Not every homebuyer will be able to bring the optimal amount of money down to a closing transaction or have ideal credit history, but they can be aided in their purchase through a loan from the FHA. The FHA, however, has strict guidelines regarding any property for which they will approve a loan. In order to provide greater opportunities for these homebuyers, many developers and lenders have taken the extra steps to ensure that more properties are compliant with these FHA guidelines.

Obtaining FHA approval can actually be one of the easiest and most painless processes to be found when dealing with the federal government. All the agency requires is a set of documents that help the FHA see that a property is within their standards for lending. The FHA uses a simple checklist to determine whether a property is an approvable risk to lend a prospective buyer the money for purchase. In the case of a condo, the FHA may examine the stewardship of the building by the condo association—it is likely that if a building is not meeting FHA standards that the association may be able to take steps that bring it into compliance. In other cases, a mortgage officer may be able to directly help the buyer or the association to take care of the outlying factors that are preventing FHA approval. Any person involved in a home-buying transaction, including the borrower, can take responsibility for making a property FHA approvable.

FHA-licensed appraisers are another important facet of the approval process. When an FHA loan is applied for, these appraisers go to work, and they tend to be more experienced and better-trained than private appraisers. As such, they do two important things for homebuyers and owners. Firstly, they provide a thorough examination of the property and its many quirks, giving the purchaser a better sense of the property they seek to own. Secondly, they often have a better assessment of that property’s value; usually a higher figure than one might get from a less experienced appraiser. Altogether, the buyer receives a number of protections and benefits from choosing to go through the FHA.

FHA loans have been a true advantage to the housing market—since the foundation of the FHA, home ownership has blossomed, with the percentage of property owners receiving FHA assistance going from a mere 6-7% at the outset of the agency to approximately 70% today. In Chicago, most condos are not FHA-approved. Some lenders point out that the Chicago condo market has been experiencing a bit of a depression, and that a chance to stimulate this market assuredly lies in bringing properties up to FHA standards. The economy of an entire metropolitan area can be greatly boosted when there are more homeowners paying mortgages. Statistical analysis has shown that homeowners enjoy a significant increase in their quality of life, and that the wealth they produce and save ends up affecting their families for generations. With that in mind, it is to the benefit of all participants in the housing market to build and renovate properties that can be purchased by a greater number of people.

No Comments »

The mortgage industry has seen a lot of changes in the past few years since the recession started. Many of the laws and regulations in place within the housing market are designed to protect buyers from fraudulent practices or other malicious enterprises. However, investors and lenders also need some form of protection against financial loss when a buyer fails to hold up his or her end of the transaction. For these creditors, there is mortgage insurance.

Like other forms of insurance, the mechanism behind mortgage insurance—also known as a mortgage guaranty—is that the insurer receives a premium, which will then be used to cover losses in case the borrower defaults on their mortgage. Generally, a lender will require that mortgage insurance be purchased if the mortgage loan is higher than 80% of the property’s sale price. The lender will decide the amount of loss coverage, which can range from 20–50%, or possibly even higher. The borrower may see the mortgage insurance premium reflected as a part of their mortgage payments, or in some cases the lender will choose to pay these premiums.

Some form of mortgage insurance has existed in the United States since 1880, although it remained an unregulated entity until 1904, when the state of New York passed laws authorizing private companies to issue insurance. At the time, however, insurers were only allowed to cover payments on mortgages owned by the original lender. In 1911, this law was amended to allow lending institutions to purchase and resell loans, and insurers were then encouraged to guarantee the property title as well, to make the mortgages more attractive to investors. For the next two decades these private companies thrived as real estate values climbed, and lenders were pleased to discover that few defaulted properties would sell at a loss. However, the real estate market collapse at the start of the Great Depression severely tested the myriad of bad business practices within the mortgage insurance industry, and as a result, the industry failed.

This failure led to government involvement in the mortgage market, specifically through the creation of the Mutual Mortgage Insurance fund, managed by the Federal Housing Administration (FHA). The FHA uses the fund to insure their own loans to prospective homebuyers, and was expanded after World War II to include war veterans through the Veterans Administration (VA) department. However, both the FHA and VA mortgage insurance programs have legislatively mandated limits to their scope—underwriting guidelines often exclude many prospective homebuyers, for example, and there is a ceiling value past which mortgages may not be insured.

