's buzzword last month was "green shoots" to suggest tiny indications of improvements to the economy and financial markets. After 2 years of lender closures and program cuts, this fall we may just start seeing some green shoots in mortgages, as well.

Mortgage financing on condominium properties has been a sore point for mortgage and real estate professionals this year due to the intensified scrutiny these properties receive from underwriting, and the often-frustrating guideline variations from one lender to the next. Perhaps most challenging for the mortgage professional is that we are unable to provide our clients with assurance that the condo has been accepted, as most underwriters wait to evaluate the condominium information until all other aspects of the loan have been approved. Much of this difficulty comes from significant variances in guideline application from one lender to another and from one underwriter to another. While, the changes to follow relate to FHA mortgages, conventional loans haven't been easy either.

On one loan I closed recently, we initially locked the loan with one lender, but never submitted it to them when it became apparent the property would fail condo approval there due to one other unit owner's delinquent dues. It was submitted to a second lender, but rejected there due to the seller's profit - he had acquired it a little under a year earlier, and, after a total rehab of the property, was projected to make $20,000 or about 15% which the underwriter thought was too much. The most aggravating part of that rejection was that the same lender had just closed a nearly identical transaction for a different seller represented by our seller's agent, but we couldn't use that transaction for leverage because adding ours would have put the lender over the maximum 10% concentration in the condo complex that FHA allows. A third lender finally approved and closed it, but not before a 2nd appraisal was done on which the appraiser, who is registered with FHA, stated that he was unable to judge whether or not the property met FHA approval guidelines.

Obviously, if anything could have gone wrong, it did on that transaction, but many of the problems stem from uneven application of FHA guidelines. Well, FHA will be changing those guidelines this fall, and it appears that the changes are largely positive, and include relaxation of requirements on commercial space in the complex, minimum number of units, percentage insured by FHA, and more. The existing processes for approval will be eliminated, and replaced by two simpler processes, one through HUD, and another at the Direct Endorsement Lender level. Here are a few of the highlights:

• Minimum units in complex reduced to 2
• Up to 25% of space in complex may have commercial use
• No more than 15% of unit owners may be in arrears on association fees
• Phasing is permitted
• 30% of properties in complex may be financed by FHA-insured loans

Several of these changes will be game changing. Providence experienced a large wave of condo conversions in the first half of this decade, as owners turned 2-4 unit properties into 2 or 3 condominium units. Previously, these properties were downright unfinanceable for buyers needing FHA financing. Not any more. The adjustment to a straight 30% limit on FHA-insured properties is also quite significant, as it will allow larger complexes more financing flexibility.

According to information from HUD, these guidelines will go into place October 1st of this year, however, if history is any indicator, adoption and adherence by different banks will be varied. Because the HUD guidelines provide only a minimum property requirement, it is likely that many lenders will apply their own "underwriting overlays" which will allow them to be more restrictive than the rules would otherwise allow. This is one of the areas I am happiest about being a broker; while we do have a lot more work to do to understand differences in underwriting requirements from one lender to the next, this knowledge helps us close loans that no one else can.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance for Roger Williams University and the University of New Haven. He can be reached by phone at (401) 263-8655, or by commenting on this article.

I have to admit I've been a little too busy lately to blog about everything, or do everything that I wanted to do, from a marketing perspective. I finally had a chance to catch up on a recent post about our services from a user on Angie's List. I'm pleased to say he was very happy with the service received on his FHA 203k rehab loan, and said, "We closed on time and under budget, We couldn't be happier with Dan Hartman."

Because we now had a review on Angie's List, I was able to set up a company account and provide some basic details about Province Mortgage Associates. I like the idea of a review system where consumers get final, public say about their experiences. It keeps everyone on their toes to deliver the best experience possible.

After setting up our basic account there, I looked at the consumer side of things, and found that we are actually the top listed mortgage company in Rhode Island. Hopefully the positive feedback will continue to flow!

This Saturday, after spending most of my day in New Hampshire at a school board meeting (I serve on the board of a private school there - more on that at another time, perhaps), I zipped back to Providence to volunteer again, this time at a Providence institution, WaterFire. I'm the co-chair of the Greater Providence Chamber of Commerce's Ambassadors, and for our spring / summer service event, we assembled a crew of over 20 ambassadors and friends to serve as ambassadors to WaterFire, staffing Ribbons of Light booths.

WaterFire is a Providence institution, was first lit for First Night 1994, and was so wildly popular that supporters rallied to make it an ongoing event. Since then, creator Barnaby Evans and his team of staff and volunteers have labored tirelessly to keep the organization running, gathering donations of time and efforts from individuals, business, and the city. It seemed appropriate to give one evening to assist in the same work.

