Tips for a Successful FHA 203k Renovation Transaction

By Paul Pykosh, Director of Renovation Lending/Senior Mortgage Banker

The FHA 203k rehabilitation mortgage program has grown in popularity as the nation’s housing stock has aged.  It allows a homebuyer to roll in the repair costs into the loan up front.   The 203k loan is perfect for homes that require cosmetic or major rehabilitation in order to make them livable or more desirable. These steps will prepare you for a successful FHA 203k loan transaction: 

1. Get pre-approved with an experienced 203k lender.  First, make sure your loan originator is well-versed in the FHA 203k mortgage, can explain the process in detail to you, and has a history of closing FHA 203k loans.  It is also important to obtain a quality mortgage pre-approval that states the terms of the 203k loan (sale price, approximate rehab costs, approximate final loan amount, interest rate, etc.).   To originate and close a successful 203k loan, the lender needs to have experience with navigating the complexity of the additional paperwork and additional players involved.  If your lender slips and calls the program the 401k loan, you know you are dealing with inexperience from the beginning! 
2. Do some homework!  Take advantage of the HUD Approved 203k Consultants before making an offer on the home.  They offer a preliminary feasibility study that will allow for a rough estimate of the necessary and desired repairs and the costs of those repairs.  Using the consultant for this can help you weed out potential ‘money pit’ properties.   Once you know the scope and cost of the work involved, this can help you structure your initial offer price more favorably.
3. Create your equity through negotiation of the sales price!  The equity in the home is determined greatly by the original ratified contract sale price.  Be careful not to bid too high since the property has to appraise high enough to include the cost of repairs.  The items that can be included for rehabilitation are flexible, but the after-completed appraised value has to validate the repair costs being done.  I have seen buyers end up with less equity because they did not negotiate the sales price low enough.  While it’s easy to get caught up in the whim and appeal of fixer uppers, it’s important to take your emotions out of the deal and treat it as a business transaction. Visit the property a few times and at least once with your contractor and/or Consultant so you know where to start and end the negotiations.   Remember that with FHA, a borrower can negotiate a seller credit for closing costs and pre-paid items up to 6% of the purchase price.
4. Work hard in the beginning of the process to have a smooth closing.  The sooner the consultant, borrower, contractor, and lender get the Specification of Repairs (a list of the specific details of the work to be done and the cost for each part of the work) completed and agreed upon, the sooner the appraisal and the underwriting of the loan can occur.  Be pro-active and help facilitate the process by staying on top of the people involved.
5. Take time to hire a good licensed contractor.    Start with referrals of professionally licensed contractors that have done jobs recently.  Interview a few, get references, and use web sites like Angie’s List to find out about a contractors reputation.  A good contractor is important to the entire loan process, both in the beginning when proper documentation is required and after closing the loan when being on budget and on schedule is vital.  Studies have shown that the lowest priced contractor has the highest number of delays and cost overruns.  The cheapest contractor often leads to the lowest quality work.

These 5 tips should put you in great shape for a successful FHA 203k loan transaction. If you have any questions on the process or to get started on your loan give me a call at (240) 238-2402. You can also check out our mortgage calculators, request a copy of our homebuyers guide or apply online.

How is my credit score determined?

By Amy Smith, Mortgage Planner

 

Credit scores are driving forces for nearly everything these days.  A low credit score may mean having to put a deposit down when opening utilities or not being able to obtain new credit for an auto loan, credit cards or a new home.  With a low credit score you can also count on higher rates on any new financing.  Here’s a breakdown of how your credit score is derived:

1. Payment History – 35% Impact – Paying debt on time and in full are positive marks on your credit report.  Late payments, collections and judgments all have a negative impact on your credit score.
2. Outstanding Credit Card Balances – 30% Impact – A high outstanding balance compared to the available credit can have a big impact on your score, especially if multiple accounts have balances that exceed 50% of the available credit.
3.   Credit History – 15% Impact – The longer you have credit the better your score. 
4. Type of Credit – 10% Impact – A mix of loans (auto, student, credit)  is always better than having a high concentration of one type of loan, especially credit cards
5. Inquiries – 10% Impact – This is based on how many people have pulled your credit in the last 12 months.  If you pull your own credit there is not an impact to your score.

There are quite a number of credit sites that will monitor your credit scores/report for you.  You can also access a free credit report from each bureau through www.annualcreditreport.com once a year.  For a more information on the points above you can click here. Feel free to also visit us online to try our mortgage calculators, request a copy of our insider's guide to credit scoring and home financing, request a copy of our  homebuyers guide or get started on your mortgage application!

To be 20% Down Payment, or Not To Be

By Chong Yi, Senior Mortgage Banker

Today’s mortgage industry is quite different than the days of our parents and grandparents.  I remember the day my dad and I discussed the interest rate that he was able to get for the house I grew up in as a child.  It was not the 4% that we are enjoying today.  In 1980, the best rate my parents were able to secure was 18% and this was considered the norm back then.

It was also the norm to put as much of a down payment as possible when purchasing, and to pay off your mortgage as quickly as possible.  At the very least, most homebuyers would put a 20% down payment so they could eliminate needing mortgage insurance. 

With interest rates being at all-time lows, putting 20% down or more may not always be the best option.  Particularly when you consider what your rate of return could be if instead, that down payment was invested elsewhere.   

For example, if a buyer were to purchase a home at $400,000, and put 20% down, the buyer would be financing $320,000.    A principal and interest payment at 4% would equate to $1,527.  If that same buyer instead put 10% down, they will be financing $360,000 with a slightly higher interest rate to offset the monthly mortgage insurance (a topic I’ll discuss further in another blog).   In this scenario, the principal and interest payment will be $1,770.  

The average buyer would look at this situation and determine it unbeneficial for them because they will be paying an additional $243 per month.  However, the savvy buyer may consider the return on investment (ROI) from the $40,000 that the buyer is saving on the down payment.  The buyer will pay an additional $243 per month so it will be an additional $87,480 in 30 years. However, if the $40,000 were to be invested in an investment vehicle that is returning at 7%, that 40,000 will be $324,659.  This will give the buyer a net ROI of $237,179 after the 30 years.

The bottom line is it’s important to not only look at the interest rate and down payment when considering your mortgage. Since there are many factors to consider, it’s imperative you work with a knowledgeable mortgage lender who is able to provide you with all of your options.

Visit us online to try our mortgage calculators, request a copy of our homebuyers guide or get started on your mortgage application!