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My previous blog suggested that the Homepath Renovation loan can be a better option than a 203K streamline.  Which I still believe but wanted to go into more detail on the costs associated with the two programs. 

The actual closing costs between the 2 programs are pretty similar so to break down those costs may be a bit overkill so I will focus on the major differences.

Downpayment:  FHA requires a 3.5% down payment while the Homepath Renovation loan only requires a 3% down payment.

Interest rate: You will almost always find that and FHA 203(K) loan will have a lower rate compared to Homepath.  However that lower rate comes at a cost.  The 203(K) loan requires 1% upfront mortgage mortgage insurance to be charged.  That fee is typically financed into your loan amount.  Your loan amount will be higher.

In the example I provided (Total Cost Analysis),  the FHA loan amount is increased by $3,008 and your monthly payments are based on the higher loan amount.   In Addition, (using the same Example) the fha loan also requires monthly mortgage insurance of $225.67 per month.  Mortgage insurance is dropped on an FHA loan when the loan balance reaches 78% of the original loan to value.  Mortgage insurance will remain on the example I provided for roughly 124 monthly payments ($27,983.08), unless the borrower pays additional to principle.

The homepath loan would require the consumer to pay 2.125% in points, which will add an additionl $6,393.85 to the closing costs associated with the homepath loan.  If you do not have enough in assets to cover this additional costs then the 203(K) loan will be your better option.  If you do have the assets the home path loan may be the better option.

Difference in Principle Balance

The first difference you need to account for is your principle balance.  Initially your loan balance will be $1,414.45 higher with the FHA loan (meaning you have less equity in the home with an FHA loan than a homepath loan).  The difference in the loan balances will get closer with each payment because of the difference in the rates.  You will be making a bigger principle payment with the 203K loan (but you have a higher loan amount).  The balance will be roughly the same after the 42nd payment.

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Since FHA decreased the UFMIP (up front mortgage insurance) premium and increased the Monthly MI (mortgage insurance) premium, I have seen an uptick in the number of Homepath renovation loans I am originating and I thought I would share why.

Whenever you make a comparison between loan programs you have to start with some Assumptions or a scenario:

Purchase Price:                    $200,000

Cost of Renovation:            $30,000 (if the cost of Renovation exceeds $30,000 no need to compare Homepath is not an Option)

Fico Score:                              660 (if your Fico score is less than 660 no need to compare Homepath is not an Option)

Property Type:                     Single Family or Condo (If the condo is non-warrant-able and cannot be FHA Approved no need to Compare FHA is not an Option)

Max Financing:                     FHA 96.5% LTV and Homepath 97%

What is the Difference in the rates? 

Homepath:With the above scenario I would have to charge 5.25% with 2.125% in points.  The homepath program has a number of loan level price adjustments that total 5.375% in points which include: 1.25% for loan to value and FICO score, 3.625% for No MI, .50% for 97% Loan to Value.  Those adjustments can be paid in cash as additional closing costs or paid by the lender by charging a higher rate.  The highest rate on my rate sheet today is 5.25% and that will allow me to pay 3.25% of the 5.375% in LLPAs leaving 2.125% that will need to be charged as points.

FHA 203(K) Streamline: With the above scenario I would be charging a rate of 4.75% with 0 points.  FHA does require UFMIP of 1% that is typically added to your loan amount in addition to requiring an additional .5% down payment. 

So…The real difference is about .50% in a rate and .625% in  points!  the monthly payment is about $100 less per month with the Homepath loan than the 203K streamline.  Closing costs and paperwork between the two programs are pretty similar.

Take a look at this Total Cost Analysis that I prepared comparing the two programs.

No doubt that the mortgage industry has become more cumbersome over the past few years..The key to smooth sailing is working with seasoned professionals that understand what needs to happen and how to make it happen. 

 Back in 2003, if a loan officer had a pulse they could get loans closed, today your loan officer needs to have a better understanding of the underwriting requirements.

I have recently been involved in getting a number of loans closed that have required that the  Condominium project be FHA approved.  Believe it or not, you can use the FHA 203k to purchase or refinance and renovate a condominium.  I have seen a number of posts about getting condominiums fha approved and having done a few, it is not as difficult as some loan officers would have you believe. 

What you will need to get an existing condo FHA approved:

1. All Condominium legal documents

• Recorded Plat Map indicating legal description
• Recorded Covenants, Conditions and Restrictions (CC&R’s)
• Signed and Adopted bylaws
• Articles of incorporation filed with the state
• Recorded Condominium site plans

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It wasn’t too long ago that FHA financing was something brokers discouraged folks from obtaining.  We have all heard it “FHA loans are too difficult” and “FHA Appraisals cause too many problems”…

Today most loans are going FHA….The same folks that wouldn’t go near FHA financing think it’s the greatest thing since sliced bread!  The loan and it’s standards really hasn’t changed, the alternative options have disappeared.  However more than a few properties will need to have minor repairs and maintenance done to the property prior to closing…or does it?

