Important Factors To Consider When Getting Financing On A Foreclosure, Short Sale or New Construction

There are a number of foreclosures and short sales in the market and when you are planning on buying a home, they may present a lot of value. But there are certain problems associated with them that homeowners should be aware of before applying for foreclosure sale financing:

  • Property Condition- Homeowners who are facing a foreclosure or want to short sell their house generally do not have the money to maintain the property well or pay for the mortgage. This can cause problems for you, if you are planning on getting an FHA loan. These require that the property should be ready to move into

  • Timing Challenges- Typically, a short sale process has very awkward timeframes for approval of the purchase contract and loan closing. Every bank has different rules; however the approval can take 7-120 days. Since there is no fixed timeframe for approval of a short sale, timing of the loan submission, rate locks & the closing can become very challenging. When you are buying a short-sale property, you should be prepared for loads of paperwork

  • New Construction- If you want to make use of FHA financing to buy new construction – there are a number of different issues that might crop up. You must have a CO- Certificate of Occupancy and if this is not available, you will not be able to go to the FHA and may have to opt for a renovation loan

  • Builder’s Certification- You might need a 10-year warranty, termite inspection, well test and septic inspection, when applicable while buying a home

  • Construction Permits- You will require specific documentation (in a certain combination), to satisfy the lender and the FHA. It is important that you work with a knowledgeable loan officer while buying any new construction with financing from the FHA

The Right Support

If you decide to use conventional Freddie Mac/ Fannie Mae financing you will still have some hurdles to navigate, but they will be a little less than the ones you encounter with the FHA. But the down payment will be higher and there are more stringent credit qualification guidelines.

Regardless of whether you plan on a FHA loan, renovation financing or conventional financing, it is crucial that you have a strong home-buying team who can help and support you through the negotiations and tons of paperwork. For more information on financing for foreclosures, contact ResMac Home Loans.

 

Why Do I Need To Pay A VA Funding Fee?

The VA Funding Fee is an essential component of the VA home loan program, and is a requirement of any Veteran taking advantage of this zero down payment government loan program.

This fee ranges from 1.25% to 3.3% of the loan amount, depending upon the circumstances.

On a $150,000 loan that’s an additional $1,875 to almost $5,000 in cost just for the benefit of using the VA home loan.

The good news is that the VA allows borrowers to finance this cost into the home loan without having to include it as part of the closing costs.

For buyers using their VA loan guarantee for the first time on a zero down loan, the Funding Fee would be 2.15%.

For example, on a $150,000 loan amount, the VA Funding Fee could total $3,225, which would increase the monthly mortgage payment by $18 if it were financed into the new loan.

So basically, the incremental increase to a monthly payment is not very much if you choose to finance the Funding Fee.

Historical Trivia:

Under VA’s founding law in 1944 there was no Funding Fee; the guaranty VA offered lenders was limited to 50 percent of the loan, not to exceed $2,000; loans were limited to a maximum 20 years, and the interest rate was capped at 4 percent.

The VA loan was originally designed to be readjustment aid to returning veterans from WWII and they had 2 years from the war’s official end before their eligibility expired. The program was meant to help them catch up for the lost years they sacrificed.

However, the program has obviously evolved to a long term housing benefit for veterans.

The first Funding Fee was ½% and was enacted in 1966 for the sole purpose of building a reserve fund for defaults. This remained in place only until 1970. The Funding Fee of ½% was re-instituted in 1982 and has been in place ever since.

The Amount Of Funding Fee A Borrower Pays Depends On:

  • The type of transaction (refinance versus purchase)
  • Amount of equity
  • Whether this is the first use or subsequent use of the borrower’s VA loan benefit
  • Whether you are/were regular military or Reserve or National Guard

*Disabled veterans are exempt from paying a Funding Fee

The table of Funding Fees can be accessed via VA’s website – CLICK HERE

The main reason for a Veteran to select the VA home loan instead of another program is due to the zero down payment feature.

However, if the Veteran plans on making a 20% or more down payment, the VA loan might not be the best choice because a conventional loan would have a similar interest rate, but without the Funding Fee expense.

The best way to view the VA Funding Fee is that it is a small cost to pay for the benefit of not needing to part with thousands of dollars in down payment.

* Disclaimer – all information is accurate as of the time this article was written *

_________________________________

Related Articles – Mortgage Approval Process:

Why Do I Need Mortgage Insurance?

Mortgage Insurance, sometimes referred to as Private Mortgage Insurance, is required by lenders on conventional home loans if the borrower is financing more than 80% Loan-To-Value.

According to Wikipedia:

Private Mortgage Insurance (PMI) is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan.

It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.

PMI isn’t necessarily a bad thing since it allows borrowers to purchase a property by qualifying for conventional financing with a lower down payment.

Private Mortgage Insurance (PMI) simply protects your lender against non-payment should you default on your loan. It’s important to understand that the primary and only real purpose for mortgage insurance is to protect your lender—not you. As the buyer of this coverage, you’re paying the premiums so that your lender is protected. PMI is often required by lenders due to the higher level of default risk that’s associated with low down payment loans. Consequently, its sole and only benefit to you is a lower down payment mortgage

Private Mortgage Insurance and Mortgage Protection Insurance

Private mortgage insurance and mortgage protection insurance are often confused.

