Underwriting Update for Financing of Investment Property with Fannie Mae

Last Friday, when Fannie adjusted the allowance for the amount of financed properties owned from 4 to 10, other underwriting requirements on investment and second home borrowers were updated as well.  (Freddie Mac still has the 4 financed property limit).

Reserve requirements vary depending on the number of financed properties owned (including primary residence):

1-4 financed properties 0wned:

  • 2 months of reserves on the subject property if it’s a second home.
  • 6 months reserves on subj. property if it’s an investment property plus 2 months reserves on each other second home or investment property.

5-10 financed properties owned:

  • 2 months of reserves on the subject property if it’s a second home.
  • 6 months of reserves on the subject property if it’s an investment property plus 6 months reserves on each other financed second home or investment property.

Note:  Freddie Mac’s guidelines are *currently* 6 months PITI.

Other underwriting changes for investment properties include:

  • 70% LTV for purchase of 1-unit and 70% for 2-4 units.
  • 720 minimum low-mid credit score. 
  • No history bankruptcy or foreclosure in the past 7 years.
  • Rental income must be documented with two years tax returns.
  • Borrowers required to sign form 4506 (which you can expect on ALL loans these days–including owner occupied).

Don’t forget that there is a significant price hit of 0.75% to fee from Fannie and Freddie with investment properties on top of the credit score/loan to value adds (LLPA).    Seller contribution is limited to 2% of the sales price with investment property.

When your financing evaporates, do you lose your earnest money?

This is not legal advice. For legal advice, consult an attorney, not a blog.

In this challenging market, many buyers are discovering that their loan program is no longer available. This is a particular problem with new construction, whether condo or house. The buyer signed a purchase and sale agreement (PSA) several months or even years ago. Back then, in the “good ol’ days,” lenders offered a variety of financing options. Some buyers relied on some of the more “aggressive” options (e.g., an option ARM) in order to qualify for the new home. Today, that financing option is gone, gone, gone, and the buyer can no longer afford to buy the property. What happens then?

Well, the short answer is that the buyer loses the money. In almost every new construction contract, the builder’s addendum will note that the financing contingency, if any, is waived within several weeks of signing the PSA (and months or years before closing). Once the financing contingency is waived, then the risk of a failure of financing rests squarely on the buyer. At that point, if financing fails, it is the buyer’s problem, not the seller’s. Accordingly, if the buyer cannot close as a result, then the buyer will lose the earnest money as the buyer is in default of the PSA.

However, there may be more to the contract than what is seen by the untrained eye. There are a variety of state and even federal laws that apply to the sale of property, and in particular new construction. In many instances, these laws create “loopholes” in the contract that allow the buyer to at least arguably rescind the contract. Thus, depending on the terms of the PSA at issue, these laws can be used to exert negotiating pressure on the seller to at least return some of the earnest money.

Certainly, a buyer should not rely on these laws when signing the PSA originally. Every buyer should be aware of the risks and obligations created by a contract. But sometimes, the buyer’s situation changes (to put “America’s Money Crisis” mildly) and the buyer can no longer perform. Heck, sometimes the buyer may just decide that the purchase is actually a bad idea and not want to complete it. Under those circumstances, the buyer should consult an attorney to determine if there is a mechanism by which the buyer can get some or all of the earnest money back.

Purchase Implosion: Pre-approval letters worth the ink?

Nearly everyone has had a personal experience of a deal falling through via the other side of the transaction not performing. It is hard to swallow when you have no control over the other party or their financing efforts. Especially bad, the call to your client who is in boxes and ready to move within hours. It takes guts to make the call and is character building.

The dreaded phone call: “….hate to bring you bad news, but our transaction has fallen through, and ….”

Chew on this scenario:

A transaction is stopped in its tracks just hours before it is slated to close. Seller has already signed closing paperwork and escrow is waiting for lender documents to have borrower sign and then proceed to close the transaction as scheduled. Escrow is then notified that the deal is apparently dead. Why? Escrow is informed by the agents that buyer’s financing fell through. Buyer’s financing addendum gives the borrower x amount of days to obtain financing, which was written to expire the day of closing. As is tradition, the selling agent provided a pre-approval letter (not pre-qualification) at the time of the offer.

In a sentence in paragraph #2 of the Financing Addendum Contingency (NWMLS Form 22A) it states:

“A letter from the lender generated or dated at or prior to mutual acceptance shall not constitute a letter of loan commitment which complies with this paragraph.”

1) Should the listing agent and seller fight for the earnest money?
2) What do you find would be some of the transaction management pitfalls that could have been avoided?
3) Is the buyer fully in compliance or did they fall short of a duty to act in a timely manner. Time is of the essence.

Buyer's question at signing

A recent buyer asked us at signing (a day or two prior to closing):

“I’ve noticed that the fees charged by my loan officer are about $1,600 more than my Good Faith Estimate. I recall only being charged 1% loan origination. Is there any explanation for this?”

