USDA Mortgages

 

A Rehab Mortgage Insurance

203(K) REHAB MORTGAGE INSURANCE[1]

Summary:

Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.

The Section 203(k) program is FHA’s primary program for the rehabilitation and repair of single-family properties. As such, it is an important tool for community and neighborhood revitalization, as well as to expand homeownership opportunities.

Purpose:

Section 203(k) fills a unique and important need for homebuyers. When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.

For less extensive repairs/improvements, see Limited 203(k). For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD’s Title I Property Improvement Loan program.

Type of Assistance:

Section 203(k) insures mortgages covering the purchase or refinancing and rehabilitation of a home that is at least a year old. A portion of the loan proceeds is used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by either

1. the value of the property before rehabilitation plus the cost of rehabilitation, or
2. 110 % of the appraised value of the property after rehabilitation, whichever is less.

Many of the rules and restrictions that make FHA’s basic single-family mortgage insurance product (Section 203(b)) relatively convenient for lower income borrowers apply here. But lenders may charge some additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.

[1] https://www.hud.gov/program_offices/housing/sfh/203k/203k–df

ELIGIBLE ACTIVITIES:

The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:

• structural alterations and reconstruction
• modernization and improvements to the home’s function
• elimination of health and safety hazards
• changes that improve appearance and eliminate obsolescence
• reconditioning or replacing plumbing; installing a well and/or septic system
• adding or replacing roofing, gutters, and downspouts
• adding or replacing floors and/or floor treatments
• major landscape work and site improvements
• enhancing accessibility for a disabled person
• making energy conservation improvements

HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.

APPLICATION:

Applications must be submitted through an FHA approved lender.

VA Loans for Alteration and Repair/ Supplemental Loans

LOANS FOR ALTERATIONS AND REPAIRS[1]

VA may guarantee a loan for alteration and repair:

• Of a residence already owned by the Veteran and occupied as a home, or
• Made in conjunction with a purchase loan on the property.

The alterations and repairs must be those ordinarily found on similar property of comparable value in the community.

The cost of alterations and repairs to structures may be included in a loan for:

• the purchase or
• regular “Cash-Out” refinance of improved property to the extent that their value supports the loan amount.

ALTERATIONS/ REPAIRS WITH A VA SUPPLEMENTAL LOAN

A supplemental loan is a loan for the alteration, improvement, or repair of a residential property. The residential property must secure an existing VA-guaranteed loan, and be owned and occupied by the Veteran, or the Veteran will reoccupy upon completion of major alterations, repairs, or improvements.

The alterations, improvements, or repairs must:

• Be for the purpose of substantially protecting or improving the basic livability, or utility of the property, and

• Be restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including fixtures.

Installation of features such as barbecue pits, swimming pools, etc., does not meet this requirement.

No more than 30 % of the loan proceeds may be used for the maintenance, replacement, improvement, repair, or acquisition of non-fixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment. The equipment must be related to or supplement the principal alteration for which the loan is proposed.

CHANGE IN RATE

The existing loan must be current with respect to taxes, insurance, and amortized payments, and must not otherwise be in default unless a primary purpose of the supplemental loan is to improve the ability of the borrower to maintain the loan obligation.

The making of a supplemental loan can never result in any increase in the rate of interest on the existing loan.

A supplemental loan to be written at a higher rate of interest than that payable on the existing loan must be evidenced by a separate note from the existing loan

PROCEDURES

Submit a statement describing the alterations, improvements, or repairs made or to be made with the prior approval application (or loan closing package, if closed automatically). In addition, report the amount outstanding on the existing loan as of the date of closing of the supplemental loan in the loan closing package.

If the cost of the repairs, alterations, or improvements exceeds $3,500: an NOV and compliance inspections are required.

UNDER $3,500 REQUIRES A STATEMENT FROM AN APPRAISER

If the cost of the repairs, alterations, or improvements does not exceed $3,500: an NOV (Notice of value) and compliance inspections are not required. Instead, a statement of reasonable value may be submitted. The statement must be completed and signed by a VA-designated appraiser. A VA-designated appraiser is an individual nominated by the lender (who may be an officer, trustee, or employee of the lender or its agent) who has been approved by the local VA office. In lieu of VA compliance inspections, the lender must submit a certification as follows:

“The undersigned lender certifies to the Department of Veterans Affairs that the property as repaired, altered, or improved has been inspected by a qualified individual designated by the undersigned, and based on the inspection report, the undersigned has determined that the repairs, alterations, or improvements financed with the proceeds of the loan described in the attached VA Form 26-1820, appear to have been completed in substantial conformance with related contracts.”