Though they sound similar, they’re two totally different types of insurance products that should never be construed as substitutes for each other.

  • Mortgage protection insurance is essentially a life insurance policy designed to pay off your mortgage in the event of your death.
  • Private mortgage insurance protects your lender, allowing you to finance a home with a smaller down-payment.

Automatic Termination

Thanks to The Homeowner’s Protection Act (HPA) of 1998, borrowers have the right to request private mortgage insurance cancellation when they reach a 20 percent equity in their mortgage. What’s more, lenders are required to automatically cancel PMI coverage when a 78 percent Loan-to-Value is reached.

Some exceptions to these provisions, such as liens on property or not keeping up with payments, may require further PMI coverage.

Also, in many instances your PMI premium is often tax deductible in a similar fashion as the interest paid each year on your mortgage is tax deductible. Please, check with a tax expert to learn your tax options.

_________________________________

Related Articles – Mortgage Payments:

What’s The Difference Between A Primary Residence, Second Home and Investment Property?

When you are applying for a mortgage loan, your “occupancy type” becomes a major factor in the actual amount of the down payment that is required, the loan program available & the mortgage interest rate. Whether you are buying, doing a term or rate financing/ taking equity out of the property via cash-out refinance- the underwriter will always take the “occupancy type” into consideration.

Types of Occupancy

There are 3 types of occupancy:

  • Owner Occupied or Primary Residence – As per the HUD, a primary residence is essentially a property which a borrower will occupy for a larger part of the calendar year. At least 1 borrower has to occupy that property & sign the security instrument as well as the mortgage-note for that property to be considered as “owner-occupied”

  • Second Home – In order to qualify as a 2nd home, typically, that property should be a minimum of 50 miles from your primary residence. The real-estate should not be acquired for rental investment purposes

  • Investment Property- This type of property is not occupied by the owner and is used only as source of rental income

Down Payment Requirements

The down payment that you make will be dependent on the type.

  • Primary Residence – Purchases for VA & USDA can go upto 100% financing, while the FHA requires 3.5 percent of the purchase price as down-payment. Conventional financing might require the down payment to be in the 5% – 25% range, based on the credit score, property type, county and the loan amount

  • Second Home – An average 10 percent of a down-payment is required for a purchase, and 25 percent equity for any refinance

  • Investment Property – The down payment requirement can be the 20-25% range based in the total number of units. When you are doing a cash-out refinance on any investment property for 2-4 units, the required loan-to-value will have to be 70percent /lower to qualify.

Note- For any kind of high-balance loan amount the mentioned LTV- Loan-to-Value requirements will undergo a change. Certain credit score requirements will also be applicable. To understand more about how the property type affects your down payment, contact ResMac Home Loans today.

Calculating Loan-to-Value (LTV)

Understanding the definition of Loan-to-Value (LTV), and how it impacts a mortgage approval, will help you determine what type of loan amount and program you may qualify for.

Since the LTV Ratio is a major component of getting approved for a new mortgage, it’s a good idea to learn the simple math of calculating the amount of equity you may need, or down payment to budget for in order to qualify for a particular loan program.

The LTV Ratio is calculated as follows:

Mortgage Amount divided by Appraised Value of Property = Loan-to-Value Ratio

*On a purchase transaction for a residential property, the LTV is calculated using the lesser of either the purchase price or appraised value.

For Example:

Sally qualifies for a 96.5% Loan-to-Value FHA program, which means she’ll have to bring in 3.5% as a down payment.

If the purchase price is $100,000, then a 96.5% LTV would = $96,500 loan amount. And, the 3.5% down payment would be $3,500.

$96,500 (Mortgage Amount) / $100,000 (Purchase Price) = .965 or 96.5%

In addition to determining what mortgage programs are available, LTV also is a key factor in the amount of mortgage insurance required to protect the lender from default.

On a conventional loan, mortgage insurance is usually required if you have an LTV over 80% (one loan is more than 80% of the home’s appraised value). On that point, if you are currently paying mortgage insurance and think that your LTV is less than 80%, then it may be time to refinance, or call your lender to restructure the payment.

…..

Frequently Asked LTV Questions:

Q:  Why do the lenders care about Loan to Value?

Lenders care about the LTV because it helps determine the exposure and risk they have in lending on a certain property. Statistics show that borrowers with a lower LTV are less likely to default on their mortgage.  Also, with a lower LTV the lender will lose less money in case of a foreclosure.

Q:  Can I drop my mortgage insurance on an FHA loan?

The mortgage insurance on an FHA loan is structured differently than a conventional loan. On a 30 year fixed FHA loan, the monthly mortgage insurance can be removed after five years, as well as when the borrower’s loan is 78% LTV.

Q:  What does CLTV stand for?

CLTV stands for Combined Loan To Value. The CLTV calculation is as follows:
(1st Mortgage Amount + 2nd mortgage amount) / Appraised Value of Property = CLTV

_________________________________

Related Articles – Mortgage Approval Process: