Thoughts on the Washington, DC, and Northern Virginia Real Estate Market » FHA

FHA Loan Limits in DC Metro Area to Return to $729,750

Katie Wethman — Tue, 15 Nov 2011 14:17:34 +0000

Good news for our area: FHA is on its way to increasing their loan limit from $625,500 to $729,750 (its ‘temporary’ level prior to October 1, 2011). The measure would be in place through 2013.

According to Reuters, a bipartisan panel of Congress agreed on a measure yesterday that would increase the limit. The increase would apply only to FHA, NOT to loans backed by Fannie and Freddie. It still has to pass the House & Senate, but indications of passing are good.

This is important for our local market, which is considered high priced. When loan limits dropped to $625,500, it meant less purchasing power for buyers trying to borrow more. This primarily affected homes in the $750-900k price range, which, after the drop meant that even with 20% down, in order to get the very best rates buyers were limited to homes under $750k (unless they came up with more cash.) At the new $729k limit, buyers can purchase up to about $875k with 20% down and still get extremely competitive (historical lows, actually) interest rates.

Stay tuned to see if the measure passes.

Proposed Elimination of Fannie, Freddie May Boost Interest Rates; FHA Insurance Premium Set to Increase The administration has released a white paper saying it intends...

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Proposed Elimination of Fannie, Freddie May Boost Interest Rates; FHA Insurance Premium Set to Increase

Katie Wethman — Mon, 21 Feb 2011 18:21:26 +0000

The administration has released a white paper saying it intends to wind down Fannie Mae and Freddie Mac and severely cut back FHA’s role in mortgage funding. Though the plan could take up to seven years to execute, it would mean a dramatically privatized mortgage market and very likely higher rates. The report offers three options, including creating a new government agency that would continue to insure mortgages or a new agency that would step in only during times of crisis. The most drastic option would end government backing for home loans beyond the FHA. This could prove to be disastrous for condo financing, which has long been problematic when it comes to FHA. (Read more about how changes in condo financing impacted sales in this post.)

This report comes on the heels of another direct hit on buyers: FHA’s recently announced increase in the monthly mortgage insurance premium of .25% beginning with case numbers assigned on or after April 18, 2011. FHA Commissioner David Stevens said “After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market,” said Stevens. “This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.” This means that FHA buyers who have a ratified contract AFTER that date will have a higher monthly payment, so plan accordingly and get those offers in during EARLY April! On a $400,000 loan it translates into an extra $83 in your monthly payment.

Interest rates have a huge impact on affordability, especially for first time buyers who typically have lower down payments than 2nd or 3rd time buyers who are rolling equity over from a previous home.

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FHA Mortgage Insurance Set to Increase

Katie Wethman — Thu, 09 Sep 2010 19:30:54 +0000

As announced earlier this year, FHA has now made official its plan to increase mortgage insurance premiums for case numbers after October 4, 2010. For loans with a loan-to-value (LTV) of over 95% (which is most first time buyers, in my experience), the monthly fee increases from .55 bps to a whopping .90 bps.

How does this translate for the typical borrower with FHA’s minimum 3.5% down payment? On a $275,000 loan, the monthly payment is about to become $70 higher per month! This makes payments less affordable for many first time buyers, and adds ‘insult to injury’ following the expiration of the first time home buyer credit.

If you’re on the fence about making an offer on a home, I’d suggest pulling the trigger before the end of September so that you can get the loan’s case number assigned prior to this hefty increase in fees.

If you’re ready to start your Northern Virginia or DC area home search, please contact us – we’d love to help!

Learn More: Attend a free first time home buyer class

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FHA Loans Getting More Expensive – Again

Katie Wethman — Tue, 10 Aug 2010 15:55:38 +0000

Bill HR 2981 was passed by both the House and Senate, paving the way for higher charges for FHA borrowers. The majority of FHA loans are 30 year mortgages with a loan-to-value of at least 96.5%, which will see an increase in the monthly fee from 55 bps to a whopping 90bp, but on the flip side will see a reduction in the upfront mortgage insurance premium (UFMIP) from 225 basis points down to 100 basis points.