COLLATERAL/ PORTFOLIO LOANS

Hindsight often gives us different perspectives and allows us to see things in the past more clearly. Much is written in hindsight about the cause(s) of the financial crisis of 2007/2008. There are many theories that it’s cause was the extensive use by lenders of subprime financing.

Subprime lending carries many definitions. Investopedia defines subprime lending as the practice of lending to borrowers with low credit ratings and higher interest rates due to relatively high default rates. Subprime lending also was chalked full of predatory features like teaser rates and prepayment penalties.

Subprime lending is viewed as having contributed to the 2007–2008 financial crisis, due in part to the phenomenon of securitization. [1]

But there also existed a non-traditional lending practice that carried a significant impact on the financial crisis that was not considered a subprime product. That was the practice of lenders making available collateral loans to all risk ranges of borrowers.

Collateral loans were loans in which the traditional practice of determining a borrower’s ability to repay (ATR) was deemed to not be necessary because properties (collateral) were appreciating very rapidly in many areas of the country. From a risk management perspective, lenders did not determine ATR because in the event of foreclosure the appreciation of the collateral for the mortgage (the property) would protect the lender from loss.

Collateral loans allowed lenders to relax their strict lending policies and offer customer friendly mortgages that in come cases were no-doc (no documentation) and low-doc (very little documentation) thus allowing customers to get loans without the burden of proof of ATR.

The financial crisis caused housing prices to fall and, in many instances, borrowers simply walked away from their homes because collateral loans, based on expected appreciation, left borrowers owing more then the value of their homes.

Nevada experienced the biggest drop during the recession, with a 60 percent decline in home prices.[2]

PORTFOLIO LOANS

A portfolio lender uses its own money to grant loans and does not sell its loans to institutional investors. The two largest investors in mortgages, Fannie Mae and Freddie Mac, buy only loans that meet their strict underwriting standards because they want to minimize risk for their investors. Borrowers who don’t meet Fannie and Freddie guidelines may want to turn to a portfolio lender.

Portfolio lenders are likely to be smaller, community banks with more flexible lending standards than conventional banks. They invest in communities and relationships, so they can make decisions based on more than the answers on a borrower’s application. They can consider intangible factors, too, and may grant mortgages to people with blemished credit with whom they’ve had long-standing relationships.

But portfolio lenders do not offer all the loan programs that large commercial banks do. Some may not offer the 30-year fixed-rate mortgage but can grant a 15-year fixed-rate mortgage or an adjustable-rate mortgage that matches up well with the investment strategy of the institution. Also, a portfolio lender will often require that the borrower have his money and accounts with them.[3]

Portfolio lenders use their portfolios for different types of lending such as commercial as well as residential loans. They also may use it to comply with the Federal Community Reinvestment Act (CRA) which since 1977 encourages lenders to meet low-income neighborhood needs.

[1] https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

[2] https://www.corelogic.com/downloadable-docs/corelogic-peak-totrough-final-030118.pdf

[3] https://www.bankrate.com/glossary/p/portfolio-lender/

 

 

The statement must specify the:

• work done or to be done,
• purchase price or cost of the work and material, and
• purchase price or cost does not exceed the reasonable value.

[1] https://www.benefits.va.gov/WARMS/docs/admin26/handbook/ChapterLendersHanbookChapter7.pdf

ELLER FINANCING

Seller financing is best thought of as the seller acting as a lender instead of a buyer seeking financing through traditional sources such as a bank, credit union, mortgage broker or mortgage banker. There are a number of circumstances that might dictate this type of rare sale.

From the buyer’s side

• The buyer may not be able to get regular financing from a lender because they are unqualified
• The buyer may want a lower cost option where the closing costs are less than a bank
• There may be a need for a quicker transaction to provide access to the property in a shorter timeframe then the lender process
• The property may not meet property standards required by lenders but the buyer still wants the property
• The property may be in a geographic area where traditional financing is not readily or competitively available

From the seller’s side

• The seller may not need the proceeds or cash right away in the home sale
• The seller may not want to do the repairs required by a traditional lender (As Is)
• The seller may not want to remove an outbuilding such as a mobile home on the site
• The seller can get a higher rate of interest providing seller financing making the note a good investment
• Like the buyer, the seller may want a quick transaction
• Seller financing may give the seller a competitive edge in selling the property

GENERAL CONSIDERATIONS

• Both parties should have legal or real estate representation
• Financing terms typically favor the seller
• Financing is not typically long term (a couple of years) with a balloon feature that require buyers to refinance and pay the seller off
• Buyers must ensure that documentation provides credit for downpayment and built up equity
• Buyers must ensure themselves that the seller can legally provide seller financing and that the property isn’t encumbered by a mortgage prohibiting seller financing sale
• Seller transactions typically require a downpayment just like a traditional lender

