FHA Conforming Loan Limits Raised Back to $729,750

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Last week, Congress passed a bill raising the FHA upper limit for Los Angeles and other “high cost” areas back to $729,750 and President Obama signed it into law on Friday.  However, whereas before the expiration of the upper loan limits, these loan limits applied to all GSE loans including Freddie Mac, Fannie Mae and FHA, this time the limit will only apply to FHA.  Freddie Mac and Fannie Mae loans still remain at the lower limit of $629,500.  This will mean that FHA loans become even MORE popular than they are now.

The thing about FHA loans, as we have discussed in this column, is that for condominium complexes they are limited to approved complexes or fully detached units.  Several lenders I work with have been successful in getting FHA approval for  condo projects that were not previously approved, especially Nader Chahine of Cornerstone Mortgage.

This is great news for us in the South Bay, as that extra $104,250 makes a big difference in being able to purchase much of the housing stock in Redondo Beach, West and South Torrance, Southwood, the Hollywood Riviera, El Segundo, and other mid-priced neighborhoods in the South Bay and Palos Verdes area.

To FHA or Not FHA — That is the question!

dollar sign moneyI get asked all the time about whether people should use an FHA loan or not.  The answer is, as with most things in real estate, it depends!  First and foremost is the issue of whether you have enough down payment to NOT use an FHA loan.  The minimum down payment you can have for a non-FHA loan is 10 percent, and you need a FICO score of over 720 to even be considered for that program.  Under that FICO score, your only options are 20 percent or more down or FHA.  With an FHA loan, you can buy a home (note the word HOME — you must live in the property) for as little as 3.5% down.

FHA loans are limited, like other GSE (Government Sponsored Entity) loans like Fannie Mae and Freddie Mac, to the upper loan limit currently in effect.  As of this post, the loan limit in our area is $729,750, although if Congress doesn’t act soon, it will go to $625,500 on October 1, 2011.    So if you consider that you were to borrow the maximum of $729,750 with 3 percent down, you will see that you could get a home of approximately $756,000 with under $27,000 down.

The other advantage to FHA loans is that the down payment can be a gift and you can have a co-signer that is not on the title, such as parents.  This makes it possible for young couples starting out to buy a place instead of renting and to be able to build their real estate wealth sooner than they would have otherwise.

The drawback to FHA loans is MI and MIP — Mortgage Insurance and Mortgage Insurance Premium.  These are an upfront payment that you have to make (though it may be added to the loan balance) and a monthly payment you make as well, which increases your effective interest rate.  However, with all interest rates at record lows and with prices there also, this is a small price to pay if it allows you to get your foot in the door of the housing market when you otherwise would not have the down payment.  Once you get to a debt to equity ratio of .8 or less (when your new home appreciates in value) you can petition to have the MI eliminated.

FHA loans are not available for every property.  There are guidelines that must be met, such as appropriate sanitation, heat and cooking facilities, so these won’t work for those short sales where someone has ripped out all the appliances and fixtures.  It also is not always applicable to “condominiums” which legally include the many townhome style complexes we have in the South Bay, such as two and three on a lot type projects.  If a property is completely detached, it can be covered.  If it is attached to other units, however, then the entire complex either has to be on an approved list (see this website here) or else the whole complex has to BE approved, which is harder to do.  Finally, even in an approved complex, there are percentage limits to how many of the units can already have FHA loans.

Negotiating the many ins and outs of FHA loans versus property type is one of the many reasons why you need to work with a knowledgeable REALTOR®!  Let me know if I can help you figure out how to leverage Uncle Sam’s loans and help get your own piece of the South Bay real estate market!  And if you need a lender who can get these loans done without a huge hassle, visit my recommended lenders page.

Interest rates are ridiculous right now

dollar sign moneyAt this morning’s sales team meeting, Grant Norris from RPM Mortgage talked about new loan programs that can get loans of about 5 percent with 5 percent down, and in some cases even lower, more like about 4.5 percent. They have some programs for Jumbo loans up to $979,750 that require only 10 percent down, which is usually unheard of for jumbos. They can do these 5 percent down loans even for attached condos and townhouses, which is a big deal because the low down payment FHA loans required that condos and townhouses either be completely freestanding or that the complex already be on the approved list, which is small in our area.

Grant had some worrisome news, however. There is a draft bill in Congress that will increase FHA downpayment requirements from the current 3.5% to 5 %. Worse, other provisions of this same bill will reduce GSE loans from the current high in Los Angeles of $729,750 all the way down to $412,500 — even lower than the low limit we now have of $417,000. This means that if someone were buying a home for $750,000 with an FHA loan, whereas today they would pay 4.5% plus Mortgage Insurance, in the future they would have to pay 5 1/8 percent, which would for most people kill the affordability — the payment would go from $3667 a month to $3940 a month, almost $300 different.

With the current “cut the deficit” cries in Congress, they almost certainly will do SOMETHING to muck up the interest rates for loans. If you are thinking about buying, NOW IS THE TIME while interest rates are still at historic lows, along with very low prices.

RPM Mortgage Forecast Part 1

I was pleased to be invited along with a select group of the other top local Realtors to hear Rob Hirt, the CEO and President of RPM Mortgage, speak about the economy and the mortgage market.  Rob is always very witty and funny along with making the mortgage market understandable and clear, so we were delighted to be able to hear his talk.

The first big announcement was that Platinum Capital, which until now has been a subsidiary partner of RPM, will be folded fully into the RPM branding and the parent corporation.  I don’t think this will change much of anything since we have already been reaping the benefits of the RPM parent, but just in case our loyal readers wonder why we no longer talk about Platinum Capital, you’ll know why.