Properties that need repairs prior to closing are still being bought and sold and not all of them have to be repaird prior to closing.  A good number of my referals come from a short sale negotiators, and it has dawned on me that unlike a traditional sale, it is much more difficult to get repairs done on a property that is under agreement as a short sale.

Solution – Structure the transactions as 203K loans…If the appraisal comes in needing repairs get the contractor and or Hud Consultantout right away.  Add the cost of repairs to the purchase..No need to delay a closing…and no need for the buyers to start looking again.   If no repairs are needed and the borrower doesn’t want to make any improvements…. no problem, close as a regular FHA loan. The difference in pricing between a regular and an FHA loan today 4.5%-4.625% for a regular FHA and 4.75%-4.875% for a 203K loan.  How much time and money do new home owners spend on do it yourself projects…You should sit down and do the math on what it would cost you in time and money to strip wall paper and paint rooms vs. paying a professional, before you sentence yourself to the next 3 months of hard labor on your time off! 

203K loans have the perception of being too dificult, take too long and are too expensive to obtain.  Those perceptions are simply not reality!

I am thrilled to say that as of today Salem Five has been approved to originate Homepath Renovation loans and thought it would be a good topic to write about.

Q: What is a Homepath Renovation loan?

A: Fannie Mae has a number of properties that they currently own and are marketing for sale.  You can find these properties at www.homepath.com. that site will list all the properties that Fannie Mae is currently marketing.  In order to be eligible for Homepath Renovation financing the listing must be designated as Homepath Renovation eligible.

Q: What is special about Homepath Renovation financing?

A: These are just a few of the benefits

1. The program allows you to incorporate the cost of repairs into your 1st mortgage.
2. It allows loan to values as high as 97% and will allow the remaining 3% to be a gift ot grant from a non profit or Govt agency.
3. No MI is required…now that sounds better than it really is because although there is no MI the rate you will pay will cost more based on the loan to value.

Q: How do I qualify?

A: The best thing to do is to contact an approved Homepath Renovation lender in your local area.  A list of lenders can be found on Fannie Mae’s Website. Some of the more important qualifications are as follows:

1. Unlike the non-renovation homepath loans investors are not allowed.  This program is for 1-4 unit properties that will be owner occupied.
2. Minimum Fico score is 660
3. The Max Rehab is $30,000 realistically that number is $27,000 because the rehab funds must include a 10% contingency for unexpected repairs.

This program is probably not right for everyone but it is certainly worth exploring.  It may be in your best interest to work with a lender/loan officer that offers both the Homepath Renovation loan as well as the FHA 203K Renovation loan.  Just in case you start to look at the scope of work and realize that all the repairs you would like to make ends up exceeding the $30,000 limit on the Homepath Renovation project.  A Common mistake folks that choose renovation loans make is they cut too many corners to keep a budget and end up saying after the fact I wish had done this or I wish I had done that…Make sure to explore all your options.

The maximum loan to values allowed on homepath loans follow the Selling guide with the following exceptions:

1. 90/90/90 for 1-unit investment properties
2. 80/80/80 for 2-unit investment properties
3.  75/75/75 for 2-4 unit investment properties where the borrower owns 5-10 financed properties as described in the “Eligibility Matrix” on the www.efanniemae.com website.

I spoke with a “Self Help” borrower I closed on about a month back and after the conversation it dawned on me….One of the reasons so many of these loans tend to end up with either the bank or the borrower disappointed with the way the project went is the that like my mom used to say “your eyes are bigger than your appetite”.

He said “I am trying to do what would cost someone that wasn’t doing the work themslves about $80,000 and I am trying to do it for $35,000″ 

It dawned on me after the conversation that this is exactly what gets a lot of folks in trouble with these loans…You decide to tackle more than you have budgeted for.  I would rather they budget for $80K in work, and get it done for $35K.  After the work is done the principle is reduced by the unused escrow account and you can recast the loan based on the outstanding balance to reduce the monthly payment.  By doing it this way you don’t have to worry about blowing the budget halfway through and not being able to finish the project.  That is not to say that the project won’t get done, but what can and I have seen happen is that while you are making these additional repairs you come accross unexpected repairs and additional expenses that you didn’t budget for.  If you have started a project you didn’t budget for and was not included ion the original scope of work…The bank is not going to disburse additional funds until the work in the original scope of the project is complete.  In many cases you have to find a way to fund these repairs out of pocket, which can prove difficult for soem and impossible for others

One of the points I try and stress is don’t cut too many corners when tackling a renovation project.  It is in cutting the corners that the problems usually arise.  I would hate to see someone do a great job renovating a house only to run out of money before you install the stairs to the front door!

