The Regan Team - Petaluma Homes & Mortgage Blog - PetalumaLending.com: August 2010

Bank overlays (aka an additional layer of guidelines) are the main reason why you can ask 10 loan officers the same question and get 10 different answers.  Every single bank and investor has their own overlays over the standard Fannie/Freddie/HUD guidelines.

So why the additional layers? 

Investor appetite for risk.  Some are ultra conservative and have so many additional guidelines only the “perfect borrower” will qualify for a loan through them. Generally I’ve found these investors while being the most restrictive have the best pricing. 

Other investors want a certain type of transaction and will favor those with fewer overlays which in turn drives that type of business to them.

An example with FHA loans in the past, when FHA didn’t have a minimum FICO requirement, some investors had a 580 FICO overlay while others had a 620. 

In other cases you’ll see the same property and borrower be denied a loan at one bank and approved with another. 

These overlays can be frustrating for borrower, real estate agent, and loan officer alike but can’t be avoided.

So next time you ask a loan officer why another bank can provide financing and they can’t, you can bet it’s because of overlays.  

In these turbulent times many people have been laid off and some have been fortunate enough to find new jobs.  With the low rates and low home prices many of these previously unemployed people are looking to purchase a new home. 

So how does unemployment affect financing?

As usual there’s not a cut and dry answer but in general 6 months is the magic number.

If a borrow was laid off for a period of time and then got a new job in the same line of work, 6 months job seasoning is the norm.  There is some flexibility if the borrower immediately secured new employment in the same field. 

If a potential home buyer was laid off and then started a new job in a different profession six months is the rule.

The big caveat is if the borrower was W2’d and is now self employed, they’ll need a 2 year history of self employment income before being loan eligible.

Flipping has been always been a part of the real estate landscape.  Investors buy a home for a considerable discount and then sell it immediately for a profit.  While there's nothing wrong with this there are a few things to be aware of.

The following tips may or may not be Fannie/Freddie/HUD guidelines, as with most loans today investors have their own overlays and these are the common ones.

-Expect any sale where the property in question has less than 12 months seasoning with current owner to require 2 appraisals and the lower of the 2 values will be used. 

-On FHA flips under 90 days many lenders require a lender ordered home inspection.  Any items appearing on the report will need to be fixed before close of escrow.

-No multiple flips allowed.  Only one change of ownership in a 12 month period.

Why are flips so restrictive?

For good or bad the simple answer is that lenders want to be assured that the buyers of these properties aren’t going to run into issues with the home that will cause them to default on the loan. 

On October 4, 2010 FHA is changing the mortgage insurance structure which will result in borrowers qualifying for less.

All FHA case numbers will be affected.

The changes include:

-The current up front mortgage insurance premium will be reduced from 2.25% of the loan amount to 1%.  Sounds good right?  Not so fast! 

The monthly mortgage insurance for terms greater than 15 years:

LTV's <= 95% will increase the monthly fee from .5 to .85

LTV's >   95% will increase the monthly fee from .55 to .9

An example of how this will affect borrowers:

$400k loan amount under the old program at 5%:

3.5% down = $14,000

Upfront MIP = $8685

Total loan amount = $392,685

Total loan payment = $2108

Monthly MI = $180

Insurance = $60

Property Taxes = $417

Total payment = $2765

$400k loan amount under new program at 5%:

3.5% down = $14,000

Upfront MIP = $3840

Total loan amount= $387,840

Total loan payment = $2082

Monthly MI =$291

Insurance = $60

Property Taxes = $417

Total payment = $2850 or $85 MORE a month than the previous plan. 

Granted this isn’t the end of the world but for those borrowers on the edge this will have an impact and cause pre-approvals to be adjusted downward. 

Send this blog to your clients and let them know FHA loans are going to get a little more expensive soon and now might be the best time to buy their new home. 

Do schools affect home prices?

Recently an agent asked me this question and it got me thinking. 

They had a client that was ready to submit an offer but the home didn’t feed into the “best” school in town.  Because of that the client wanted to offer about $40k less than asking.  The agent was surprised as they had never had a client give that as a reason for a lower price. 

The home was in great condition in a clean and desirable neighborhood and the school it did feed into was considered very good, just not the best.

Their offer wasn’t accepted and while schools are important I don’t see a $40k price reduction being justified in a community like Petaluma California. 

So how much, if any, do you think schools affect home prices?