Orange County FHA, VA & First Time Buyer Loan Information: October 2009

Orange County, CA condo buyers using FHA financing just got an extra month added to the upcoming deadline of the end of the Spot Approval program. Back on June 12, 2009, FHA Mortgagee Letter 2009-19 was released, detailing new FHA Condo project approval guidelines, and setting a date for the end of the Spot Approval program along with elimination of nearly all condo project approvals in Orange County.

New Deadline for Spot Approval Program is December 7, 2009

Initially, the deadline was to be October 1, 2009. Then, with a push from the National Association of Realtors, FHA relented and decided to delay implementation of the new policy until November 3. Now, the deadline has been delayed again until December 7, 2009.

What Will Happen When, Or if This New Policy Goes Into Effect?

FHA financing for condo's will be very difficult, at least in the near term. Currently, FHA has a list of approved condo projects. FHA financing is available for properties within those approved projects. For those projects not approved, FHA has offered the Spot Approval program. The Spot Approval program is a relatively streamlined process for allowing financing on an individual unit within a non-approved condo complex. But FHA is not comfortable with the Spot Approval program. As a matter of fact, FHA really isn't very comfortable with their Approved Condo list. So, now, effective December 7, the list will be effectively scraped clean. Any project that has not been approved in the last 2 years will need to be re-certified. This means the lender will need to submit a package to HUD proving there are no material changes to the project that would keep it from being approved again. Since very few, if any projects in Orange County, have been approved in the past two years, a bottleneck is expected once the new process becomes effective.

Does the Delay Mean FHA is Going to Ease their Stance?

Maybe. In the FHA notification from this week, they announced they will provide better guidance on the new policy, including 1) they will offer additional leniency's to address the "difficult market" conditions, and 2) they will augment some portions of the Mortgagee Letter 2009-19, providing additional information and clarification. FHA also made it very clear that the Spot Approval program is extended through December 7. It actually sounds like FHA is realizing this is no time to make it any more difficult on first time home buyers than it already is.

FHA is Alive and Well in Orange County!

FHA financing currently makes up more than 25% of the closed transactions in Orange County. This is because of the flexibility FHA offers, especially in regards to low down payment and FICO scores as low as 620. With FHA loan limits in Orange County at $729,750, the program has proved to be popular not only with first time home buyers, but also move up buyers. There are not been a better time to purchase a home in Orange County in years.

Authored by Tim Storm, an Orange County, CA Loan Officer - Please contact my office at Frost Mortgage Lending Group for more information about an Orange County, CA home loan.  877-786-4243 x 7.

www.OCFHALoans.com

Contact us for your Orange County FHA Mortgage:

Call our office today and see how we can help you and your family. Ask for your Free First Time Home Buyer Report.

877.786.4243 x 7 | tstorm (at) ochomebuyerloans.com

* Licensed by Department of Corporations under the California Residential Mortgage Lending Act. PRMI Branch License 813F487.

Too often, Orange County real estate transactions fall out of escrow just when they are supposed to be closing. Why? While there are no specific statistics to back an answer to this question, 2106 expenses would seem to be good answer to that question. We know that appraisal issues have also been common in 2009, but too often tranactions fall apart because of the borrower qualification, even after they were supposedly "PreApproved." What are 2106 Expenses and why do they become an issue, at times, late into escrow?

What are 2106 Expenses?

2106 Expenses are also called Unreimbursed Employee Expenses. These are expenses some employed workers will writeoff on the Schedule A of their Federal Tax Returns. Typically, these expenses are associated with people who have a sales or commission based job. For example, if the borrower is not reimbursed for mileage, meals, hotel stays, license fees, or even basic business supplies, they are able to claim these expenses on their tax returns. This can result in a nice tax writeoff, but will also have an effect on the amount of home they will qualify for.

What Types of Jobs Will Typically Result 2106 Expenses?

Besides people in sales positions, just about anyone may have expenses they can write off. Of course, it may also depend on how aggressive the CPA is in advising their clients. It is not unusual for teachers to have unreimbursed expenses, as they quite often pay for supplies out of their own pocket. Some borrowers will get a little carried away and show some questionable expenses on their Schdule A. Its all fine and dandy until its time to qualify for a mortgage.

Why is This an Issue Now More Than Ever?

In the past, lenders did not request full tax returns from every borrower, even on a Full Income Documentation loan. 2 paystubs and 2 years W2's was enough. If there were expenses being written off, the lender never knew it because the additional information was never requested. Times have changed. Technically, lenders still don't require full tax returns in Prequalifying or even PreApproving a borrower for a mortgage. But lenders do require that Tax Transcripts be pulled from the IRS ON EVERY DEAL. This is what the Form 4506-T is all about. It used to be that the 4506-T form was only used after the close of escrow, if ever, as more of a Quality Control measure, making sure the borrowers had given the lender the tax returns which had actually been filed with the IRS. Rarely did this ever cause a problem, especially since most tranactions did not require tax returns anyway.

Now, lenders need to review a full set of 2 years Federal Tax Returns to make sure there are no surprises that come up late in a transaction. Some lenders will request the 4506-T form on the first day of the loan application, but some do not request Tax Transcripts until after the file has been underwritten, or worse, just prior to funding. This can easily create a situation where a deal is declined just a week before the moving vans are scheduled.

How Much Can this Effect a the Amount of Mortgage a Borrowers Qualifies For?

Lets say a school teacher has an annual salary of $75,000 a year, 800 FICO scores, one car payment of $300 per month, and 20 years on the job. She has $15,000 saved for the down payment. She is looking for an FHA approved condo in Irvine. Pushing the debt to income ratios, and making some basic assumptions for PITI plus HOA dues, this teacher would qualify for a purchase price of approximately $380,000. That would be pushing the debt to income ratios near the limit. But now lets assume that the teacher spends $10,000 a year in the classroom, keeping her class supplied with paper, pencils, and updated learning aides. Maybe she also has spent money on keeping herself educated on the latest teaching methods. The $10,000 in expenses needs to be deducted from her gross salary of $75,000. This is not much different than how a self employed borrower qualifies for a loan based on their income after expenses, not before. Based on $65,000 net income, this same teacher now qualifies for an approximate purchase price of $325,000. (this is still assuming an FHA purchase with 3.5% down payment.) That is a $55,000 drop in purchase power. That will kill a lot of deals if not caught during the PreQual and PreApproval stage of the process.

Mortgage PreApproval Needs to be Thorough

To make sure, or at least greatly decrease the chances of an ugly surprise at the end of escrow, the lender should request a full set of 2 years Federal Tax Returns on Day 1. And of course, the tax returns need to be reviewed carefully before issuing a Prequalifcation or PreApproval. There is too much time and money at stake in a real estate transaction to do it any other way.

Authored by Tim Storm, an Orange County, CA Loan Officer - Please contact my office at Frost Mortgage Lending Group for more information about an Orange County, CA home loan.  877-786-4243 x 7.

www.OCFHALoans.com

Contact us for your Orange County FHA Mortgage:

Call our office today and see how we can help you and your family. Ask for your Free First Time Home Buyer Report.

877.786.4243 x 7 | tstorm (at) ochomebuyerloans.com

*Licensed by Department of Corporations under the California Residential Mortgage Lending Act. PRMI Branch License 813F487.