I don’t know about you…But I would…

That has been the average return on the additional closing costs associated with a renovation 203K loans that I have closed in the last quarter.  By no means am I saying that buying a home is a can’t miss investment…but if you are in the market for a home it would be wise to find the best way to invest your down payment and closing costs.  The perception of renovation lending is that the closing costs are much higher on a 203K renovation loan than a standard FHA loan.

The additional Fees you will pay on a 203K loan are as follows:

• Supplimental Origination Fee (1.5% of the Renoivation Cost)
• Draw Inspections ($150-$250 per inspection-usually 3-5 Inspections)
• Title Run Downs ($50-$100 some lenders require these for each draws others just for the final draw)
• Hud 203K Consultant fee (This will range between $0-$1,500 depending on the size of the Project)

Over the last quarter on average my 203K loans have had additional closing costs of about $2,500 and they have after improved appraised values of more then $29,000 in equity.  It’s equity not cash so it’s not like you will be able to run out furnish your home with the equity…but If you work with the right realtor that helps you find that diamond in the rough…you may have the opportunity to refinance after the work is complete and eliminate PMI.  No one can guarantee that will happen but I know it has happened.  My average loan size is $280,000…Monthly Mortgage Insurance on that loan amount is $128 per month.  For some that cash flow  increase makes refinancing worth while…Not to mention you aren’t spending your weekends and free time scraping wall paper and painting rooms and dropping ridiculous amounts of money at Home Depot…on the Honey Do List!

A fellow blogger on Mortgages Unzipped (Brian Brady) posed a great question on a previous blog post:

“In Southern California, there are many requests for solar panel financing. Can alternative energy improvements be part of a renovation loan?”

I have been originating Renovation and construction loans for more than 16 years and I have been asked this or a similar question 2-3 times over the past 16 years and each time the folks asking the question have been from the other coast….East Meets West….I  found that curious and can only come up with a couple of explanations…

1. Those of us from the east coast are not as environmentally conscious as the folks on the west coast.

or

2. The cost benefit on the east coast is just not as advantageous as it is on the west coast.

 I have to go with number 2…

To answer Brian’s question…alternative energy systems can be included in a renovation loan.  You can also use the Energy Efficient Mortgage benefits along with a 203K loan, although I am not sure that the lift you get from an Energy Efficient Mortgage is worth the additional headache…especially when you are obtaining renovation financing to begin with.

I by no means think that folks should be looking at real estate solely as an investment. First and foremost you need to think of real estate as a roof over your head and a home for your family.  However, that does not change the fact that the purchase of a home will likely be your single largest investment of your life!

It makes sense to do all you can to make it a good investment!  Forbes Magazine just published an article on the Top 10 Cities to go from Renting to buying. A few points that the article made:

1. The article identified cities where the purchase of a home is a better investment than normal.
2. The cities on the list have the biggest discounts on the premium to buy.
3. The cities, or more accurately MSA’s (Metropolitan Statistical Areas), have big projected increases in home prices over the next 5 years.

I believe that when the market shifted from sellers to buyers, coupled with the bursting of the housing bubble and the recession, the opportunity to create equity has shifted from the seller to the buyer.

During the boom sellers would throw on a coat of paint or make superficial home improvements so they could demand top dollar for the property.  Since the shift in the market I believe the opportunity is with the buyers.  In the current market many of the properties for sale are bank owned or pre-foreclosure (short sales) properties.  The condition of bank owned properties are usually worse.  They are likely vacant and it is not uncommon to see these properties with the appliances and or kitchen cabinets having been removed.  In addition they, like the pre-foreclosure properties, are likely to have deferred maintenance because the current or previous owners simply didn’t have the cash to take proper care of the property.

Whether the seller is a bank or a distressed seller, odds are they do not have the cash they would need to repair the property…Can you hear it?….

Knock…Knock….

Who’s there?

Opportunity!

In many cases the seller of the property, has a property that is in need of repair…it is not the most attractive property available…That translates into a lower price.  Just in the month of January I have closed 5 loans with Renovation Financing:

Clearly not all deals are the same but all but one generated a substantial amount of equity. These gains are not projected, they are actual cost verse the after improved appraised value.   If Forbes/Case Shiller’s predictions of value increases is accurate… by choosing a home in need of repair and using renovation financing you can increase your equity gains over the next 5 years.  Every market presents opportunities. The most successful folks I know can identify the opportunities and take advantage of them.

Starting 2/1/2010 Hud is issuing a waiver to the 90 day flipping rule!

One of the hurdles for folks that are buying and renovating distressed properties are the end buyers have not been eligible for FHA Financing.  The lifting of this rule will increase the buying pool for these properties…

If you want to take a look at some reaction to the change check out this thread on Zillow!

More to follow but I thought this was worth a quick shout!