A good faith estimate is a tool that allows borrowers to use a loan cost estimate that was done in "good faith" to compare costs to other lenders costs.  The good faith estimate is a bit difficult to read, especially when looking at one for a 203K renovation mortgage, but it IS A REQUIREMENT!
Often, loan officers do not want to send out a good faith estimate becuase of the difficulty in reading it and, istead, will send out a closing cost worksheet.  I have seen many lenders guilty of not sending out an actual good faith estimate and understand the issues involved in actually doing them, but feel that it is the right of the borrower to recieve one when it is due to them.
The easiest way to remember when a good faith estimate should be sent out is the anacronym "PENCIL".

P - Property
E - Estimated Value
N - Name
C - Credit
I - Income
L - Loan Amount

So, if the loan officer knows the property address, the Estimated Value of the home your are looking to refinance or purchase, your Name, your Credit has been reviewed, verified your Income and knows your Loan Amount; he or she should be giving you a good faith estimate.

Over the last month you may have heard from various mortgage interest groups regarding the implementation of the Qualified Residential Mortgage (QRM) rules.  At its source QRM is part of the Dodd-Frank risk retention regulation.  The Dodd-Frank rule requires that a direct lender retain a 5% interest in any loan that they originate and sell to the secondary market subject to certain exemptions and loan specific criteria.  As you might imagine there is a great deal of debate about the types of loans that are exempt.  To this point, there is broad agreement that government insured and guaranteed loans will be exempted. There is some disagreement as to whether or not loans sold to Fannie Mae or Freddie Mac should be exempt.

One interesting aspect of the risk retention rule is that loans not exempted but with an LTV of greater than 80% will be subject to the risk retention rule. 

However, this debate evolves it is clear that the wholesale lender/broker model is likely to benefit from the risk retention rule. It means that lenders with very deep pockets will be able to continue to originate viable loans that are subject to the rule; thus further enhancing a broker’s relationship with wholesalers that tend to be strong banks.

However, the rule deeply concerns small mortgage bankers. Small mortgage bankers do not have the capital to absorb the required retention and are likely to decline to originate loans of this type.  This creates an opportunity for the wholesale/broker model in that this channel will be able to continue to originate loans subject to the rule and offered by the banks.

The idea of the risk retention rule is to impose on a direct lender the requirement to have skin in the game and to believe in the loans that they originated by virtue of the fact that if there is pain the originating lender will share in the pain.

Over the next few months as this discussion develops I will try to keep you informed.

            A common misconception in the real estate world is that FHA will not insure a home with fuse boxes.  In truth, as long as the service is 100 amp service, FHA will insure the loan.  Of course, as a homeowner, you would want to have 200 amp service with a circuit breaker.

            The real issue with the fuse box is homeowner’s insurance. Many of the insurance companies will not insure a house with fuse boxes because the homeowner can override the panel by sticking a penny in place of the fuse in order to run more electricity thru it.  This becomes a serious fire hazard and is the main reason that a fuse box is dangerous and uninsurable for many insurance companies.

            Frank Apuzzo, insurance agent from Group Benefit Administrators of Connecticut, tells me that there are a few insurance companies that will underwrite the insurance with a fuse box, but a contract to replace must be in place with an end date in mind.  This should work well with the streamline 203K.  For more information you can view Frank’s website at www.insuremect.com.

           

In my last post I promised a comparison of a FHA insured loan with 3.5% down compared to a conventional loan with 3% down and Private Mortgage Insurance.  Although FHA is still a great option and is far less restrictive than conventional mortgage insurance, you can see that PMI makes sense in some cases.

	FHA LOAN	CONVENTIONAL LOAN
SALES PRICE	$200,000	$200,000
MORTGAGE AMOUNT (WITH UP FRONT PREMIUM)	$194,930	$194,000
CLOSING COSTS (LENDER)	$1,100	$1,100
DOWN PAYMENT NEEDED	$7,000	$6,000
INTEREST RATE AND TERM	4.5% 30 YEARS	4.75% THIRTY YEARS
MONTHLY PRINCIPLE AND INTEREST	$1,013.37	$1,043.29
LOAN-TO-VALUE	96.50%	97%
MONTHLY MORTGAGE INSURANCE	$193.58	$146.66
MONTHLY PAYMENT WITH MI	$1,206.95	$1,189.95
MONTHLY DIFFERENCE	$17.00 MORE	$17.00 LESS
OUT OF POCKET	$1000 MORE	$1000 LESS
EQUITY AT CLOSING (BASED ON LOAN TO SALES PRICE)	$5,070	$6,000

It has been a long time since I last posted a blog.  Sometimes I don’t know where the time goes.  In any case, during my hiatus from writing I noticed that the pendulum is shifting.  Lenders are starting to bring back some of the programs that helped buyers get into homes with less money down.  I am not referring to the subprime,” if you have never paid your bills that is OK type of stuff”, because  the loans that are coming back are high loan to value, full income verification, PMI loans.

Lenders are lending up to 97% Loan-to-Value on single family homes, for owner occupants, with good credit scores.  The loan does require PMI, so we have to be certain that the property and buyer meet the PMI guidelines.  Tomorrow I will compare the FHA loan with 3.5% down to the OMI loan with 3% down. 