So in other words, the up front fees (this amount is often rolled into the loan balance) will go down, but the monthly charge goes up, hampering the monthly affordability for many borrowers.
The change is due to go into effect September 7, 2010.

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Potential Extension of June 30 Settlement Deadline & FHA Loans About to Get More Expensive–AGAIN!

Katie Wethman — Mon, 14 Jun 2010 15:49:05 +0000

Senate Majority Leader Harry Reid has co-authored a proposal to extend the June 30 settlement deadline for the first time buyer credit until September 30 to give lenders more time to process the incredible volume of contracts trying to close. The surge in loan volume has created delays around home appraisals and the usual delays associated with short sales are also creating headaches for buyers hoping to take advantage of the credit. Of course, savvy buyers know that many short sales will NEVER close, so the extension may not help them at all. Read more about why short sales never close here.

The House also passed legislation this week granting the Federal Housing Administration (FHA) the authority to raise the annual fees it charges borrowers to help shore up the agency’s dwindling cash reserves. The fee is currently capped at 0.55 percent of the value of the loan. The bill raises the cap to 1.5 percent. FHA Commissioner David H. Stevens said it wants to raise the fee for new borrowers to 0.9% next year to help raise capital and also make the fees more consistent with private mortgage insurers. FHA has certainly been a good deal for buyers recently, with very competitive rates and low insurance charges, which resulted in FHA’s share of purchase loan market from 3% in 2006 to 30% recently. As the agency raises those fees, it plans to somewhat lower the upfront fees it charges borrowers.

Buyers: FHA is still a great option in 2010–low rates and fees, and only 3.5% down. If you’re interested in starting your Northern Virginia home search, contact us.

More: Attend a free first time homebuyer class in Arlington.

Search: See homes for sale in Northern Virginia and Washington, DC.

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FHA to cut Seller Contribution to Closing Costs to 3% of Sales Price

Katie Wethman — Fri, 04 Jun 2010 15:33:04 +0000

Within the next few months, it’s going to get a little tougher for FHA buyers. Starting sometime this summer, FHA will make official its announced policy of limiting the seller contribution to buyer’s closing costs (aka “seller subsidy”) to 3% of the purchase price, down from 6%.

What fees make up the buyer’s closing costs?

The fees vary by jurisdiction, broker, and settlement attorney, but a good way to categorize them would be:

Prepaids – These are generally required by the lender, and may include prepaid insurance, prepaid property taxes, and prepaid interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
Points – A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands and thousands of dollars, so it’s important to discuss this with your agent and your lender.
Fees – These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge. Broker’s and attorney’s fees are scattered throughout the closing statement sections.
Title Insurance – This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This is in the 1100 section.
Government and Transfer Charges – Paid to the local jurisdiction. These can be quite substantial—for example, in the District of Columbia, the transfer (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers just had big increase (from $1 per $1000 in value to $5 per $1000) in their transfer taxes.

In our local DC and Northern Virginia area, traditionally closing costs have run about 3% anyway, so the impact will likely be minimal for most buyers in our area. But for those buyers who are struggling to come up with cash for the down payment AND closing costs, this reduction could put a last minute wrench in their purchase. Plan accordingly.

Financing Condos in a Mixed Use Building

Katie Wethman — Fri, 12 Feb 2010 20:13:21 +0000

As if condo buyers didn’t have enough headaches trying to buy a condo with the new FHA rules in place, many are also running into troubles with “mixed use” buildings, i.e., condos that have residential units but also commercial space (usually on the ground floor or street level), as is common in urban areas like ours.

Examples of this commercial space may be a grocery store or restaurant on the bottom floor of the building or a convenience store as part of the lobby…all of which is very convenient, however, may create difficulties for obtaining the loan you want. Under current Fannie Mae and Freddie Mac guidelines, financing becomes an issue if the commercial space is more than 20% of the entire project. If it’s more than 25%, you cannot do an FHA or VA loan either.

After finding what seemed to be the perfect condo for one of our buyer clients in Alexandria, it was disappointing to learn a Whole Foods occupied 43,000 square feet (28.6%) of the building, taking some popular financing options off the table for our buyer.

