As an investor, it's important to know the details of
HUD/FHA programs so you can deal effectively with buyers
and sellers, particularly in the area of foreclosures.
Owner-occupants have first choice on these properties, but
when repossessed properties don't sell, you can pick up
some real bargains. So, my advice is to study the basic
information I provide in this article, and then gain as
much knowledge as possible from the HUD/FHA web sites. That
way, when opportunities do arise, you'll be ready to seize
them. Basic Information on FHA The Federal Housing
Administration (FHA) is part of the Department of Housing
and Urban Development (HUD).
The purpose of the FHA is to insure lenders who make loans.
Established in the 1930s, this governmental agency's aim is
to make it easier for people to achieve the American
dream—owning a home.
Looking deeper into the purpose of the FHA, you'll find
that its function is to provide mortgage insurance for a
person to purchase or refinance a principal residence. In
other words, the mortgage loans are funded by private
lending institutions (mortgage companies, banks, savings
and loan associations, etc.), and those mortgages are then
insured by HUD.
This arrangement has several benefits for prospective home
owners: Low down payments Low closing costs Easy credit
qualifying
FHA has programs for: First-home buyers Seniors Fixer
uppers Manufactured housing and mobile homes Energy
efficiency, etc.
In this article, I'll look at only three of these
program—the first-time buyer, fixer-upper, and
manufactured housing programs. First-Home Buyer Programs
These programs have the following eligibility requirements:
The borrower must meet standard FHA credit qualifications
(judged by the individual's credit record). The borrower is
eligible for approximately 97% financing. The borrower is
able to finance the upfront mortgage insurance premium into
the mortgage. The borrower will also be responsible for
paying an annual premium.
Within this category, the eligible properties are
one-to-four unit structures. As of this writing, the
highest maximum FHA mortgage is $362,790 while the lowest
maximum amount is $200,160. The 203(k) Program for Fixer
Uppers This program provides loans to allow you to buy or
refinance a property. In the loan, you can also include the
cost of making the repairs and improvements. The loans are
provided through approved mortgage lenders nationwide.
They're available to buyers wanting to occupy the home.
The down payment requirement for an owner-occupant (or a
nonprofit organization or government agency) equals about
3% of the acquisition and repair costs of the property.
There are several steps to obtaining such a loan:
The buyer locates a fixer-upper and signs a sales contract
after doing a feasibility analysis of the property with a
realtor. The contract should state that the buyer is
seeking a 203(k) loan. It should also state the contract is
contingent on loan approval based on additional required
repairs by the FHA or the lender. The homebuyer then
selects an FHA-approved 203(k) lender and arranges for a
detailed proposal showing the scope of work to be done. The
proposal should include a detailed cost estimate on each
repair or improvement of the project. The appraisal
determines the value of the property after renovation.
If the borrower passes the lender's credit-worthiness test,
the loan closes for an amount that will cover the purchase
or refinance cost of the property, the remodeling costs and
the allowable closing costs. The amount of the loan also
includes a contingency reserve of 10% to 20% of the total
remodeling costs. It's used to cover any extra work not
included in the original proposal.
At closing, the seller of the property is paid off and the
remaining funds are put in an escrow account to pay for the
repairs and improvements during the rehabilitation period.
The mortgage payments and remodeling begin after the loan
closes.
The borrower can decide to have up to six mortgage payments
(PITI) put into the cost of rehabilitation if the property
is not going to be occupied during construction, but it
cannot exceed the length of time it's estimated to take to
complete the rehab.
Escrowed funds are released to the contractor during
construction through a series of draw requests for
completed work.
To ensure completion of the job, 10% of each draw is held
back; this money is paid after the lender determines there
will be no liens on the property. Manufactured/Mobile Homes
According to HUD, a manufactured home...
..."is built to the Manufactured Home Construction and
Safety Standards (HUD Code) and displays a red
certification label on the exterior of each transportable
section. Manufactured homes are built in the controlled
environment of a manufacturing plant and are transported in
one or more sections on a permanent chassis." Source
http://www.fha.com
For this segment of the market, many lending institutions
provide conventional and government-insured financing plans
for buyers. The most common method of financing a
manufactured home is through a retail installment contract,
available through a retailer. Some lending institutions
offering conventional, long-term real estate mortgages may
require the homes to be placed on approved foundations.
Manufactured homes are eligible for government-insured
loans offered by the Federal Housing Administration (FHA),
the Veterans Administration (VA), and the Rural Housing
Services (RHS) under the U.S. Department of Agriculture.
Key Point: Study the details of each FHA program carefully
so you're fully prepared to seize foreclosure opportunities
when they occur.
Jack Sternberg
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg's deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com
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