These listed examples are just a few of the many motivations of the buyer and the seller electing the use of seller financing. This financing method typically accommodates a method of sale and is not a preferred long-term financing option due to higher rates and balloon options.[1]

Affordable Housing Programs

USDA: AKA Rural Development

The US Department of Agriculture provides government assistance in rural areas throughout the US. Its objective is helping improve the economy and quality of life in rural America. Through their programs, it helps rural Americans in many ways:

• It offers loans, grants and loan guarantees to help create jobs and support economic development and essential services such as housing; health care; first responder services and equipment; and water, electric and communications infrastructure.
• It promotes economic development by supporting loans to businesses through banks, credit unions and community-managed lending pools. It offers technical assistance and information to help agricultural producers and cooperatives get started and improve the effectiveness of their operations.
• It provides technical assistance to help communities undertake community empowerment programs and from a housing perspective it helps rural residents buy or rent safe, affordable housing and make health and safety repairs to their homes.[2]

Rural Development (RD) programs give individuals the opportunity to buy, build, repair or own safe affordable housing. Eligibility for these loans, loan guarantees and grants are based on income and the average median income for each area.

Rural Development loans are made directly through the USDA. They are also made by USDA approved lenders through loan guarantee programs. (This course will highlight these two programs which can vary by state.) [3]

Single Family (Direct Housing Program) Loans: AKA Section 502 Loan Program

• Safe, well built affordable homes for “very-Low and low-income rural Americans”
• For families or individuals
• Purpose: to buy, build, improve, repair or rehabilitate a rural home as a permanent residence
• Population: up to 35,000
• Loan made directly to the borrower
• LTV up to 100% of market value or cost
• Loan terms of 33/38 years
• Applicant may be eligible for a payment assistance subsidy on the loan

[1] https://www.investopedia.com/articles/mortgages-real-estate/10/should-you-use-seller-financing.asp

[2] https://www.rd.usda.gov/about-rd

[3] https://www.rd.usda.gov/files/RD_ProgramMatrix.pdf Direct Program Applicants must:

• Be without decent, safe, and sanitary housing
• Be unable to obtain a loan from other resources on terms and conditions that can reasonably be expected to meet
• Agree to occupy the property as your primary residence
• Have the legal capacity to incur a loan obligation
• Meet citizenship or eligible noncitizen requirements
• Not be suspended or debarred from participation in federal programs

Single-Family Housing Guarantee Program for Approved Lenders

• To assist low- to moderate-income applicants/household buy their homes by guaranteeing loans made by private lenders
• For Families or individuals
• For the purchase of a new or existing home or refinance an existing Rural Development guaranteed or direct loan
• Rural area also defined with population limits up to 35,000
• The loan is guaranteed to an approved lender and not a direct loan with Rural Development
• Terms: 30-year fixed. The interest rate is negotiated between lender and borrower. Loans up to 100% of market value plus the amount of the up-front guarantee fee being financed.

Who may apply for the Guarantee Program?

Guarantee Applicants must:

• Meet income-eligibility.
• Agree to personally occupy the dwelling as their primary residence.
• Be a U.S. Citizen, U.S. non-citizen national, or Qualified Alien.
• Have the legal capacity to incur the loan obligation.
• Have not been suspended or debarred from participation in federal programs.
• Demonstrate the willingness to meet credit obligations in a timely manner.
• Purchase a property that meets all program criteria[1]

HUD Revitalization Program[2]

Good Neighbor Next Door

Law enforcement officers, pre-Kindergarten through 12th grade teachers, firefighters and emergency medical technicians can contribute to community revitalization while becoming homeowners through HUD’s Good Neighbor Next Door Sales Program.

HUD offers a substantial incentive in the form of a discount of 50% from the list price of the home. In return you must commit to live in the property for 36 months as your sole residence.

How the program works:

Eligible Single-Family homes located in revitalization areas are listed exclusively for sale through the Good Neighbor Next Door Sales program. Properties are available for purchase through the program for seven days.

• Revitalization Areas are HUD-designated geographic areas authorized by Congress under provisions of the National Housing Act. Revitalization Areas are intended to promote “the revitalization, through expanded homeownership opportunities, of revitalization areas.”

The criteria for designating an area as a Revitalization Area relate to:

• Household Income,
• Homeownership Rate, and
• FHA-insured mortgage foreclosure activity.

HUD-owned single-family properties located in a Revitalization Area are eligible for discounted sale through special programs, including:

[1] https://www.rd.usda.gov/resources/publications/fact-sheets
[2] https://www.hud.gov/program_offices/housing/sfh/reo/abtrevt