Can I buy another home if my house is underwater?

Did you know that about 50% of all homeowners in Arizona owe more on their current home than what the home is valued at. This is a shocking statistic, but this information becomes very important once a decision is made that you need to move.  Every week I get calls from clients wanting to know if they can get approved to buy another home and rent out their current home.  The answer is Yes, but with many lender guidelines.  Since most homeowners are  underwater, the banks are being very careful on these guidelines.  If you fit the guidelines correctly, then buying a new primary home and renting your existing home is going to be acceptable, but if those guidelines are not being met, then the loan will be declined.

First of all the property being purchased must meet Occupancy Guidelines.

Occupancy Guidelines:  A primary residence is the residential property physically occupied by an owner as the principal home domicile.  Among the criteria
one should consider in evaluating whether a property is a principal home are the following:

• It is occupied by the owner for the major portion of the year
• It is in a location relatively convenient to the owner’s principal place of employment
• It is the address of record for such activities as federal income tax reporting, voter registration, occupational licensing, and similar functions
• It possesses the physical characteristics to accommodate the owner’s immediate dependent family.
• The borrower states an intention of occupy the property as a primary residence.

If these guidelines cannot be met on the new home purchase, then the loan cannot be approved for a primary residence use.  The loan approval for home financing would need to be classified as either a 2nd home or investment property.

Once occupancy is established to be legitimate, then the guidelines will fall either under FHA or Conventional Guidelines:

FHA Guidelines:  Converting Existing Homes to Rentals

Rental income from the borrower’s current primary residence is permitted, provided at least one of the following FHA requirements is met:

• The borrower obtains new employment or a job transfer that is not within a reasonable commuting distance of the current primary residence or
• The borrower has a 25% equity position in the current primary residence as evidenced by an appraisal or sales price with the most recent six months
• If one of both of the requirements above are met, all of the following documentation is required:
• Fully executed lease agreement (a 25% vacancy factor will be applied to the monthly rent stated on the lease agreement) and
• Evidence of the borrower’s receipt of the security deposit and
• Evidence of the borrwer’s deposit of the security deposit to his or her bank account

Basically if there is 25% equity in your current home, we can use rental income to offset the debt.  Otherwise both debts would have to be counted against the borrower.

Conventional Guidelines:  When converting a primary residence to an investment property

The underwriting guidelines will use 75% of gross rental income as stated on the lease as evidence of rental income or to offset the payment if the
following conditions are met:

• There must be documented equity of at least 30% in the existing property derived from at least a 2055 exterior-only inspection (drive-by appraisal), dated no more that 60 days from the Note Date.
• The rental income must be documented with a copy of a fully executed lease agreement and
• The receipt of a security deposit from the tenant and deposit into the borrower’s account.

Basically if there is 30% equity in your current home, we can use rental income to offset the debt.  Otherwise both debts would have to be counted against the borrower.

Last, the underwriter will require a letter of intent for moving and the reasons have to meet a common sense approach of why someone would be moving such as upsizing, downsizing, moving closer to work, etc.   If the intent is not clear or does not makes sense, the underwriter could decline the loan.

If you are thinking of buying again and want to convert that current home into a rental and have questions if you can qualify, please do not hesitate to give me a call.

This will be the fourth loan in the last 12 months that I approved using some sort of down payment assistance.  Even though seller assisted down payment went away using programs such as Ameridream and Nehemiah, HUD has been allowing buyers to use FHA financing with down payment assistance from a 501(c)(3) nonprofit corporation.  Two companies that come to mind that I have worked with now has been Newtown Community Development Corporation Community Land Trust and Desert Mission Neighborhood Renewal.  Both nonprofits have certain guidelines that have to be met and will require home-buyer education.

Free Money!!

So far my favorite program from the nonprofits is the Individual Development Account (IDA).  This program will match buyer saved dollars of up to 3 times what they saved up. The
cap is $15,000.00.  For instance if your client saves up $2,000.00 for down payment, they can get matched up to $6,000.00 from this (IDA).  Also, FHA loans will allow the buyer to use the funds for both down payment and closing costs.

This is just one of  the many programs that are still available out there for home buyer assistance.   For more information about this mortgage program or many others, please feel free to contact me.

If you are looking to buy a home and are having a hard time figuring out where the down payment is going to come from, I wanted share with you 10 great sources that can be used with an FHA mortgage to buy a home with as little as 3.5% down.