It seems that with the appetite for lending increasing in the last few weeks we may be looking at making more loans available for more buyers.  These loans are affordable and repayable.  Isn’t that the idea?

The easiest way to purchase a house with instant equity is to purchase the least expensive house in the neighborhood that you want to live in.  This particular type of property is traditionally a little run down and sometimes smaller than the other properties surrounding it.  In today’s real estate market, there may be at least two or three of these in each neighborhood.

The instant equity in this property comes from renovating the property after purchasing it.  Usually, you do not get a dollar for dollar increase in value when you do a renovation on a property.  With a dated house that is in need of repair, because of the amount of bank owned property on the market, the seller most often reduces the sales price well beyond the actual cost of repair in order to entice a sale.

Using a purchase renovation mortgage, like the FHA 203K,  is a great way to finance the improvements this exact property.  Most buyers do not have the savings for a down payment and a renovation.  The renovation mortgage only needs the buyer to have the down payment and some closing costs (which the seller can pay)!

    After tons of research (I came up with this at Dunkin Donuts, while having coffee), I have realized that the rise and fall of Charlie Sheen mirrors the rise and fall of the housing market.  Let me tell you how:
   
    Charlie had a long run with a successful show, supported by marginal acting skills, his value as an actor increasing exponentially.  The housing market, supported by marginally documented mortgages, had values increase more drastically than ever before.

    
    Charlie, popular and successful, turned to drugs, alcohol and prostitutes.  The housing market, deemed the easiest way to become successful, employs anyone, including alcoholics, drug addicts and prostitutes. Even Jordan Belfort, a self admitted drug addict, woman hound and securities fraud convict received a job from Countrywide (they would have hired Charlie in a second!)

    

    Speaking of Countrywide:  They saw the mortgage market turning for the worse, but decided not to tell anyone, since they were making so much money at the time.  CBS and Charlie’s handlers saw Charlie turning for the worse, but decided not to help, since they were making so much money at the time.

In the end Charlie, inevitably, has a public meltdown and is fired from his show, possibly sending his co-stars to unemployment.  The housing market inevitably has a meltdown, affecting the global marketplace and sending over 10% of the country into unemployment.

    
    Eerily similar, Charlie now lives with two porn stars, while the mortgage industry has to live with Dodd and Frank.

    
    The only difference that I can see is that the government has come in to bail out the housing market and restrict the mortgage market to the point of hindering the housing recovery, while Charlie appears to have no help, has not restricted his consumption and is hindering his own recovery.

Good luck to both!

    The renovation loan is a perfect fit for a buyer who is purchasing a dilapidated bank owned home or distressed home. There is, however, another great use of the program.  Most real estate agents will tell you that the most important factor in purchasing real estate is location, location, location.  I tend to agree.

    My idea, and it is proven, is to purchase the smallest home in the best neighborhood and use the FHA 203K renovation loan or the Fannie Mae Homestyle Renovation loan to expand the home.  I have seen many capes become colonial style houses this way. There are even modular “toppers” that can be added to these capes or ranches.  Typically this buyer is doing a $125,000 - $150,000 renovation but gaining much more in equity because they went from the smallest house in the neighborhood to a great house in the neighborhood.

    President Obama officially declared seven counties in Connecticut a disaster area this week.  He did this due to the damage to residential and commercial property that occurred from the record breaking storms that hit us in January.  It seems apparent that we will see even more damage due to the flooding from the melting snow and recent rain.

    FHA will assist people that are affected by the storms by insuring loans through their 203(h) program.  The 203h insures mortgages to 100% loan to value for people who were displaced because of damage to their properties.  The great thing about the program is that they will insure loans for borrowers that were renting properties in an affected area also.

    Applications for the insured loan must be submitted within one year of the president’s declaration of a disaster area.

    Last year, and I mean the twelve months ago kind of last year not the three months ago kind, I wrote a mortgage purchase loan for Bill.  Bill was a first time homebuyer that was purchasing a run-down two family in New Haven.  Bill had graduated from college the year before, obtained a good job and saved money.  Bill had no credit score because he made the decision not to borrow any money because he never had a need for it.

            Fortunately for Bill this was twelve months ago, because we were able to get him a FHA renovation mortgage by using his rent and utilities as a credit reference.  FHA insured loans were great for Bill’s situation.  Bill also helped out a distressed area by buying and rehabbing a run-down home. All was good!

            If a buyer in Bill’s situation walked in my door now, I would have to tell him to go out and get a credit card and a loan that he does not need and come back when he has a good credit score.  Lenders no longer take the alternative credit when a borrower has no score. 

            I understand that a buyer who has poor credit is a risk, but someone who made a decision to not borrower and who can document that they pay rent and other bills on-time is not a risk!  This guideline that comes down from the big lenders, Bank of America, Wells Fargo, etc is hurting an already damaged market. They took our tax money but now they choose not to lend it out to our most deserving clients? Apparently, today’s Bill needs to pay 21% interest to Bank of America on his credit card for them to want to lend him money at 5%. Oh…Now I get it!