Short Sales Are Anything But Short
When it comes to short sales, the biggest complaint among home buyers, sellers, Realtors and mortgage lenders is unanimous – it takes too long.
Recently, some senators proposed a bill addressing the issue of short sales timelines. The legislation, also known as the Prompt Notification of Short Sale Act, will require a written response from a lender no later than 75 days after receipt of the written request from the buyer. The lender’s response to the buyer must specify acceptance, rejection, a counter offer, or a need for extension with an estimation of when a decision will be reached. The servicer will be limited to one extension of no more than 21 days. The bill will also allow the buyer to be awarded $1,000, plus “reasonable” attorney fees if the Act is violated.
Short sales occur when the seller has negative equity in the property and the existing lender/servicer agrees to accept a payoff amount less than the amount owed, thus enabling a sale of the property rather than pursuing lengthy and costly foreclosure proceedings.
While I think the proposed legislation is needed, I would like to see a shorter time requirement and a more severe penalty for non-compliance. Short sales and foreclosures still account for about half of all purchase transactions.
FHA Mortgage Insurance Costs to Rise, Again!
The popularity of FHA financing has soared in recent years due to the down-payment requirement of only 3.5 percent of the purchase price. The appeal of this program has been to first-time homebuyers that were previously prohibited from buying due to higher down payment requirements and higher home prices.
Last fall, Congress opted not to extend the temporary higher loan limits of $729,750 in designated high-cost markets such as Orange County for “conventional” loans being sold to Fannie Mae and Freddie Mac. With the rollback of conventional financing limits to $625,500, that left FHA loans to fill the gap between $625,500 and $729,750.
While FHA loans can still be had up to $729,750, the cost of the FHA Mortgage Insurance is about to increase for loan amounts above $625,500. It was increased last year too.
How Much Does FHA Mortgage Insurance Cost?
FHA Mortgage Insurance comes in two parts. First there is an “upfront” premium of 1 percent of the loan amount. This premium is tacked on to the loan amount. For example, on a loan of $729,750, the upfront premium is $7297.50 making the total loan amount $737,047.
Secondly, there is the “annual” mortgage insurance premium that is being increased from 1.15 percent to 1.40 percent of the loan amount. On a loan of $729,750, the monthly cost of the insurance rises to $851.38.
FHA loans are insured by the federal government against default by the borrower. The increase in premium is designed to bolster the FHA’s reserves, so it would appear that they are bracing for more defaults in the future. Analysts claim the higher annual premium will reduce demand for FHA jumbos and push more borrowers to seek out private jumbo loans, which is probably true.
Private Mortgage Insurance
Conventional loans by contrast, are insured with private mortgage insurance (PMI) which is less costly, but requires a larger down payment of 5 percent to 10 percent depending on the loan amount and the guidelines of each private insurer.
Conventional loans sold to Fannie Mae and Freddie Mac and FHA loans insured by the government account for over 95 percent of all mortgages originated in the U.S. Loans that are larger than the Fannie Mae, Freddie Mac and FHA limits are considered “jumbo” loans. Since the mortgage meltdown a few years ago, there is no longer a secondary market in which lenders can sell jumbo loans. Therefore, each jumbo lender can set its own requirements. Interest rates are always higher for jumbo loans, and they require a down payment of at least 20 percent.
While I think that there should be some premium to be paid to offset the higher risk due to exceptionally low down payment requirements, the government’s actions aren’t supporting housing prices in a time of need. Housing, along with employment, are the keys to an overall economic recovery.
Which is the Better Program?
An experienced mortgage originator should review and compare all of the options with every homebuyer to help guide them to the best program. There are many variables to consider, such as down payment, credit scores and others that could make one program more or less advantageous than another.