August 12, 2010

FHA News -  FHA recently announced that they are revamping the Mortgage insurance structure for FHA loans.  Originally to start in Sept, 2010 it is now set to change on Oct 4, 2010.  The Up Front Mortgage Insurance Premium (was 2.25%) will be reduced to 1% BUT the monthly premium (was .55% annually) is now increasing to .85% and .90% (depending on certain qualifying factors).  Congress recently authorized the FHA to increase fees to a max of 1.55% for the monthly factor.  FHA has elected to use lesser for now.  Bottom line,  buyers payment will go up.

The following is taken from the FHA Press Release…

“Last week, FHA Commissioner David H. Stevens announced plans for implementing FHA’s new mortgage insurance premium structure. As we work to publish a Mortgagee Letter, it is our intention to announce that based on industry feedback and our desire to have this change implemented successfully in the marketplace, FHA will make the premium fee changes on all new case numbers effective October 4, 2010. Over this past week, the industry responded with support of the new fee structure, but voiced strong concern about having system changes ready in time to meet the original September 7, 2010 deadline. Since these system changes impact regulatory disclosures, lenders expressed they must have the additional time to implement and test systems. FHA took this feedback seriously and has accommodated the need for additional time.”

In the Metropolitan Kansas City area it appears that home values above $300,000 have taken the hardest hit in reference to loss of value.  It gets even worse if you go into the Jumbo market which includes mortgage loan amounts starting at $417,001.  

As a result of the downward move in values, the opportunity to capitalize on this market shift encourages some homeowners to approach builders about “real estate trades” instead of trying to sell the existing home themselves.

  Here is the main hurdle  a homeowner will face when considering a builder trade…………….

  IF you put together a builder trade and it states in the contract on your new home that it is subject to the builder purchasing your existing home, underwriting will require a copy of both contracts and an appraisal on both houses.  The objective is to make sure that the price the builder is paying you for your existing home is fair market value and that he is not paying you more than the house is worth and then elevating the value of the new home to cover his loss on your existing home. 

If your contract to purchase is not contingent upon the builder purchasing yours a 2nd appraisal would not be required BUT a copy of the HUD settlement statement from the sale of your old home would be necessary so that the underwriting knows where your funds to close came from.  If the buyer of your old home is the same as the seller of your new home (as appears the HUD settlement statements ) there would be an issue of value and the new lender would normally not fund the loan until an appraisal of your old home was reviewed to justify the value you were paid.  The goal is to determine that the transaction is an “arm’s length transaction”.  The concept of an arm’s length transaction is to ensure that both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party; also that the values offered for both properties are “fair market value” and not values that are unrealistic to what a stranger to either home might be willing to pay.

Most builders will consider trades when they have an inventory of completed homes that are not under contract.  The builder’s incentive to trade is to reduce the amount of debt his home inventory is carrying.  If a construction loan is for $300,000 and he can sell you that home by buying your home (ie. $150,000)  he has reduced his debt by $150,000 (and his monthly interest payment would be lower as a result).  If the builder can’t either make a profit on his sale or reduce his monthly inventory overhead he has no motivation to trade homes.

The builder will determine what he can pay you for your existing home by subtracting out the future realtor fees and closing costs (and interest accrual as he probably won’t be able to pay cash for it)  that he will have to pay when it is eventually sold.  Normally he will have his realtor determine what value it will probably sell for and reduce that amount by the future costs ( at least10% and probably more).

  Your net equity from the builder’s price he is willing to pay for your home will normally determine if you have the funds to purchase his new one.    A family that has the ability to put their home on the market; sell it and then start to look for “deals” come out the best but normally that will require a two move transition.