Ilyce Glink has this to say on the new financing rules for condo buyers:

Developers who built multi-use properties, with commercial, retail or restaurants on the first floor and condo units above may find that their properties will not be approved for financing.
Fannie Mae guidelines require that no more than 20 percent of a building’s floor area ratio (FAR) can be commercial. So if the building has 3,000 square feet, with a 1,000 square foot shop on the first floor and two 1,000 square foot condos above it, the property will likely not be “approved” and a buyer will not be able to get financing.
All this is bad news for condo buyers. Buyers who didn’t close before the end of 2009 may now find themselves rejected for financing if they are buying in a condo building that has not been approved or can’t be approved. Can you imagine the headaches this will cause?
Lenders say that buyers who need a loan to close on their purchase should ask whether a building is approved for financing before bothering to go for a showing.

She continues…

While there are some waivers being granted, condo buyers all over the country will find it more difficult to finance their purchases. These days, if you can’t finance a property, the number of prospective buyers will decline, and the property value could tumble.

What does this mean for buyers? Expect headaches, long waits, bigger down payments and higher interest rates if you’re buying a condo in a mixed use building that has too much commercial space–assuming you can get financing at all! And if you’re thinking of putting an offer in, it’s wise to do some legwork on the building and with your lender before you go through the effort.

This is all thanks to the “tightening” of the credit markets that’s been going on since the bubble burst. Will some of these rules loosen in the future? I hope so. Otherwise, current owners in buildings with high percentages of commercial space need to be prepared to wait it out.

This information deemed reliable but not guaranteed. Every situation is different and you should check with your agent and a lender about specific properties.

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Will the New FHA Rules Kill Arlington Condo Sales?

Katie Wethman — Wed, 10 Feb 2010 18:21:23 +0000

On February 1, HUD and FHA rolled out major changes to the condo approval process. Previously, buyers wishing to use FHA financing had two options: If the condo was listed in the FHA’s “Approved Project” database, you were good to go. But if it wasn’t, buyers had the option of going through the (now in hindsight relatively easy and straightforward) “Spot Approval” process, which typically could be completed within 30 days or so at minimal cost. Spot approvals had to be obtained on individual units for each transaction — it was an exception-based process. Given that condos are the main option for many first time buyers, who may lack the 10-20% down payment required in conventional financing, we saw an explosion in the use of FHA financing, which requires just 3.5% down, in the past few years, and a lot of spot approval applications.

The approved database remains in place and is the easiest option, but the new rules scrap the whole Spot Approval system completely, and now require condos to go through a lengthy and expensive HRAP (HUD Review and Approval) or DELRAP (D.E. Lender Review and Approval) process. The good news is that once a community is through the HRAP or DELRAP process, their approval will potentially remain in place for several years and applies to the entire building, and future buyers can simply coast in on that approval. You need only to check the database.

The process is much more cumbersome than the previous spot approval application, though, and these rules are all new. As a result some lenders are deciding it’s not worth the time (4-6 weeks) or cost (several thousand dollars per review) to jump in to this arena just yet. Some are letting other lenders “bite the bullet” on this one and will jump in later, after more condos are through the process and they can ride the coattails of lenders before them.

So what effect will this new hurdle in obtaining FHA financing have on Arlington’s condo market?

In the past 30 days, according to MRIS statistics, financing for sold condos (excluding retirement communities) was as follows:

Surprisingly, more than HALF the sales used Conventional financing! This would indicate that the condo market isn’t going to come to a screeching halt after all. But is there a difference based on price point?

Financing Used in Arlington Condo Sales by Price

Clearly there is heavier dependence on FHA in the under $300K and $300-500K price points, but I’m surprised it isn’t even heavier that this data indicates. This indicates to me that the lower priced condos (under $300k) are going to be disproportionately affected, but also are unlikely to completely halt. And look at the high percentage of all cash deals in that segment!

So it may take us a few weeks, or even months, to get the majority of condos through this painful new HRAP/DELRAP process, but hopefully in the long run it will be easier for everyone. While we’re going through this initial launch phase, keep in mind that settlement times will be MUCH longer (remember that June 30 $8000 credit settlement deadline?) and buyers may incur thousands of dollars in extra cost if they’re the unlucky “first mover” in a building trying to do FHA.