What are the re-disclosure laws (both state and/or Federal)? Obviously, this buyer was a bit under pressure and did not want to create waves to delay the purchase.

The Baby or the Bathwater



Are we throwing out a program that works, the FHA Down Payment Assistance Program, in this case the baby, while trying to fix the sub prime mess, the bathwater? I guess it all boils down to how valuable home ownership is and how well it helps drive a healthy economy.

A lot of realtors, including myself, have used an FHA non profit down payment assistance program (NDPA) with borrowers that want to own a home but can’t save a down payment fast enough to keep up with rising home prices. FHA programs, like Nehemiah or AmeriDream,  allow more options for buyers, including the gifted down payment portion, and now that zero down payments are hard to find, this program is needed even more. 

The non profit down payment assistance programs are going to be stopped in February unless Congress votes to extend the program.  In the HUD Appropriations bill, congressional members are being influenced by a study done by HUD that shows that the default rate from the non profit down payment programs is 1% higher than other down payment assisted loan programs. 

However, there is a further study by George Mason University that contradicts the HUD study and calls into question the validity of that statistics.  For instance, the HUD sampling was limited to four  US cities that had a higher than normal use of the programs and decreasing home values. Because of this study, the bill extending the programs may not pass.

The George Mason University study as well as the HUD bill is available by emailing me.  It is long and takes time to get through, but here are the key findings, extremely edited!
1.  627,000 NDPA loans in 5 years.
2.  National economic benefits as a result of these loans in the same time period is 4 times the estimated costs.
3.  Those using this program had total wealth growth of 9.6 billion of this period.
4.  NDPA homeowners contributed 228 million in property taxes in that time period.
5.  NDPA homeowners generated 7293 jobs just in using more utilities due to their home ownership
6.  Spending on household items created 60794 jobs, 1.8 billion in personal income, and 5.8 billion in total economic output.
Senator Patty Murray has voted against this bill possibly because of the influence of the HUD study.  I hope she changes her mind. Since over 95% of all homebuyers using this program have not defaulted, we would be punishing those hopeful buyers and throwing out a wonderful and productive program.

How are condo/home sales being financed?

I don’t know about you, but I’ve been chomping at the bit to know how people who are buying, are financing these purchases.  It’s a monumental task to wade through the detail on this. I probably should have waited a week to get all of the September closings into the mix from the last few days.  But I just couldn’t wait another day!  The suspense was killing me. 

I used all sales from one city on the Eastside, closings from 8/1 through end of September, purchase prices of $400,000 or less.  For confidentiality reasons, since I am revealing mortgage data, I will not name which city I used.  Too easy to trace some of these to the actual purchaser.  I think it will be important to track over the next 6 months, how these percentages change, particularly with regard to FHA and financing for purchases with less than 20% down.

Here are the results of approximately 60 closings. Another 25 or so did not have the data recorded yet as to the mortgage amount and type.  I’ll pick those up in the next analysis.

1) 41.5% were 20% down or more.  Most exactly 20% down. 

2) 25% were 100% financed. Interesting note: 75% of the ones with 100% financing were done as ONE loan.  No second mortgage. So PMI may be back in a big way.  (private mortgage insurance instead of a high rate 2nd mortgage, for the amount financed representing over 80% of the purchase price.)  unless these programs waived PMI.  In any event, one loan and not two, as has been customary for quite some time now.  Big shift.

3) 15% were 10% down.  75% of those were also done as one 90% loan and not two, as in 80% and 10%.  Again…big shift.

4) 10% were 5% down.  Half done as one loan, and the other half done as two loans.

5) 5% were cash purchases.

6) 3.5% were FHA.  The amount financed on these were both 98.4% of sale price, and not 97%.  Important to note, as we tend to say that FHA is 3% down, but it really doesn’t work quite that way in reality.  One was sale price $274,000 with a financed amount $269,766.  The other was sale price $213,000 and financed amount $209,709.  More like 1.6% “down”.  I vaguely remember this from “the old days” but time for everyone to get up to speed on FHA and review some actual closing statements regarding how FHA really works at the end of the day.  While only 2 of 60 were financed using FHA, we should be seeing many more of these.  So we all need to get a lender in to explain FHA financing to the agents, in minute detail, with real closing statements as samples, NOT GFEs!

The under $300,000 market looks good with a 3 month supply in escrow…but something tells me a lot of these won’t close, due to financing, unless a lot of agents get up to speed on how to finance these really, really FAST!  Inventory also looks OK, with less than twice that amount on market, but if we can’t close out those in escrow, there’s not much hope for the existing inventory either, especially if 2/3rds of those in escrow come back on market…which they easily could.  I say at least 1/3 of these will not close.  I’m thinking it will actually be half to 2/3rds that will not close.  Mainly because in escrow represents three times the average per mo. that closed in the last two months!  So my guess is that many of these are in closing date extensions, trying to figure out how to finance.