1.  Earnest Money Deposit: A lot people don’t think about this one, but your upfront money given to as Earnest Money is actually funds that can be used for that down payment.  Satisfactory documentation can include a copy of the borrower’s cancelled check.

2.  Checking and Savings Accounts: Any funds that have been in the bank account for 60 days or more are considered sourced and seasoned.  A verification of deposits and any explanation of big deposits will be required.

3.  Sales Proceeds: Any net proceeds from a sale of a house that is currently owned property may be used as a cash investment on a new house.

4.  Sale of Personal Property: The most common one’s I have run into have been Cars and Weapons.  With the Cars, a bill of sale and some type of third party value system to verify the appraised amount works.  For instance my own client had a classic car and bill of sale and an online auction site showing others vehicles selling for like value was established.  We then used these funds for his down payment.

5.  Gift Funds: FHA is one of the only loan programs left that allows a buyer to get a gift from the following sources:  The FHA guidelines specifically state:  If the donor is the borrower’s relative, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide home ownership assistance to low-and moderate income families or first-time home buyers, or a close friend with a clearly defined and documented interest in the borrower.  The gift donor may not be person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them.  My most common gifts have come from relatives and employers, because you can establish a clear gift relationship.

6.  Savings Bonds: These are government issued bonds and are counted at original price unless eligibility for redemption and value are confirmed.

7.  IRAs, Thrift Savings Plans, 401K’s and Keogh Accounts: Almost all retirement type vehicles can be used for a down payment source.  Evidence of redemption is required. Some people also just borrow against their retirement accounts.  This can also be done through another method I will mention next.

8.  Collateralized Loans: This is a long against some type of collateral such as stocks, bonds, retirement accounts, vehicles or other real property.  Again the most common is borrowing against retirement vehicles such as a 401K to use those funds for a down payment.  The borrower must show the ability to pay back not only the mortgage but also this debt.

9.  Cash Saved at Home: I like to call this mattress money.  This is acceptable, but understand requires a very detailed explanation which includes working through a family budget and the reasonable accumulation of funds.  Also, some investors will not accept this method anymore even though FHA does.

10.  Sweat Equity: This is not that common anymore, due to all the over building of real estate, but home builders used to use this as an acceptable method for down payment.  Basically it is labor performed or materials furnished by the borrower before closing, on the property being purchased as the equivalent of a cash investment.  Basically the borrower’s labor may be considered as the equivalent to cash, if the borrower can demonstrate his or her ability to complete the work in a satisfactory manner.  This has always been popular among builders to have a homeowner go in and paint and use that labor toward their equity.

Sometimes figuring out where to come up with the funds for the down payment on a home is more than half the battle.

I wanted to share another success story about how FHA flexibility helped another home-buyer purchase a home. I had a client that was pre-approved for mortgage financing.  The client had great credit, a stable job/income and had a clean rental record.  However, the onething she was lacking was the ability to come up with the FHA 3.5% down payment requirement.  This is when flexibility makes a huge difference.  FHA is still one of the only loan programs that allows the down payment to be gifted or funds to come from proper government sponsored down payment assistance programs.  Well with some checking around, we were able to find the client some government sponsored down payment funds.  Now I had a complete borrower and we got the loan closed.  Again FHA saved the day.

Back in August 2008 I wrote a post (And You Really Thought You Can’t Get a Home with $100.00) about FHA HUD homes
having a special deal on certain properties that allowed only $100.00 down.  Well Folks FHA and HUD have decided to cancel this
program for the time being. The marketing company for Hud homes is Arizona is www.mcbreo.com.  They announced on
July 19, 2010 the incentive Expiration for Arizona and Nevada.

from mcbreo website: ” HUD’s $100 Down payment initiative will expire on July 31, 2010.  The $100 down payment was
for owner occupants (Any individual who purchases a HUD home as their primary residence for at least 12 months after
closing and who has not purchased a home from HUD as an owner occupant in the past twenty four months) purchasing a
HUD Home with FHA financing. This incentive will continue to be eligible for all contracts signed by seller by
July 31, 2010.  Contracts signed after the July 31,2010 deadline will not be eligible for the $100 Down payment incentive.”

This program was a good help to many buyers, and I am sad to see it disappear.  It seems like there are fewer and fewer
options for homeowners.