* If you know you are going to use FHA to buy a condo, being under contract by April 30 is NO guarantee that a currently ‘unapproved’ condo can get through this process by June 30. *
*My advice is to get under contract EARLY if using FHA to buy a condo if you’re trying to beat the tax credit deadline. *

And for those who can’t or won’t do FHA, remember ‘cash is king’ and you’ll likely need at least 10% as a down payment for a conventional loan.

And here’s another tip: If you’re looking at condos priced above $400,000 or so, contact me to discuss an important option that you may be completely missing in your search that would completely eliminate this issue!

To start your condo search, contact us — we’d love to help you!

Learn More: Attend a free First Time Home Buyer Class

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State of the Northern Virginia & DC Real Estate Market: January 2010

Katie Wethman — Sat, 23 Jan 2010 19:18:01 +0000

Spring has sprung early as far as the real estate market is concerned. Buyers are out and circling, anxiously waiting for inventory to hit. I know I’m starting to sound like a broken record, but the lack of ‘good’ inventory continues to be the story in real estate circles. Check out our market data graphs: Arlington is down to 4 months of inventory and Northern Virginia is down to just 3 months. That’s the lowest level of inventory since August 2005. Remember August 2005? When there were bidding wars, and properties sold for tens of thousands above asking?? Looking at the graphs, you can see that the number of contracts stays roughly the same each month (and has for many years)…so it’s not the buyers that are driving market changes…it’s the inventory.

The implication for buyers is very important: 1) get started early because it may take you a lot longer than you think to find the house you want and 2) when you finally do find one that meets your needs, jump on it!

As a result, sellers, if you’re considering selling, NOW is the time to get the house into shape and on the market! There are buyers out there and I recommend you list sooner than later. As this article notes, the economy and tax incentives have upset the seasonal trend of a ‘spring’ market. Please contact us if you would like to discuss how to best prepare and price your home for the market.

Changes were announced on Wednesday for FHA loans, which currently account for 30% of all purchase loans. The upfront mortgage insurance premium was increased from 1.75% to 2.25% of the loan value. While most FHA borrowers can continue to make down payments of as little as 3.5 percent when they take out a loan, those with a credit score of less than 580 will have to make a down payment of at least 10 percent, possibly starting in the early summer. The agency will reduce seller concessions from 6 percent to 3 percent of the home’s value, in line with the industry norm, this summer. They’re also tightening the screws (again) on condos.

I’ve scheduled a First Time Home Buyer class for January 26, 2010 at Arlington Central Library. If you or someone you know is thinking of buying, please contact me to register. The session is free, but space is limited and registration is required. The next class is scheduled for March 3.

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VHDA Loans Allow Financing of Down Payment

Katie Wethman — Tue, 15 Dec 2009 15:01:23 +0000

The Virginia Housing Development Authority has extended its Homebuyer Tax Credit Plus program to match the deadlines of the Federal First-Time Homebuyers Tax Credit.

VHDA’s program lets borrowers use a second mortgage to finance up to 5% of the sales price (enough to cover FHA’s 3.5% down payment requirement) by using the $8000 first time home buyer tax credit–effectively allowing borrowers to “monetize” the credit. The second mortgage helps cover the down payment and closing costs, with zero interest and no payments for the first 12 months. Borrowers then have the option of paying it down within the first 12 months, using their $8000 credit to pay it off, or paying it off over 29 years.

There are restrictions on the program, of course. Purchase price is limited to $408,100, and gross household income for two or fewer persons cannot exceed $86,900 for the Washington, DC, MSA, including Northern Virginia.

The deadline for the program matches the newly extended deadlines for the tax credit, so buyers must be under contract by April 30 and settled by June 30, 2010.

If you need help starting your home search, or finding a lender, please contact us.

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Learn More: Sign up for our free first-time home buyer class at Arlington Central Library on Jan 26 at 7:00 pm (registration required) Details and registration information can be found here.

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