Kathleen Davis

Rules for Buying a Primary Residence WITHOUT Selling Current Home!

Remember there is up to a $6500 tax credit for move buyers! Must be in contract by 4/30/10 and close by 6/30/10.

Scenario 1: Home on the market and purchasing a new primary residence

• Current home does not sell before the close of the new home than:
  • Borrower qualifies on new home with current and new home monthly payments
    • includes principle, interest, property taxes, and hazard insurance
  • Reserves at closing on the new purchase will be required (bank specific)
    • as a rule use 6 months of principal and interest payments (PITI) to cover both homes
    • possibly reduced 2 months (PITI) depending on the loan to value on the new purchase
• Current home is sold BUT not closed before purchase of new primary residence
  • Each lender maybe different MAKE SURE to check. HOWEVER....
  • What could be required so both payments are not used to qualify for the new home is:
    • Present: Non-contingent sales contract for sold home
    • Present: Lender's valid loan approval for new buyer for sold home
    • Reserves of a certain number of months required to cover both homes
    • Sold to a relocation company
      • Copy of the executed buyout agreement
      • reserves for both homes may not be required

Scenario 2: Converting Primary Home into Second Home; purchasing new Primary

• Each lender is different but they will require a certain number of months reserves in the bank at closing to cover both homes; principle and interest payments
  • this will again depended on lender as well as loan to value
• Distance between the homes will be taken into consideration to determine if truly a 2nd home
• Write a letter of explaination of what this will be your 2nd home and why purchasing the new primary

Scenario 3: Converting Primary Residence to Investment and purchasing new Primary

• Qualifying with rental payments on home being converted to investment
  • Borrower must have 30% equity in the existing home (25% equity if new home purchase is an FHA loan)
    • value is determined by an exterior appraisal dated not more than 60 days from date of closing on new home
  • Reserves at closing for a certain number of months (bank specific) will be required to cover PITI (principal/interest payments) for both homes at closing
  • Fully executed lease agreement for tenant
  • Proof of receipt and deposit of security deposit
• Do not have 30% equity in current home.
  • Borrower will have to qualify with both payments current home and new home
  • Reserves will be required

Letter of explanation will probably be required by the lender of why you are selling/keeping your current home and buying a new one.

Only certain borrowers will qualify however if they do this is the perfect time to consider. Move up tax credit, low interest rates still, and low home values!

Jump on the Wagon!

For prospective homebuyers who are on the fence about making a home purchase, the next few months represent a countdown of sorts as huge tax credits are about to expire. Here are important details for you to know:

Tax Credit for First-Time Homebuyers (FTHBs)
FTHBs (that is, people who have not owned a home within the last three years) may be eligible for the tax credit. The credit for FTHBs is 10% of the purchase price of the home, with a maximum available credit of $8,000. Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

Tax Credit for Current Homeowners
The tax credit program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years. Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

What Are the New Deadlines?
In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010. Those in the military do have some special extensions on the timelines available.

What's So Great About a "Tax Credit"?
The benefit of a tax credit is that it's a dollar-for-dollar benefit, rather than a "tax deduction", or reduction in a tax liability that would only save you $1,000 to $1,500 when all was said and done. So, if a first-time homebuyer who qualified for the entire benefit were to owe $8,000 in income taxes and would qualify for a tax credit of $8,000, she would owe nothing.

Better still, the tax credit is refundable, which means the homebuyer can receive a check for the credit if he or she has little or no income tax liability. For example, if a first-time homebuyer is eligible for a tax credit of $8,000 but is liable for $4,000 in income tax, she can still receive a check for the remaining $4,000!

Higher Income Caps
The amount of income someone can earn and qualify for the full amount of the credit has been increased. Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible. Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.

Maximum Purchase Price
Qualifying buyers may purchase a property with a maximum sales price of $800,000.

It's also important to note another upcoming deadline as the Federal Reserve winds down a program that has been keeping home loan rates artificially low. The fact is that the lowest rates of 2009 were driven down to their attractive levels because of the Fed's Mortgage Backed Securities (MBS) purchase program, which the Fed once again emphasized in its January 27, 2010 Rate and Policy Statement will end on March 31, 2010. As the Fed's program winds down and ends, rates could rise over time since MBS will have less support from the Fed.

If you have any questions regarding the tax credit, pick up the phone and call me. I'm here to help you take advantage of one of the greatest opportunities homebuyers may ever have.

Those Who Wait Will Pay Thousands More This Spring

Waiting a few extra days or weeks to purchase a home this spring could cost buyers thousands of extra dollars as the office of Housing and Urban Development (HUD) implements several changes for loans guaranteed by the Federal Housing Authority (FHA).

Coming just weeks before the April 30 deadline for the Home Buyer Tax Credit and just days after the March 31 expiration of the Federal Reserve Board's mortgage backed securities purchase program (which has kept home loan rates artificially low for over a year), these FHA changes make it even more important to act now to save big.

Here are a few reasons why:

On April 5th, the cost of required up-front mortgage insurance for loans guaranteed by the FHA will increase from 1.75% to 2.25%. For a borrower purchasing a $200,000 home with a $7,000 down payment, the up-front mortgage insurance will increase by $965. Up-front mortgage insurance is typically financed in the final loan amount so the impact to a monthly payment will be minimal but overall, the increase is still borne by the borrower both upfront and monthly.

Later this spring, the amount of money that a seller can return to the buyer from their sale proceeds will be reduced from 6% to 3%. The reduction in these "seller concessions" can increase the amount of cash a buyer will be required to pay at closing by $6,000 for a home purchase of $200,000.

There is only one way to avoid being affected by all of these costly changes that lie ahead - submit all FHA mortgage applications by the last week of March.