Today, private mortgage insurers succeed or fail based on their ability to identify mortgage risk and decide if they wish to cover it. They may decline to cover a certain mortgage, or adopt strict underwriting conditions based on the property, the buyer’s credit history and job status, or a number of other factors. Within state regulations, they may raise premiums on riskier sales or use methods such as reinsurance or risk pooling to mitigate potential loss. Some mortgage insurers will adopt a strategy of trying to help borrowers in danger of default, through credit counseling and debt management, with the understanding that foreclosure on a property tends to be an unpleasant and costly process for all parties involved.

A home is a major investment for its buyer, which is why smart homeowners purchase adequate insurance to shield them against disaster. The mortgage, however, is an investment by the lender in the dependability of the borrower—and as such, it’s equally as important for them to purchase mortgage insurance to provide a safety net in case the borrower is unable to pay back the loan. Such systems are in place in order to maintain the stability of the housing market, and when they work well, all parties benefit.

No Comments »

Let’s be real about one thing when it comes to buying your home – it’s an emotional purchase as much as it is financial. There’s no way you can quantify the emotional value you place on your home, but to determine its financial value, you need an appraisal. An appraiser discovers, lists, and values property, a vital role in the housing market. The art of the appraisal is complex and demanding, and has been complicated even further by recent shifts in guidelines and legislation that redefined the relationship between lenders and appraisers. Below are some useful facts you should know about the appraisal process.

Overview

In the mortgage process, an appraiser works with the lender, determining the value of the subject property. Based on the appraisal, the lender can determine if the collateral of the building is worth the risk a bank would undertake in granting a mortgage. The size of the loan is based on either the contract price or the appraised value; the lender will use the lower of the two values to determine the loan amount.

The underwriter will use the appraisal as a guide to approving the loan; only after the underwriter has signed off on it has the loan been officially approved.

Appraisal Factors

The appraiser examines a number of factors to determine the appraisal value. Location, as is often noted, has profound impact on a property’s value, but so does the reputation of a building itself—if people want to live in a particular “green” building, or a building with other amenities or assessments, the value of that property will be higher. The demand for the building may also be influenced by the lending and development history of the property.

Not all properties are appraised in the same way. For example, a single-family home and a condo on the same street in the same neighborhood will be appraised by weighing the distinctive features of each building. The current condition of a condo is an especially important factor, as a condo may not be expanded or improved in the same way that a single-family home can. The floor location in a high-rise building project (the “view”) can differentiate the values of units in the same building.

The Lender/Appraiser Relationship

In May of 2009, the Home Valuation Code of Conduct was enacted to combat the practice of lenders placing pressure on appraisers, as well as other problems in the valuation system that contributed to the recent economic collapse. Appraisers and loan officers no longer have direct contact; their working relationships are managed by a third party whose primary responsibility is to ensure all parties are following the Code.

Fannie Mae and Freddie Mac

Fannie Mae (FNMA) and Freddie Mac (FHLMC) are the two largest purchasers of mortgages on the secondary market. These two organizations have specific guidelines for property mortgages that they purchase; a property that meets these guidelines is called “warrantable.” Some of these guidelines involve the number of investors, the number of pre-sold units in the project, or how much commercial space may be sold in the building. A “non-warrantable” building that fails to meet Fannie Mae or Freddie Mac requirements is much harder to lend for, since a large part of the financial process involves selling the mortgage to the secondary market.

Preparing for an Appraisal

Although there are very few things you can do right before an appraisal that will significantly alter the value of your home, it’s a good idea to make the living area clean and presentable, as if hosting for guests. A home’s value is based in part on appeal—the perception that, when the home looks it best, buyers would be very interested in living there.

It might also be nice to place some milk and cookies on the counter for the appraiser. It may not affect their judgment of the property, but it will bring a smile to their face!

For more information on how you can estimate the value of your home, please contact your PERL Mortgage Advisor today!

No Comments »