FHA Lending Tightens Up, Consumers to Consider Residential Hard Money Lenders?

Filed under The Real Estate Market by on April 2, 2012 at 4:14 pm {no comments}

The latest development in the ongoing real estate and finance saga is new, tighter regulations for FHA loans. Will these tighter standards force more consumers to consider residential hard money lenders to fund their real estate purchase?

While the regulations may impact some consumers who could end up turning to hard money as an alternative source of funding, the reality is that the vast majority of those impacted would not be able to qualify for a hard money loan. Yes, that’s right, I’m saying that the borrowers who cannot qualify for an FHA loan based on these new regulations are borrowers, for the most part, who would not qualify for a hard money loan.

Most of those impacted by this regulation are those putting 3.5% down on a home. So they are being financed 96.5% of the purchase price. At that level, the FHA wants to ensure that all their debt is accounted for. Makes sense, especially since the high loan to value loans are typically the most risky. Here’s an overview of the regulations from CNN Money:

Starting April 1, borrowers in ongoing disputes with creditors over debts of $1,000 or more may no longer qualify for FHA-insured loans. Even borrowers with perfect credit scores can be denied over a single $1,000 problem charge.

The change is part of the agency’s effort to reduce its risk as it grapples with a depleted reserve fund that has fallen below legally-mandated levels. The FHA insures mortgages which are originated by private lenders. To help bolster its capital reserves, FHA will also hike the insurance premiums it charges borrowers beginning in April.

The new rule requires borrowers with loans in collection that add up to at least $1,000 to either pay off the debt, prove they’re making payments on the disputed loans or explain why the disputed loan is somehow wrong — and document their case — before they can close on a FHA loan.

Disputed accounts going back more than two years, along with those related to fraud or identity theft, will not count against borrowers, according to the FHA, but lenders must get evidence, such as police reports, that document client claims of identity thefts or fraud charges

(Read the full article here)

So basically they are saying that if you want to buy a home and put only 3.5% down, you have to take care of outstanding issues on your credit report. It makes sense to me. Although this has the potential to slow the housing market some if many borrowers cannot qualify for an FHA loan, it is a risk reduction tactic that can help ensure borrowers are able to meet their housing obligations.

To come back to our original point of these turn down borrowers not being able to qualify for a loan from residential hard money lenders. The reason this is true is not due to the credit, but due to the down payment requirement. While FHA and other conventional loans require credit worthiness to mitigate risk, hard money lenders require equity to mitigate risk. On a residential purchase, a borrower really needs to put down at a bare minimum 30% to obtain a hard money loan. That is unrealistic to many would be home buyers.

Investment Property Purchases Increase, Tight Credit Harms Owner Occupied Buyers

Filed under The Real Estate Market by on March 29, 2012 at 12:36 pm {no comments}

In a recent report, the National Association of Realtors says that investment property purchases have increased over 60 percent. Although investment purchases have increased, financing remains tight for owner occupied buyers. This makes for a slower recovery, as many would be buyers only have hard money loans for owner occupied homes as an option.

NAR’s 2012 Investment and Vacation Home Buyers Survey, covering existing- and new-home transactions in 2011, shows investment-home sales surged an extraordinary 64.5 percent to 1.23 million last year from 749,000 in 2010. Vacation-home sales rose 7.0 percent to 502,000 in 2011 from 469,000 in 2010. Owner-occupied purchases fell 15.5 percent to 2.78 million.

With this increase in investment property purchasing, we may be seeing the end of the down market. This indicates that investors are feeling increasingly confident about the real estate market.

NAR Chief Economist Lawrence Yun said investors with cash took advantage of market conditions in 2011. “During the past year investors have been swooping into the market to take advantage of bargain home prices,” he said. “Rising rental income easily beat cash sitting in banks as an added inducement. In addition, 41 percent of investment buyers purchased more than one property.”

Yun said the shift in investment buyer patterns in 2011 shows the market, for the large part, is able to absorb foreclosures hitting the market. “Small-time investors are helping the market heal since REO (bank real estate owned) inventory is not lingering for an extended period. Any government program to sell REO inventory in bulk to large institutional companies should be limited to small geographic areas. Even where alternatives are needed, it’s best to rely on the expertise of local businesses, nonprofit organizations and government,” he said.
(read the rest of the story here)

Yun continues on to say that many of these purchases were made all cash (49% to be exact), which underscores in part the difficulty many people are having in obtaining financing to purchase property. This is especially true for owner occupied properties.

“Given the tight credit in recent years, many would-be normal home buyers for owner occupancy declined,” Yun said.

So what is a potential buyer to do? One option is to consider hard money loans for owner occupied homes. Hard money has less stringent credit requirements than the banks do. For example, there is no waiting period between foreclosure or short sale and the time when you can qualify for a home loan. The trade off, however, is the requirement to put more cash down (typically 35% or more).

With improving investment purchase numbers, however, and the roll out of new loan programs to help underwater borrowers refinance, we could be looking at a stabilization of the real estate markets in the near future. Most likely any improvement will start on a local level before it spreads, but any improvement is likely to be welcomed by most.

For real estate investors looking to invest in real estate, hard money lending is definitely and option they can explore. While many banks cap the number of properties a borrower may own, hard money has no such limits. In addition, there are fix and flip type loans for investors looking to buy and sell to an end user for a profit.

As credit loosens up, we expect to see some improvement in the real estate markets. I don’t anticipate the large run up in prices like we saw in the early 2000’s (stated loans had much to do with that), but a stabilization is a great start.

Is The Real Estate Market Coming Back Yet?

Filed under The Real Estate Market by on March 21, 2012 at 4:29 pm {no comments}

Is the real estate market coming back yet? That seems to be a common question these days. While money still seems to be tight, there is some movement that would indicate to me that we could be seeing the early signs of a recovery in some areas. That would make sense, as we would expect the prime markets to lead us in a recovery.

According to Neil Shah and Nick Timiraos, The Wall Street Journal; neil.shah@wsj.com:

Real-estate markets are showing signs of life as falling prices spur buyer demand, lifting home sales and new construction from the depressed levels of the past three years. The spring selling season, traditionally the busiest period of the year, appears to be off to its best start in five years. Sales of existing homes in January and February were at their highest level since 2007, according to data out Wednesday, though sales in February edged down by 0.9% from January on a seasonally adjusted basis. the decline in real-estate prices has slowed its pace, making Americans less cautious about spending and potentially more disposed to buy a home.

For the first time since 2005, investment in residential real-estate, including home building and renovation, has contributed to U.S. economic output for the past three quarters.

(Read the rest of the article here)

As we move forward through the year, we should see if this shapes up to be a true recovery. Looking forward, I would expect any recovery to be lengthy, and it could be some time before it reaches some of the hardest hit areas, but a recovery has to start somewhere.

There is still a good sized inventory of distressed homes on the market and coming to market, which may continue to depress the hard hit locations, but with new loan programs being rolled out and other recent events we may really start to see this ease up here in the near future. With a better real estate market, we can likely also look forward to a better overall economy.

Page 1 of 212»