If I can answer any questions you may have about how these changes could impact you, call me. I appreciate your business.

We all hear that interest rates are the lowest in 58 years. Interest rates are so low right now for a few reasons.

1) our government is making it extremely cheap for banks to borrower money
2) our governement is also buying the mortgage back securties which are the loans that banks make, sell them to Fannie and Freddie, who than sells them on the open market

Here is how Interest Rates will start to increase:

Our governement will stop buying these mortgage backed securties at the end of March. Big question is who will buy them? If no one will buy them than we have Econ 101; lots of supply but no demand thus pushing the price of bonds down causing the banks to increase interest rates on the next set of loan that are made. Why....to make the yields on these bonds higher so the market looks at them more favorably to purchase as well as to make up the loses on the ones that were sold at a much lower price. This also will help pull back some of the supply thus creating a demand as less loans will be made.

There has been a tremendous amount of money flooded into our economy by the Fed to help stimulate the economy. At some point those monies need to be pulled in to help increase the value of the dollar which makes it look like a better investment as well as reduce the amount that is in the market. This happens with inflation as well as when the FED starts to increase the cost of money borrowing between banks.

How do your reduce the flow of money....increase interest rates...

What payment would you like:

$417K house with 3.5% down - payment: $2,129.56
or
$417K house with 3.5% down - payment: $2,284,81

That is a difference of $155

Here is what happens by the end of the year:
$417K house with 3.5% down - payment: $2,412.62

Why would you wait! Rates at 4.875% on a 30 year FHA loan today....tomorrow rates by the end of the year... probably 6%.

The new loan underwriting world - this promises to have a huge impact for REALTORS® because the field of qualified buyers is shrinking further due to many underwriting changes. Due to the ongoing mortgage meltdown the last few months have seen a dramatic change in how ALL loans (FHA, VA, FNMA, FREDDIE MAC and JUMBO) are being underwritten. It goes without saying that everything is FULL DOCUMENTATION, however, that is just the tip of the iceberg.

The investors who buy the loans we originate are demanding details and documentation never before asked for in the long history of the mortgage business. If your clients haven't already expressed dismay over what their loan officer is asking for, they will in 2010. Here are some potential pitfalls we are seeing in loan files that can cause a "decline" and some of the increasing documentation that is often being asked for by underwriters:

Potential Pitfalls:

1. Declining income - this is a giant red flag in today's world because it may signal that the company may be soon going out of business or that our client may soon be laid off, or that the client's income may decline further. In either case, often only the current lower income will be considered - no matter how much the client has made previously unless proper documentation is obtained to show that these three scenarios won't happen.

2. Job Gaps - lenders are extremely wary when a borrower has had a gap in employment of more than two months. Such a gap may require that the borrower be on his/her current job for an additional 6 months or longer before being approved for a loan, especially if the gap is recent. We have to adequately explain all employment gaps in the last 2 years.

3. 4506T's - All loans now require that the lender order a 4506T (buyer's tax transcripts) from the Internal Revenue Service for 1 - 2 years, even on salaried individuals. This is a fraud prevention requirement, but it does cause trouble in some cases. Whatever shows on the 4506T is what the lender must go by. The two items most likely to cause an underwriting issue are UNREIMBURSED BUSINESS EXPENSES AND BUSINESS LOSSES. They must be deducted directly from the borrower's income. This is causing more than a few loans to be declined for insufficient income.

4. Tougher debt to income ratio requirements. The new version of Desktop Underwriter (through which most loans are analyzed) has a max approval ratio of 45% (% of debt to borrower's income). If the borrower has great compensating factors (such as residual income, low payment shock, limited use of debt, 2 or more months of reserves, good job tenure, high credit scores, income earned but not used to qualify etc.) an approval to 50% may be possible. A borrower with high ratios must have at least 3 of these, and the loan must make sense. For most borrowers 45% will be max. In pre-vious versions of DU we have seen numerous approvals granted into the 50's and 60's, especially on low loan to value loans. No more.

5. Credit - lots of changes here too:

• Max 620 credit scores on most loans
• 720 to 740 credit scores required on conventional loans above 80% by MI companies
• All inquiries that show on a borrower's credit require a written explanation
• Disputes on credit reports mean that the loan must be manually underwritten by an underwriter. A DU approval is not sufficient.
• If a borrower has one mortgage late in the last 12 months they can't get a loan in most cases.
• Short sale and foreclosures - they are generally classified the same (except for FHA) and require a 3 - 5 year wait before the borrower can qualify for another loan. FHA will approve a borrower who has had a short sale as long as they had no late mortgage payments prior to the short sale and that there is no deficiency judgment against them.

6. Bank Deposits - a loan officer must be a detective today when it comes to collecting and reading bank statements. 2 months bank statements are required even if we have a verification of deposit. All sizeable (size is at the underwriter's discretion) deposits require an explanation and proof of source. Any NOTICE OF INSUFFICIENT FUNDS on a borrower's bank statements are a big negative factor.

7. The appraisal - many REALTORS® have either lost transactions in 2009 or have had their sellers take less than they thought they were going to get because of the HVCC rules that require lenders to order appraisals through Appraisal Management Companies (AMC's). This does not have to happen in all cases if the loan is done by Cherry Creek.

In the 2010 loan qualifying arena it could be said with some accuracy that a borrower is guilty until proven innocent (or unapprovable until proven approvable). This is unlikely to change within the foreseeable future as investor's losses from foreclosures and short sales continue unabated.

I can help you with some of these things. I understand how to help know before we get to the closing table if a borrower can purchase. Don't get to removing contingencies to find out there is an issue.