I was proud of the group we brought, and I believe we were quite successful in achieving our goal of helping in fundraising efforts. This weekend's event was especially important because the United States Conference of Mayors was in town. It was quite an experience welcoming such an illustrious group to Providence, along with the 5000-plus other attendees, and I look forward to participating again!

Is there a light at the end of the tunnel? Investors may be suggesting so with the recent surge in the Dow Jones Industrial Average from its March low below 7000 to a recent peak over 8700. Still, some doubt should exist considering the recent economic data hasn't so much indicated the United States economy is getting better, rather that the economy is worsening at a slower pace. Still there is one area, very close to the epicenter of the economy's troubles, that suggests recent changes are achieving their desired results.

In the 18 months leading up to December, 2008, the spread between 30-year mortgage rates and the benchmark 10-year treasury note rose steadily, reaching a peak at over 3%. This was a period of unprecedented worry over asset quality, as years of declining credit standards were exposed in massive defaults, especially among sub-prime adjustable rate mortgages. These loans had been given at lower standards for credit history or income documentation, and often at higher loan-to-value ratios than conventional mortgages.

As this played out, mortgage lenders introduced a seemingly endless series of guideline updates intended to improve the quality of newly originated mortgages, ranging from adding "declining markets" requirements, and increasing required down payments, to outright program elimination. In addition, mortgage vendors, such as mortgage insurance companies, have tightened their requirements, further reducing mortgage availability. While one result of this is that more borrowers are being turned down for mortgages, the market is recognizing these efforts, and the result can be seen in the current Mortgage - Treasury Spread.

As of June 11th, 2009, the Mortgage - Treasury spread stood at 1.73%, meaning investors required a rate 1.73% higher to justify investing in riskier mortgage assets rather than safer US government securities. The 10-week moving average fell to 1.68%, approaching the historical equilibrium around 1.5% that had stood until the watershed revelations of July, 2007.

The spread briefly reached 1.24% at the end of May, as a surge in Treasury rates had not yet caught up to mortgage pricing.

Several factors preclude the spread returning to the 1.5% level permanently, although it is possible it could settle near this level. The 1.5% level came about in part due to a massive increase in the quantity of assets seeking investments; mortgages replaced stock and treasury investments due to stock volatility and low returns on treasuries. The current economic crisis has erased much of the wealth associated with that period, permanently affecting demand. Addtionally, stocks have presented attractive opportunities of late. However, Treasuries are becoming less desirable compared to other assets due to their increased supply.

In coming months, it is important to be mindful of housing statistics, in particular, to gauge the success of the economic turnaround. Existing Home Sales figures will provide insight into the absorbtion of properties, especially foreclosed properties, into the market. Of particular note is data regarding the supply of existing homes. Until this supply subsides, home-price stabilization cannot be expected to occur. Also important is employment data, as another wave of foreclosures could easily follow from the 6 million or more jobs already lost since the beginning of the recession. If this happens, the Mortgage-Treasury Spread could easily widen. While inflation will be a significant focus of the Federal Reserve, it is not expected to meaningfully impact the Mortgage-Treasury Spread, as inflation impacts both types almost equally. Of note, though is one recent article suggesting that the Fed is facilitating Treasury purchases by buying mortgage-backed securities. This could be dangerous if the Fed is unable to continue and other buyers remain unwilling to participate in the market.

One final thought that has seen little press lately, but likely will in the near future, is the question of duration for new mortgage-backed securities. Duration of a financial asset is the average amount of time in which the investor will receive the proceeds of the investment, and provides a measure of the risk faced on that investment as interest rates change. Essentially, the longer the asset's duration, the greater the risk it faces in a rising rate environment. While most mortgages have either a 15- or 30-year term, their duration is much shorter due to the amortized nature of the loans, and due to natural events such as refinancing or home sale which cause loans to be prepaid.

Several factors in the current environment are likely to cause a shift in expected mortgage duration. Specifically, recent home-price depreciation will extend duration, as homeowners will be less likely to sell or refinance should they have insufficient equity. Second, newly written mortgages at historically low interest rates are less likely to be refinanced in the future, which had been a significant historical factor in shorter mortgage duration. Offsetting these is a possible cultural shift towards debt aversion which may lead homeowners to pay down existing debt more rapidly.

Mortgage risk relative to Treasury risk has decreased significantly in the last 6 months, however, the outlook for the market is still not as clear as investors would like it to be. The continued recovery could be threatened, should market factors impact demand for home purchases. Perhaps the most important news will come shortly, with the Federal Reserve's June meeting. For now, while it is clear that mortgage risk has normalized, whether it will stabilize at this level is anyone's guess.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and also serves as an Adjunct Professor of Finance at the University of New Haven and Roger Williams University. Dan can be reached by commenting on this article, or by phone at (401) 263-8655.