Well, the quarterly financial announcements of Freddie Mac and Fannie Mae sent negative repercussions through Wall Street and the Housing industry. Both produced negative financial results 3 times worse than Wall Street analysts expected. I am not suggesting that these analysts are omniscient; however, they were expecting (hoping) some positive signs that we were at or near the bottom. It does suggest however, that we should expect higher interest rates and further tightening of credit for home mortgages.
We have said it before; conventional loans are (basically) available for people with a great credit score and a substantial down payment. Even then an interest rate surcharge of up to ¾ of a point could be added to the interest rate, depending on the amount of the down payment and /or credit score. If your client lacks either the down payment or sufficient credit score (generally a 580 minimum), you should be looking at other financing options that offer programs with little or no down payment, such as VA, USDA Rural Development, FHA and (State or local) bond programs. (We will have a detailed analysis on Bond programs available next week.) Even though the new Housing legislation eliminates down payment assistance and will require a 3.5% down payment, the FHA program does allow for gift funds to be contributed towards minimizing cash required at closing.
We have attached a link from a previous article that compares some of these programs.
http://rismedia.com/wp/2008-07-30/comparing-loan-programs/
You must focus on what viable financing options are available for your clients. Get your clients pre-approved for one of these programs before you get too far into the purchase process. Save yourself and them a lot of time and effort. The environment is not going to change anytime soon.
We will continue to keep you apprised as changes occur. Let me know if I can answer any questions or be of assistance to you.
Wednesday, August 13, 2008
Saturday, August 2, 2008
Fannie Continues Tightening the Screws
Effective August 1, 2008, Fannie Mae issued some new rules affecting the conversion of a principal residence to a second home or investment property.
For a second home, both mortgages will be used to qualify for the new transaction (as occurs today.) The difference is that the borrower must prove 30% equity in the existing property or be required to escrow 6 months of principal, interest, taxes and insurance (PITI) for BOTH properties. With 30% equity, the lender may allow 2 months escrow on both properties.
On investment properties, Fannie now will require 30% equity on the existing property for the investor to claim up to 75% of the rental income as an offset to the mortgage payment in qualifying for a loan. Without the 30% equity, the rental income cannot be used as an offset AND the current and proposed mortgage payments must be used to qualify for the new loan. In addition, 6 months PITI for both properties must be escrowed.
With declining home values in most markets, these changes will make many homeowners ineligible for mortgage loans, when they want to retain ownership of the existing property.
Finally, as additional restrictions / requirements are placed on borrowers by Fannie, Freddie or the mortgage insurance companies, it becomes incumbent on real estate professionals to ask the pertinent questions of their client at the beginning of your relationship. Pre-approving your client is more critical than ever.
For a second home, both mortgages will be used to qualify for the new transaction (as occurs today.) The difference is that the borrower must prove 30% equity in the existing property or be required to escrow 6 months of principal, interest, taxes and insurance (PITI) for BOTH properties. With 30% equity, the lender may allow 2 months escrow on both properties.
On investment properties, Fannie now will require 30% equity on the existing property for the investor to claim up to 75% of the rental income as an offset to the mortgage payment in qualifying for a loan. Without the 30% equity, the rental income cannot be used as an offset AND the current and proposed mortgage payments must be used to qualify for the new loan. In addition, 6 months PITI for both properties must be escrowed.
With declining home values in most markets, these changes will make many homeowners ineligible for mortgage loans, when they want to retain ownership of the existing property.
Finally, as additional restrictions / requirements are placed on borrowers by Fannie, Freddie or the mortgage insurance companies, it becomes incumbent on real estate professionals to ask the pertinent questions of their client at the beginning of your relationship. Pre-approving your client is more critical than ever.
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