Out: Exotic Loans, 100% financing; In: FHA, VHDA!

FHA is back with a vengeance. It's a key tool in the current lending environment for getting buyers qualified with only a 3% down payment (with gifts permitted in certain circumstances.) There are a few extra hoops to jump through, but I find more and more buyers are utilizing FHA now that the lending limits have been increased in our area.

The Virginia Association of REALTORS has this webcast "Mortgage Lending in 2008: Back to the Future, How FHA can help you and your clients," for agents, but I think it provides a good overview of FHA for anyone thinking of buying. At about an hour, it's a bit long, but worth it.

Some Restrictions on Condos
FHA won't work in some instances, though. Sometimes condos--especially new construction--gets tough. Condos must be on the FHA-approved list to qualify. If it's not on the list, it's still possible to get a spot-approval, but it must meet certain other criteria, e.g., more than 60% owner-occupied, which sometimes is problematic with condos. Some of the criteria may be streamlined as part of an expected upcoming FHA modernization, though, so stay tuned.

VHDA Loans
Another great option for first time buyers in our area are programs through VHDA (Virginia Housing Development Authority), which provides a variety of low-interest loan programs and low-down payment options for buyers who meet certain maximum income limits and property price restrictions. You also must not have owned a home in the previous 3 years unless you're buying in a designated target area, must attend a VHDA-approved educational seminar, and meet certain other guidelines.

Read more: Mortgage Loans: Jumbo, Conforming, FHA, and Jumbo Lights

Read more: Why Don't Fed Cuts Always Cause a Drop in Mortgage Rates?

Read more: What is Private Mortgage Insurance (PMI)?

Want to learn more or have more questions? Attend a free first time home buyer seminar that I teach.

Foreclosure Risks: Title Defects

One risk of buying an REO (bank-owned) property that you rarely hear about is the potential for title issues. Buyers incorrectly assume that since liens are typically extinguished in a foreclosure, that the title is free-and-clear. Not always so!

Let’s discuss the process. Lenders require buyers to obtain title insurance on the property. These policies protect the lender, and if you opt for extended coverage, the buyer. (See my post on how to save money on a title policy on a non-REO purchase here.) The policy protects against defects in the title, competing claims, etc. To issue this insurance policy, the settlement attorney’s office will perform a title search, issue a commitment to insure (sometimes called a binder).

The REO addendum (see post on risks of that addendum here) is usually written such that the bank is protected even if the title they convey isn’t perfect, so you can’t come after them if you determine later that there is a title issue. More importantly, the addendum requires only that they convey insurable title, not marketable title, as is required in the standard Regional Contract. Remember that the addendum trumps the contract, so don’t go relying on that paragraph in the offer that requires marketable title.

What’s the difference between insurable and marketable titles? Marketable means it’s free from threat of litigation. Insurable does not guarantee clean title, but rather simply requires that there is a title insurance company willing to “insure over” the defect. (Ever wonder why bank addenda require that you use their title insurer and settlement agent?)

Why should you care about insurable versus marketable title? Because when YOU go to sell down the road, you won’t have the benefit of that trump card, the REO addenda, nor will you have a settlement attorney in your pocket that will “insure over” defects. It’s possible that the price on an REO deal will be such that you don’t care about the insurable versus marketable difference—but make sure you review, and ask lots of questions about, what is being “insured over,” or you may find yourself paying to cure title defects years later when you sell.

What can a buyer do to protect himself? First, choose your own settlement attorney. Have them perform a title search as quickly as possible to identify any problems early. If the bank insists on using their title company, consider shelling out the few hundred for your own concurrent title search. Many foreclosures have significant title issues, and many bank addendums provide a very tight timeframe for identifying and objecting to them. An example of an issue that might be identified would be if the listing included a parking space, but upon searching the deeds, the bank didn’t actually own the parking spot—how can they convey what isn’t theirs? Second, review that title search and make sure you understand all the possible defects. Finally, buy the best title insurance you can--it's a one time cost at closing that may save you many times more than the cost of the policy.

Read more: Beginning of series on Foreclosure Risks

Resource: A great local settlement attorney - Ekko Title

Search for foreclosures

If you're interested in learning more about REO and foreclosures, or thinking of buying one, I'd love to advise you on the home buying process.

Housing Bill: Senate Amendments Create Buying Incentives

The senate started piling on amendments to a proposed housing bill that, if passed, would add some interesting incentives to buy. Of particular note is a proposed $7000 tax credit (not a deduction--a credit!) to anyone buying a foreclosed home (see my post: "I want to buy a foreclosure.") A credit that size would indeed compensate for some of the risks involved in buying a bank owned property (see beginning of series here.)

For people in a 30ish% marginal percent tax bracket, a $7000 credit is equivalent to about $23,000 of income tax-free--that is 23,333* 30% tax rate = $7000 in your pocket!

Not interested in a foreclosure? That's okay--Senator Ben Cardin wants to give a temporary $7000 credit to all first time home buyers--similar to the measure that has spurred a lot of first time buyers in DC for years--as well. (TBD on whether first time buyers who purchase a foreclosure get $14,000.)

We'll have to keep an eye on this to see if it passes through as-is, but if I were on the fence about buying, $7000 is a nice chunk of change for the government to chip in.

Update 04/08/08: The House plan is proposing an $8000 first time buyer credit, and is good for the next 12 months. The credit would need to be repaid after 15 years. Stay tuned -- this is destined for committee before being passed. So far, this is just a bill, not a law...remember the classic ditty: I'm just a bill...

Read more: Figure out your marginal tax rate, that is, the tax paid on the last dollar earned.

Read more: Risk of buying a foreclosure series starts here.

Read more: Tax Tips for Homebuyers

Read more: Local Classes for First Time Homebuyers