The Foreclosure Blues

Over the last months, I have had at least five different clients come to me and tell me they were going to by a Foreclosed Property.  All five clients had two things in common; First, They were all first time home buyers with limited disposable cash, and second, they all had unreasonable expectations.

So here are a couple of things to keep in mind when you consider buying a Foreclosed Property.

1.       Banks Are Smart-  A lot of people think they are going to buy the home for 40-50% of its value.  It ain’t gonna happen.  The bank has had an inspector and an appraiser out to the property.  They have a market analysis and know exactly what price they are going to sell it for.  And, depending on the scope of work needed to make the house habitable, they are going to list it at 70-80% of its value.  Several realtors have told me horror stories about clients that only want to put low-ball offers in on foreclosures, and 12 months into it they are still writing offers.  It’s not a lottery and it’s not free money.  The bank didn’t get to be a bank by giving anything away, ever.

2.       Garbage In Garbage out-  The house is going to need work and the bank is not going to do it for you.  So often when people have their home foreclosed on, they quit taking care of it.  When they move they take the light fixtures and switch plates and the appliances.  In several instances I have seen the furnace and carpeting ripped out too.  Not to mention vandals taking all of the copper piping (I’ve seen this 3 different times).  As the potential borrower, you will have to fix this prior to getting a loan (the bank will not), or you will have to get a construction loan to make the repairs.  Construction loans are a different beast.  They require a larger down payment, have tougher underwriting guide lines and are more expensive.  Construction loans do not usually allow Sweat Equity either.

3.       Sweat Equity Kills The Passion-  Although the thought of buying a house and generating 20% equity in it instantly might be romantic, nothing will kill the passion in a new marriage like living in a construction zone.  I have seen this time and time again as both a lender and as a General Contractor (in my old life).  If it will take a professional crew 2 weeks to get the work done, it will take you 6 months, if you are diligent.  Face it, you are going to work all day (8-9 hours), then you still have to raise kids, run errands, make dinner, mow the grass, etc…  It is hard to find the time to be a construction worker too.  Living in that mess will create tension in a marriage.  I’m not Dr. Phil, I’ve just seen it happen a few times.

So, with all of that being said.  Let’s go look for a Foreclose Property!  There are bargains to be had.  But remember, those bargains come at a price.  Make sure your expectations are in line with reality.  At the least, I would not recommend a first time home buyer, newly married couple buy a foreclosed property.  Save that for your second home.

Jon Hayes

NMLS #: 130501

Hallmark Home Mortgage, NMLS#: 53441

317-430-315

To FHA or Not To FHA…That Is the Question

The other day a Realtor friend of mine sent me a Purchase agreement and had marked the loan type as FHA.  The borrower had a great credit history and was putting down 10% of the purchase price.  I called my friend and asked him to change the loan type on the purchase agreement from FHA to Conventional.  At this point my realtor friend asked me, “Why?  What’s the difference?”  Well, as my grandpa used to say, the difference is in the details. 

FHA is a great program.  Here are some of the Pro’s for using FHA:

·         FHA will lend money to borrowers with lower credit scores, down to a 640. 

·         FHA also has great interest rates, Below 4% last week

·         FHA offers lower down payments, 3.5% of the purchase price

·         FHA can be used with Indian Housing to subsidize down payment (restrictions apply)

·         FHA has lower time restrictions on Bankruptcy and Foreclosure, 2 and 3 years respectively

What’s the catch you ask?  Ok, here is the Con:  FHA Mortgage Insurance is higher.  A lot higher.

Mortgage insurance is money that borrowers pay into a pool to cover the losses incurred should their loan go into default.  For FHA the borrower will have to pay 1.75% of the purchase price in up front mortgage insurance and 1.25% per month in mortgage insurance premium. 

For example, let’s say a borrower is buying a house for $100,000 and using an FHA loan.  The down payment would be $3,500 (3.5%) and the Base loan Amount would be $96,500.  The FHA Up Front Mortgage Insurance would be $96,500 x 1.75% or $1,688.756.  FHA will roll this into the loan so you add the upfront mortgage insurance to the Base Loan Amount of $96,500 to get a total loan amount of $98,188.75.

On top of this the borrower will have to pay the monthly mortgage insurance premium of 1.25%, or $102.28.  This amount must be paid every month for a minimum of the first 5 years.

Compare this to Fannie Mae (FNMA).  For FNMA you need 5% down payment.  In the same scenario with a purchase price of $100,000, that would be a $5,000 down payment and a $95,000 Loan Amount.  There is no upfront mortgage insurance with FNMA, only monthly.  The monthly mortgage insurance amount can vary, but I would expect it to be around .96%.  So the borrower would only owe $59.37 per month.  The monthly mortgage insurance obligation can be dropped at any time once the borrower has reached 80% loan To Value.

From the comparison it is easy to see that FNMA is a better deal.  So why would you ever use FHA?  There are several reasons.

·         Credit- FNMA requires a minimum 680 credit score.  If you are below this you must use FHA

·         Down payment- If you do not have 5% down payment you must use FHA

·         Bankruptcy and Foreclosure- If you have had either within the last 5 years you must use FHA

Those are the main reasons you would use FHA.  It is a great program if you fall into one of those categories.  Sure the cost is a little higher for the borrower, but the risk is higher for the lender.  In the end it evens out and makes home ownership a possibility for many people.

If you have questions about either program, and how your scenario fits in, please call me at any time.

 

Jon Hayes, NMLS#: 130501

Mortgage Loan Originator

Hallmark Home Mortgage

9000 Keystone Crossing, Suit 1050

Indianapolis, Indiana 46240

Phone:  317-430-3105

jonhayes@hallmarkhomemortgage.com