Ron Brown FHA & VA Home Loan Specialist

I have gained a reputation for being the guy who always gets the "hard" loans, and most interesting situations, and I have always taken a great deal of pride in finding a way to get them closed. This post falls into the category of "there is no such thing as a normal deal."

I was recently introduced to a young, newly engaged couple interested in buying their first home in Puyallup. I did the usual First Time Home Buyer meeting where I go over what they will need, and how the process works. Normally, this is pretty standard stuff since I am an authorized instructor with the Washington State Housing Finance Commission for First Time Home Buyer seminars. However, this time I was stumped, and was required to research a few options directly with the IRS concerning qualifying for the First Time Home Buyer Tax Credit.

One of the situations that can disqualify a buyerfrom receiving the $8,000 FTHB Tax Credit is buying from a "close relative,"and this couple had an opportunity to purchase a home from the Groom to be's "Step" Grandmother. The property was originally owned by his blood grandfather who had passed away a couple of years ago, and the Title history showed his family name as the only name on the chain of title for decades. I ended up having to go directly to the IRS legal department for an answer, and this one even stumped the instructor for their auditors! Since there was no blood relation between the current owning grandmother the wording of the law worked for us, but because she had acquired the property via inheritance from the direct blood relative that worked against us.

In the end, we were able to sort through all the distractions, and get confirmation that they would indeed get the full tax credit, but not because of the lack of blood relation. Instead, we took the path of least resistance. When non-married co-borrower's are buying a home the tax credit can be split between the buyers in any ratio, or allocated entirely to either one. Since the Bride to be had no relationship to the seller, and they would not be married at the time of the transaction, nor would they be married before the end of this year (therefore they would file taxes separately), we could just allocate the entire $8,000 Tax credit to her as a First Time Home Buyer.

There are other aspects to consider when buying from a relative, such as the maximum Loan to Value limitation of 85% for FHA loans, but I'll blog about those another time. Just be sure to do your research before writing contracts for a transaction that might be construed under the Identity of Interest disclosures. If you are interested in applying for a mortgage, or have other questions, just click Ron Brown FHA & VA Loan Specialist to visit my secure web page, or simply leave a comment.

One of the biggest mysteries for many First Time Home Buyers is how to gauge their credit. There are many different services that will give access to your credit profile, and score, but they charge an average of $15 per month for "monitoring," and just knowing your credit score is not an accurate way to know if you will be considered a strong borrower by a bank. Years ago, banks used an internal scoring system that allowed the loan officer to get a good read on a prospective borrower before pulling their credit. This was, and is important because having too many credit pulls is damaging to your credit score.

Many of the concepts that were in place 10 to 15 years ago are being revisited by investors through their underwriting guidelines today, so I thought this type of analysis might be helpful.

Here is a sample of such a scoring questionnaire.

1) How long have you been on your present job?

Less than a year = 1 pt.

1 to 2 years = 2 pts.

2 to 4 years = 3 pts.

4 to 10 years = 4 pts.

Over 10 years = 5 pts.

2) Do you have a telephone in your own name?

No = 0 pts.

Yes = 1 pt.

3) How much is your monthly income?

Less than $1,000 = 1 pts.

$1,000 to $2,000 = 2 pt.

$2,000 to $3,000 = 3 pts.

Over $3,000 = 4 pts.

4) What is the total of your monthly debts in comparison to your after tax income?

50% or more = 0 pts.

40% to 49% = 1 pt.

30% to 39% = 2 pts.

20% to 29% = 3 pts.

Under 20% = 4 pts.

5) Are any of your current outstanding loans past due? (This includes outstanding collections)

Yes = 0 pts.

No = 1 pt.

6) Do you have any prior loans with this bank?

No = 0 pts.

Yes, but with late payments = 0 pts.

Yes, but no late payments = 1 pt.

Yes, but paid off w/no late pmts. = 2 pts.

7) Do you have an open checking account?