The key to the next six months will be everyone getting totally up to speed on FHA and FAST!  If the low end can’t move in the first quarter, because agents don’t understand FHA or alternative financing, 2008 is in big trouble.  Old saying: “As goes the low end (in the 1st quarter), so goes the year.”

I’m pushing all of our agents in that direction, to help the industry and consumers.  Focus on the low end and totally “get” how to finance it, for people with little money down.  The better we handle this, the better the market will be.  Every broker should be having seiminars on FHA and minimum down financing, and not waiting to see how the market does without our influence.  The best agents need to go down to the low end price-wise, and focus on helping this market move, and not leaving the cheap seats to those least qualified to juggle the financing piece of this low end market.

Fewer sales failing on financing in the under $400,000 market will be THE key to Seattle’s holding on to its preferred market position nationally.  Don’t let Seattle down.  Roll up your sleeves and get down there where it really matters.  The first time buyer market.  DO NOT leave that market to inexperienced newer agents, without a lot of support.

It’s a darned shame escrow can’t intervene and help with this too.  Not a good time for them to be “neutral parties”.  They are the ones with first hand knowledge of which lenders are closing, and which aren’t.  I’ll give you a few clues:

Bank of America closed about 20% of the zero down, one loan, 100% financing.

Wells Fargo closed about 15% of the zero down, two loan 100% financing.

Countrywide, First Horizon, American Mtg Network, Choice Lending, Gn Mtg LLC, Mortgageit Inc., Planet Financial, Mtg. Network Svcs., Liberty Financial, Rainland – all of these closed one or more those 100% financed in the last 60 days.  FHA – Wells Fargo.

I’m not recommending these lenders, and don’t even know many of them.  Just reporting who seems to be getting the job done.  I’ll try to pick up the last week of September, those not yet updated in the County records data, in a week or so.

Phinney Neighborhood annual home fair, Sunday, Jan 28th

Phinney Neighborhood Center is hosting their annual home fair this weekend. This is a wonderful event with a lot of great information about home upkeep, upgrading, and overall design concepts. Several builders and architects attend this event and provide their expertise in a comfortable environment. One of my clients, Kirk Jolley, of Kirk Redo is usually in attendance as an exhibitor. He’s got great woodworking and finishing skills as I’ve seen his personal residence that he rebuilt after a former owner’s long neglect and I’ve seen many of his client projects, including the floor of my own home office – and he’s a great guy too! I’ve also volunteered in the past to help at the event as a member of the Phinney Neighborhood Association but sadly can’t make it to this year’s event. However, I do believe it is a great opportunity for people that are considering making changes to their home in the coming year to start getting educated about the process and to get some wonderful design ideas.

HOME DESIGN AND REMODEL FAIR : Imagine, Explore, Build
Sunday, Jan. 28, 2007, 10 a.m. – 4 p.m.
Phinney Neighborhood Center, 6532 Phinney Ave N.
Admission: $5 for PNA members, $8 for the general public, children under 12 Free

The 10th annual Home Design and Remodel Fair will offer local homeowners a chance to meet with trained professionals and get advice on remodeling and home improvement projects.

More than 75 exhibitors ranging from general and specialty contractors to landscape professionals to architects and designers will be on hand to offer advice and resources needed to complete any home improvement project. Many of the exhibitors have a “green” emphasis.

Presentations will also be featured throughout the day. Topics include everything from choosing a contractor to stocking your toolbox.

The presentation schedule includes:

10:30 Choosing & Hiring a Contractor
11:10 Remodeling for Resale Value
11:50 Financing Your Remodeling Project
12:30 Working with an Architect

12:45-1:15 in the Blue Room
Q&A with Around the Home & More KOL Radio hosts Kevin Liger & John Kappler

1:20 DIY Mini Home Inspection
2:00 Making the Most of What You’ve Got
2:40 Tools for the Homeowner
3:20 Design/Build: What is it?

Cocktail Party Primer

I’d like to open this thread up to a conversation on the health of the Seattle market…

but there is a catch. I will not allow it to dissolve into a conversation about racism, liberals, RCG, or faith. If you’d like to have a reasonable intellectual conversation, you are more than welcome to participate. If you attack me, RCG, or any contributor, then I’ll happily delete your comment.

By the way, please consider this post the “anti-linkbating” post. Not only will I quickly delete any off topic comments, but more importantly, I will mark those comments as “spam”. That will allow me to ban your email, name, IP, etc. from the site after only a few off-topic comments.

Two days ago, Michael Lindekugel of Team Reba made a very interesting comment. No one ever challenged him on the merits of his argument, so I think it makes an appropriate starting point into a discussion on the health of the Seattle market:

It’s the hot topic at most cocktail parties. Is Seattle going to experience a bubble and burst? The short answer is no…..the long answer follows:

We experienced a busy market with a shortage of supply and increasing demand resulting in four or five offers and short “Days On Market