Rob reviewed the causes of the current mortgage meltdown in a very funny and entertaining way.  He said  “it was as though the entire country had seen two hot looking women, NINA (No Income No Assets) and her equally air-brained sister, SISA (Stated Income Stated Assets) and decided they were just so enticing they just had to be a lot of fun — but then the lights came on and we realized they were really pretty ugly and came with a whole lot of baggage!”    It was a humorous way to discuss the ridiculous high-risk loans that started all this mess and the Credit default swaps that accompanied them.

Rob talked about the new rules as part of the Dodd-Frank financial reform act.  By April 1, 2011, rules will be issued as to what makes up a   “Qualified Residential Mortgage” (QRM).  If a lending institution follows the rules and has QRM mortgages, they will not be liable to hold as much reserves, but if they issue non -QRM loans, the will have to hold 5 percent of the total loan in reserve, which obviously reduces their ability to lend and their profitability.  Thus, Rob predicts that 95 percent of new loans will be QRM.  There will no longer be NINA and SISA, the ugly twins, but there will be able to be documented loans for self-employed people coming back.  Loans to value will be less than 80 percent.  He believes that the new rules will offer Debt to Income ratios up to 50% of all expenses.

Rob said multiple times that now is the greatest time to buy a home since 1970 based on the affordability index kept by the National Association of Realtors (NAR).  The core inflation level is at the lowest level since 1950 (when it first began to be tracked).  Home prices have also stabilized.

Quantitative Easing II was the next topic.  Rob explained that the Fed basically has two missions from Congress  by law — keep inflation under control and help to keep unemployment above target levels.  Target inflation levels are 2 percent, but inflation is only at .6 percent, and target unemployment levels are at 6 percent but is currently at 9.5 percent nationally (and more locally.)  Therefore, since they have a ways to go before they worry about inflation and a long way to go before they get unemployment down, easing the money supply (by essentially printing money via Treasury bills) is their only tool left since they can’t really lower interest rates any more.  So Rob believes we will see some inflation but also a decrease in unemployment.  Hooray!

Tomorrow — Part 2 with Rob’s forecast for 2011!

Sad Sad Saga of Why to Use “Double-Apping” on Mortgage Applications

A few weeks ago, I had some very nice young clients come to me who had very little money down and wanted to buy their first home in Southern California.  They wanted to buy, but weren’t sure they could afford to buy in our expensive market.

After consulting with them, we figured out that they could indeed afford a small townhome. I found it for them and we opened escrow! Yay!  Everything should be good, right?   At the time, I asked them to please “double-app” the loan, meaning go with two different mortgage brokers to ensure that at least one of them would come through for them.  I really wanted them to have at least one of the loan guys be someone I had worked with before, someone I could count on if things got rough, as they might with a loan where they had so little money down.

I even offered to pay for the second appraisal fee out of my commission so that the cost of running two applications wasn’t a consideration for them, since they were so tight on money — I felt that strongly about it.  But somehow, the other lender, someone they found on the internet, with a few sly remarks here and a few twisted words there, somehow seemed to give them the impression that the reason I was pushing so hard for “my guy” was that somehow I was getting an illegal kickback on the loan or something.  Of course, the only thing I pride myself more on than my service is my ethics, so I was horrified by this insinuation, but nobody came right out and said anything … it was just the ugly elephant under the rug that seemed to be messing up my relationship with my clients.  So I backed off on my begging them to double-app and instead let them put all their eggs in the one basket of this loan guy they found on the internet.

Fast forward three weeks.  We are supposed to close escrow next week and the internet loan guy informs them today that they aren’t going to get the loan that he has been promising them for three weeks is a “done deal” and “a piece of cake”.  He’s got a zillion excuses, a million people to blame, a billion sad stories as to why it’s not his fault.  The recent issues with sub-prime lenders is some of it, but I can’t help but wonder how much of it he could have controlled.  Maybe none, but I just don’t have a history with this guy and I don’t know how much to trust him.  If it was “my guy”, I’d have known every step of the way what was happening and we wouldn’t be surprised now.  None of this gets my clients into their new house, however!!    So now, at the very last minute, we are trying to get “my guy” involved in the deal to see if somehow he can save the day and get these very nice, very sweet people their house.

The last time I personally bought a home to flip, I used two different loan brokers and told them they were in competition with each other.  It helped me to keep the fees down really low and at the last minute get even more shaved off the interest rate on one of them.  I wasn’t dishonest about it, I was very up-front.  It’s just business.  If they don’t want to be competitive, they don’t have to bid.  But by knowing that the “other guy” is out there, it forces each of them to perform to the best of their ability, including being sure that there aren’t any junk fees or extra high interest rates in the package.  It also helps me as your Realtor ensure that we get loan documents in time to ensure a successful close of escrow so that you can move right into your new home on time.

So if I (or if you aren’t in my area, some other great Realtor) tells you to “Double-App” , in the words of the Nike commercial “Just Do It.”  It might be the smartest $400 you ever spent.   And for Seller’s — you may want to insist that the Buyers double app with someone your Realtor trusts just to be sure you have a backup plan!

Updated 4/11/08:  We closed three weeks late on this home due to the poor management of this loan guy.  My clients had to pay extra fees for delaying the escrow, the Sellers almost lost their'”upleg”, and ultimately my Buyers accepted a loan that was far higher interest rate than what they had been promised just so they wouldn’t lose the home completely.  They told me they were sorry that they had chosen this loan guy and that they wished they had listened to me about double-apping.  As soon as a little more time passes, we will try to get them re-fi’ed into a better loan – this time with someone we can trust.