Cherry Creek Mortgage Company announced on February 20, 2009 that they are now requiring minimum credit scores of 620 or higher for most FHA and VA loans. This comes as no surprise since most industry standards with investors have already moved in this direction. These new credit score requirements will not apply to borrowers who are applying for an FHA Streamline Refinance or VA Interest Rate Reduction.

Now please be aware that this is NOT an FHA or VA rule. FHA and VA loans in general are not credit score driven programs. However, due to higher default rates on these type of loans, the investor market who buys these loans put in certain stop gaps to get a better handle on marginal credit score borrowers and high default rates.

Mortgage Loan Programs for Credit Challenged Buyers

Every time I turn on the television or listen to the radio I hear another media talking head share with the public that banks are not making mortgage loans for buyers with credit scores less than 680, 720 or 740. Well I want to first set the record straight that this is not entirely true.

Now Let me make myself clear that “YES WE CAN” get you a mortgage if your credit score is lower than 680. There are conditions, but it is possible and I do it everyday for a lot of my clients.

Now that I set the record straight, let me explain this a little further.

First of all, it depends on where you go to get the home mortgage. Some of the bigger commercial banks and other financial institutions only sell a certain selection of mortgage products. Most of these mortgage products are all credit driven loan programs and are called conventional loans. So if you go to one of these banks or financial institutions for your home loan they might give you the same answer that you have been hearing on the radio or television. For example, I have a client that just came to me for help with a home loan. She originally went to her credit union to get the loan before speaking with me. This credit union told her that she had to put at least 5% down and she needed a credit score of at least 680 to secure the loan. Since she did not meet this criteria the credit union informed her that they could not provide the loan. What she was not told was that there are many alternative mortgage loan programs for buyers who do not have to put 5% down or require a 680 credit score.

So what are the mortgage loan options if your credit score is below 680?

The best mortgage programs for buyers who are credit challenged are ones in which the loan program is not entirely based on credit. Most government backed loan programs fit under these criteria such as FHA, VA and USDA loans. These programs are what I call “Guideline” loan programs. Under these types of loans you can expect less amounts required for down payment and credit scores as low as 580. Now the catch is you must meet the loan programs “Guideline”. Most of these programs require at least 2 years solid employment in the same line of work with the ability to prove that you can afford the payment. Having money saved up in your bank or retirement accounts always strengthen the file. Credit is used and most of these programs look at specific patterns on your credit. For example if 6 years ago you had a bankruptcy and have started to re-establish your credit, and your new history has been clean for the last 1-2 years, you will probably get approved on your credit profile. These types of loans are all reviewed by a human underwriter and sometimes things from your past can be explained with letters of explanation. Basically your file is reviewed on a case by case basis based on the program guidelines that are set up for each one of these government loans.

If you have further questions and would like to discuss your situation further, please feel free to just drop me an email or just call me.

On March 6, 2008 HUD announced a temporary FHA loan limit increase in counties across the United States. The Economic Stimulus Act of 2008 permitted FHA to insurance loans up to 125% of the area median house price.  These loan limits now run out on December 31, 2008.  After that date all FHA loan limits will revert back to the county limits based on median home price.  The impact on the homebuyer community is huge.  In some counties this could change the maximum loan limit by hundreds of thousands of dollars.  If you are looking to buy a home using FHA, please call me now to see if this is going to impact your new FHA mortgage loan. 

Attention Police Officers, Firefighters, Teachers and EMT’s. If you are in the market for a home you need to be aware of this specialized FHA loan program through HUD called the Good Neighbor Next Door Program. I am helping a couple of teachers right now with this loan and the outcome has been fantastic. Let me explain the mortgage loan details a little bit further. Basically if eligible for the program you can take advantage of an incentive to get into the home at a discount of 50% off the list price of the home. In return for the discount you commit to HUD that you will live in the home for 3 years as your primary residence.

Also you can use this program in conjunction with a 203K loan. Cherry Creek Mortgage Company has been doing these loans in conjunction with each other.

How the Program Works:

First of all the buyer must purchase the HUD home in a revitalization area. I always recommend getting your Real Estate Agent involved upfront and letting them know that you want to pursue these homes. Your agent can be a great guide with the HUD Homes available in your revitalization areas. You will also want to get your FHA mortgage pre-approved upfront before starting to look at these homes.

HUD does require that you sign a silent second for 50% of the value until you have fulfilled your 3 year occupancy requirement.

For further information, please feel free to contact me.