No = 1 pt.

Yes, but w/NSF charges = 2 pts.

Yes, w/no NSF charges = 3 pts.

8) How long have you lived at your current address?

Less than 2 years = 1 pt.

2 to 3 years = 2 pts.

Over 3 years = 3 pts.

9) Do you have a Savings account?

No = 0 pts.

Yes, but less than $500 = 1 pt.

Yes, $500 to $1,000 = 2 pts.

Yes, over $1,000 = 3 pts.

10) Do you own any Real Estate?

No = 0 pts.

Yes = 3 pts.

Applicants with less than 50% of the total points were rejected outright.

Applicants with 50% to 60% were un-approvable without a co-signer.

Applicants with 60% to 70% were considered a reasonable risk, but reviewed prior to submission.

Applicants with 70% to 90% were granted a loan within reasonable limits, unless there was a bankruptcy on record.

Applicants with 90% or more of the total were automatically approved within reasonable limits.

Hopefully, this will help some of the First Time Home Buyers in determining where they fall in a generic underwriting scenario. While this sample is from over 10 years ago, the principals are still valid.

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington

Puyallup WA

I was recently told I need to spice up my blog, put some pizazz in it with color pictures, etc. One of the things recommended was to put a "mortgage widget" on the side of the blog page. These are clever little pieces of "eye candy" that show the "average" interest rate for some of the loan options available nationwide. It got me thinking about several different issues.

First, is there really any such thing as an "average" mortgage? While the vast majority of homes have mortgages, and many of them have several common characteristics, there really just is no such thing as an "average" mortgage. Every homeowner has a very "specific" mortgage, and rates are influenced by dozens of different factors, such as credit score, loan to value ratio, amortization period, etc.

The second thing that came to my mind was all the Realtors who ask regularly ask me "what are rates today?" expecting a solid answer they can give a client who I have never met. I always answer in the same way; rates are up, or down from the last timethey asked. Many of these Realtors are frustrated with such an answer because they want to tell their buyer what the interest rate on their loan will be so they can calculate a potential payment. While I understand the motivation, the question "what are rates today?" is nearly the same as me asking "how much does a house cost today?" I would be met with a dumbfounded expression, followed by a long series of questions about what kind of a house, and where.

Finally, my thoughts wandered to the specificsof these "widgets." I've noticed that I never see one showing FHA Loans. They almost all are willing to tell me what the average FNMA 30 year fixed, or FHLMC 15 year are going for, but I never see anything showing FHA loan rates of any kind. FHA loans come in all the same flavors as the Conventional loans: 30 year fixed FHA, 5 year ARM FHA, 15 year Fixed FHA, etc. so whyis it that these "widgets" don't address FHA loans? Maybe it has something to do with the fact that FHA does not set the interest rate for their loans, leaving it to the investors, and the market. I'm sure if anyone was interested they could get the statistics for FHA loans just as easily as they can for Conventional though.

At any rate, if you are still with me at this point, you are willing to read through the flash, and look for the facts which is what I try to give everybody. It may not be flashy, but I would hope home buyers, and especially First Time Home Buyers in the Puyallup, and Pierce County area would be more interested in substance.

Ron Brown

FHA & VA Loan Specialist

The deadline for First Time Home Buyers to receive the $8,000 tax credit is approaching very quickly. I know Realtors have been doing everything they can to promote this, and increase the public awareness, but I am amazed by how many people I talk to that are nearly oblivious to it.

The last time I really addressed this issue was when the Washington State Housing Finance Commission decided they were not participating in any kind of "bridge Loan" program to allow FHA buyers to access the Tax Credit proactively, and use it for a down payment. This was unfortunate as a lot of credit worthy buyers were simply unable to save up enough to cover the 3.5% down payment necessary for an FHA loan when the $8,000 would cover this completely. Granted, FHA still allows for gifting of the down payment from a direct relative, or true non-profit entity that they recently revised yet again, but in our current economic circumstances, only a few lucky buyers have that option.

