Short sales, foreclosures and new construction homes all have caveats that need to be considered when pursuing financing.
If the guidelines and potential pitfalls are not properly understood, you could face delays in closing or potentially even a denied loan.
Short Sales & Foreclosures -
Short sales and foreclosures are everywhere. They often represent great value when looking to by a new home.
However, they also present a unique set of problems that homebuyers need to be aware of and plan for.
1.) Property Condition
Typically, when homeowners are facing foreclosure or looking to short sell their house, it means they lack the financial means to pay the mortgage or maintain the property.
A property in poor health can cause many financing issues for traditional financing. FHA loans have specific rules requiring that the property is move-in-ready, unless you’re using a 203(k) Rehab Loan.
2.) Timing Challenges
Short sales typically come with awkward timeframes for purchase contract approval and loan closing.
Each bank is different, but approval can take anywhere between a week to 120 days. As a general rule, the larger the bank the longer it takes to get short sale approval.
The lack of a set timeframe for short sale approval makes the timing of loan submission, rate locks and closing very challenging. You have your approval conditions cleared to close on time, just to find out that new appraisals, income, employment and asset verifications need to be updated by an underwriter to cover the most recent 30 days. Worst case, purchase contracts and legal documents may have to be re-submitted to a bank for an updated approval.
Either way, be prepared for a lot of redundant paperwork when purchasing a short sale property.
Home buyers looking to purchase new construction using FHA financing will have more hoops to jump through than those purchasing through conventional (Fannie Mae / Freddie Mac) financing.
If you want to use FHA financing to purchase new construction then you need to be aware of a number of issues that can trip you up.
First, you MUST have a certificate of occupancy (C.O.) certifying that the property is complete and move-in-ready. If you do not have this then you typically CANNOT go FHA. You’ll need a renovation loan, but a FHA 203K WILL NOT work.
You’ll need to employ the Fannie Mae HomeStyle for a property without a C.O.
In addition to the C.O. you’ll need some combination of the following documents as dictated by your lender and your unique situation:
- Builder’s Certification
- One Year Builder Warranty (10 YR Warranty may be required)
- Termite Inspection (when applicable)
- Septic Inspection (when applicable)
- Well Test (when applicable)
- Construction Permits
There are a number of factors which go into exactly what combination of documentation will be required to satisfy your lender and FHA, so it is best to work with an experienced loan officer when purchasing new construction with FHA financing.
If you plan on using conventional Fannie Mae / Freddie Mac financing you’ll still have hoops to jump through, just not as many as FHA. You’ll also have a higher down payment requirement and the credit qualification guidelines tend to be stricter.
Whether it be FHA financing, conventional financing or renovation financing, it’s important to have a qualified home buying team in place that can lead you through the maze of paperwork and negotiations.
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The VA Funding Fee is an essential component of the VA home loan program, and is a requirement of any Veteran taking advantage of this zero down payment government loan program.
This fee ranges from 1.25% to 3.3% of the loan amount, depending upon the circumstances.
On a $150,000 loan that’s an additional $1,875 to almost $5,000 in cost just for the benefit of using the VA home loan.
The good news is that the VA allows borrowers to finance this cost into the home loan without having to include it as part of the closing costs.
For buyers using their VA loan guarantee for the first time on a zero down loan, the Funding Fee would be 2.15%.
For example, on a $150,000 loan amount, the VA Funding Fee could total $3,225, which would increase the monthly mortgage payment by $18 if it were financed into the new loan.
So basically, the incremental increase to a monthly payment is not very much if you choose to finance the Funding Fee.
Under VA’s founding law in 1944 there was no Funding Fee; the guaranty VA offered lenders was limited to 50 percent of the loan, not to exceed $2,000; loans were limited to a maximum 20 years, and the interest rate was capped at 4 percent.
The VA loan was originally designed to be readjustment aid to returning veterans from WWII and they had 2 years from the war’s official end before their eligibility expired. The program was meant to help them catch up for the lost years they sacrificed.
However, the program has obviously evolved to a long term housing benefit for veterans.
The first Funding Fee was ½% and was enacted in 1966 for the sole purpose of building a reserve fund for defaults. This remained in place only until 1970. The Funding Fee of ½% was re-instituted in 1982 and has been in place ever since.
The Amount Of Funding Fee A Borrower Pays Depends On:
- The type of transaction (refinance versus purchase)
- Amount of equity
- Whether this is the first use or subsequent use of the borrower’s VA loan benefit
- Whether you are/were regular military or Reserve or National Guard
*Disabled veterans are exempt from paying a Funding Fee
The table of Funding Fees can be accessed via VA’s website – CLICK HERE
The main reason for a Veteran to select the VA home loan instead of another program is due to the zero down payment feature.
However, if the Veteran plans on making a 20% or more down payment, the VA loan might not be the best choice because a conventional loan would have a similar interest rate, but without the Funding Fee expense.
The best way to view the VA Funding Fee is that it is a small cost to pay for the benefit of not needing to part with thousands of dollars in down payment.
* Disclaimer – all information is accurate as of the time this article was written *
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