Some of the most misunderstood FHA pitfalls
Mortgage financing has become extremely difficult to understand. Fannie may continues to set very tight guidelines but they are not impossible if your Loan Officer you are dealing with understands the mine field. Home buyers with less than 20% down payment are recommended to use FHA financing. FHA financing is usually the best form of financing in this case but the estimates can be very confusing when shopping for a mortgage. I will break down the most misunderstood items when getting a loan.
Up Front M.I.
All FHA loan have what is called up front M.I., Mortgage Insurance. What this is at the time of escrow closing you will see your loan amount increase 1.75%. This is not an out of pocket cost to the home buyer. This is a one time up front cost that is added to the agreed upon loan amount required to complete the transaction between the home buyer and the home seller. For example;
Home cost ………………… 250,000
3.5% down payment …….… 8,750
Requested loan amount …241,250
1.75% up front MI …..………4,375
Final loan amount ……….245,625
This is where the most, how shall I say it, BS gets thrown around. There is one bank in particular that is really pushing the fess issue and hiding behind a loophole. FHA loans allow a Loan Officer to show a charge called a “Loan Discount Fee” whether this line item is used for a true buy down or put in the loan officer’s pocket. It is my opinion that Countrywide used this business practice to become the largest home lender in the country. It is also my opinion that the even with the new name the same old practices continue.
It is common practice of a Bank in America where thier Loan Officers mislead home buyers with the promise of less that $1,000 in fees. This is simply not true. Every deal of this type that I have seen has a mysterious “Buy Down Fee” that is usually 1.25% of the loan amount. Imagine that!
Always, always, always demand to see in writing your rate lock. Your rate lock and your good faith estimate are what show you the true cost of your loan. Read it and understand it before you sign your loan doc’s. The Banks nor Brokers do loans for free. No fee loans are a thing of the past. The difference is that Brokers legally have to show their fees and there are loopholes that allow banks to hide fees.
I would recommend that everyone request a rate from a Bank and a Broker so you can see the benefit of using a Broker. Getting the right Broker is important. It is also important to get the right Loan Officer at a Bank as well. Do not get lost in the false sense of security of using a Bank to obtain a home mortgage.
Loan Officers that work for a Bank have to meet quotas to keep there jobs. Ya ya, the Banks will tell you this is not true but it is what it is. We all know that policemen have quotas but the official answer is not quotas but rather “observing properly.” This observing property practice is also used by the Banks when dealing with their Loan Officers.
There is a Bank that rode up and pulled a new twist out of the stage coach. If you loan shop they will require you to get a “Loan Cancelation Letter” from every Bank that gave you a pre-approval and pricing. The Banks have a system called “Disco” that is used for background checks. Clearly the L.C.L. is used to keep a borrower locked into a particular Bank. If you think about this what bank is going to send you a written cancellation letter on an approved loan? They are going to try to match the fees like a used car salesman.
H.V.C.C. is an appraisal requirement that went into effect on May 1st 2009. This is supposed to be a regulated appraisal system so that appraisals are done in a uniform fashion. Here is the problem, the banks are in control of the HVCC appraisers’ and a Broker is not allowed to contact them.
So let’s say the home next to yours is in need of serious repairs to be livable and is for sale. A home in this condition would never sell for the price of your home that has been kept up. These appraiser’s in question only get on average 50% of the HVCC cost so they are not going to give your appraisal the time that it needs to be considered a qualified appraisal. So when they obtain sells comps to value your home the sell of the home in disrepair will be factored in. This will hurt your homes value.
The new HVCC law does not allow us to speak with the appraiser to inform him that the home comps that he used have special circumstances that reduced the sales price. This hardly seems fair to existing home owners. The good news is that the Brokers Association has filed a lawsuit in order to block the HVCC and should have a ruling within the next few months. In the mean time pending sales will continue to hurt home values.
Here is a recent example of the flawed HVCC program;
A new home in Riverside CA was recently appraised a $400,000. This was $55,000 below the agreed upon purchase prices. This HVCC appraisal value made the loan unable to do in a conventional fashion. The buyers had already invested $120,000 in upgrades to the property that was now at risk. When the Broker learned about the HVCC apprised value he revised the loan to a FHA program. A qualified FHA appraiser went to the property and came back with an apprised value of $535,000. It was because the HVCC appraiser gave no value to the $120,000 in upgrades and took the first three comps in the area.
This is just one example of the flawed HVCC program that Barney Frank led the cause on. Yet again a perfect example of why people that have never worked in the private sector have little to no business setting policy. I hate to think of the no doubt thousands of people that have found themselves caught in this very situation. I can only hope that they had a knowledgeable Loan Officer that guided them correctly.