There have also been a few issues with the acceptable organizations such as Tacoma Down Payment Assistance, and Pierce County Down Payment Assistance running out of available funds. Again, this is due to the economy we are in as there is increased competition for the Bond investment dollars used to fund these types of programs. There are only so many investment dollars, and specifically bonds, available right now. The good news is they are now expecting funding any day, but it may be too late for some.

In light of all these things, I have been hearing more people calling for an extension of the Tax Credit. There has been some movement on this, and I recently wrote a blog for Puyallup First Time Home Buyers on a local realtor's website. However, keep in mind that regardless of how much we in the real estate industry may want something, it is up to our elected leaders in the legislative branch of government to make it happen.

Ron Brown FHA & VA loan Specialist First Mortgage Company of Washington

Just what exactly is "Streamline" about an FHA to FHA Refinance?

I get asked by a lot of people about the benefits of a Streamline Refinance versus a traditional refinance. After all, the title Streamline Refi seems to indicate that this process must be much more abbreviated than a regular full documentation refinance.

First off, there is little if any difference in cost between an FHA Streamline Refi, and the refinancing of a Conventional Loan. An FHA Streamline Refinance will still require the services of an escrow company, and Clear Title must be verified so you will need to buy another Title Insurance policy. Unless your lender is working for free (and if they say they are you can bet their lying) there will be new charges for Underwriting, or Processing, or Administration, or perhaps all of the above. If you are shown a Good Faith Estimate without any of these fees, you might want to ask where the profit comes from that pays all those people for their labor. On top of these, you will likely have to reestablish new impound accounts for you Taxes, and Insurance payments. While these are not technically "closing costs," they can still add to your loan balance. Typically these are rolled into your new loan, so in essence you are lending yourself money, and paying it back over a new 30 years with interest. There is also a very good chance you will need to pay for a new appraisal. This used to be the one thing you actually did not have to pay for a second time with a Streamline Refinance, but given today's atmosphere of declining markets, most investor's will require one, and in some cases two!

So, if all those fees are going to still be there for a Streamline Refinance, it seems pretty obvious that there is nothing "streamlined" regarding cost, so just how do we justify using the term "streamline"? The true answer is that in today's market streamline can mean very little. Traditionally, an FHA Streamline Refi was available for anyone to take advantage of significantly lower rates during the first couple years of the loan, and the borrower did not have to go through all the hoops of verifying their employment and income because they now have a mortgage payment history to base their approval on. That is where the term streamline refi comes from: the documentation, or verification process was simplified from the exhaustive background checking that went into the initial approval. However, most investor's are now asking for much of that same verification process in order to be approved for a new streamline refinance, making the term even more out of touch.

The reason that investors are now asking for pretty much all of the same documentation s they did when they originated the loan really comes down to two things. First we have had a significant drop in value for homes which means that the original loan to value ratio is probably not reliable, and investor's are not very keen on giving out loans with a lower interest rate for properties that could take a bigger loss if they had to be foreclosed on. The second issue relates more directly to our economy: unemployment. Traditionally, your good payment history was enough to bank on continued timely payment, and the investor assumed you still had the same employment and income. Now that unemployment is near 10%, investors are wanting reassurance that you are still in a good position to make all your payments.

Very little of these changes has actually come from the government offices of HUD, FHA, or VA (a VA streamline refi, or IRRRL loan is very similar to FHA), but instead comes from the investment banks because they stand to lose money even if the loan is guaranteed through FHA. The best way to explain how it is that FHA guidelines say you don't need certain information, but you are still being asked for it is to think of it as a speed limit. The sign on the freeway says you are ok to go 60 mph, but if you're a cautious investor, you may choose to only drive 55. In the end it is the investor that determines if they are willing to give you the loan.

Ron Brown FHA & VA Loan Specialist First Mortgage Company of Washington 253-881-4699