New Mandated Loan Options

The Federal Reserve Board amended the Truth in Lending Act, Regulation Z that is geared prohibiting three main areas of loan office compensation. The new rules which become effective April 1^st is the latest in a long line of regulations that have changed the face of residential mortgage lending over the past several years. The rules, affecting all loan originators, who for compensation, obtains an extension of consumer credit for another person outlaw certain practices. They include basing loan officer compensation on certain terms or conditions except loan amount, being compensated both by the lender and the client for the same transaction, and steering based on the loan officers ability to obtain greater compensation. As a result of these rules, clients are now able to negotiate a pre-determined compensation for acquiring the applicable mortgage loan or agree the lender can compensate the loan originator a preset percentage of the loan that does not vary based on rate.  When shopping for loans, you may hear these options commonly known as “Consumer-paid” option or “Lender-paid” option. The intention of the new rules is simply to have the loan officer’s interests to be better in line with that of their client’s. Unfortunately, certain originators or originator firms had made a practice of directing clients to overall higher cost loans solely for the benefit of extra compensation

While the spirit of the news rules is well intended, the resulting changes will unlikely have a meaningful benefit for the consumer. Several regulations including the Home Valuation Code of Conduct, Mortgage Disclosure Information Act, and the new Good Faith Estimate have been rolled out in the last two years, all with the same goal of helping improve real estate lending practices. In actuality, the new rules have burdened clients with increased paperwork, extra costs, fewer options, and unending regulations from numerous local, state and federal guidelines. Well, what’s so wrong with these new rules? Many consumers have limited home equity which preclude them from benefiting with lower rates by financing the “Consumer-paid” cost option.  Such an option generally would allow a consumer to obtain the lowest rate available. On the “Lender-paid” option, consumers will have less of an ability to renegotiate for lower rates with their originator. When banks compensate the originator a fixed percentage of the loan amount that cannot be allowed to decrease, the originator also is unable to lower their compensation under any circumstances.  While consumers are allowed to increase their interest rate in exchange for a fixed percentage of the loan amount as credit for their closing costs, the broker is not allowed to do the same. The practice of crediting the borrower money from originator compensation at closing to pay for an appraisal,  provide a special incentive, or help client’s  when they are short funds for closing is strictly forbidden.

As with any new policy, there are always unanticipated consequences that must be dealt with. Consumers, along with the originators who help them obtain their needed mortgages will have to adjust to yet another change in the housing industry. Perhaps the results will be more favorable that the current outcome. More than likely this new policy will result in yet another rule that will inundate an already overwhelmed consumer understand how this helps their bottom line.   

Another Option for Homebuyers: 203 (k) Renovation Lending

Prospective homebuyers today have a significant amount of inventory available to them for review. Many markets are flooded with potential foreclosure or short sale purchases that are much more affordable than ever before. However, these homes may often need a full or partial renovation before they are deemed to be in the livable condition required to obtain a standard FHA, VA or Conventional mortgage loan.  For those homebuyers, an FHA 203 (k) may be the right answer for you.

The Federal Housing Administration (FHA) administers the 203 (k) program as part of the Housing and Urban Development Agency (HUD). Buyers can utilize the program in one of three ways: purchase a property, that is resided in by the owner as an “owner occupied property”, as a refinance of existing balance of their current loan on the home they currently occupy while taking out funds to complete applicable repairs, or lastly to purchase a home on another site and move it onto a new foundation and rehabilitate it.

Unlike with standard loan programs, the 203 (k) Rehab loans allows one to qualify based on the future value of the home’s value AFTER the repairs are completed. This is especially vital in areas that a home is in dire need of repair and the other comparable homes support a higher appraised value. Such improvements on the right property can be a great investment for those looking to move to a new area, first-time homebuyers or those who have occupied a home for many years and need upgrades on their residence. For those who currently occupy the residence, most lenders will essentially allow you to “cash-out” the equity in a refinance for such improvements to 97.75% of the home’s equity whereas a typical loan program has limits in place to 80%.  Homeowners unable to reside in the home while work is completed may be eligible to refinance up to 6 payments into the loan while the work is being completed. The eligibility for this program is quite similar for that of a standard FHA loan – meaning a limited or sometimes no down payment needed at all.

The program is extremely beneficial to many in today’s market. However, like everything it has its limitations. Applicable repairs are closely regulated, monitored, and inspected by the bank appraiser for quality and completion of work. Furthermore, repairs are required to be completed by an applicable General Contractor and not by any handyman. Home buyers must own the property and intend to reside in the home after repairs are completed. They must also work with HUD approved 203 (k) Consultant who meets with borrowers to coordinate their wants and needs. The Consultant also evaluates the property to determine which repairs are needed for HUD and Code requirements.  The Consultant often acts as the liaison between the lender, client, appraiser and borrower and whose write up is used by the General Contractor to bid for the job. Rates for the program average about 35-50 basis points above a standard FHA 30 year loan rate, still making the program a must for many applicable homebuyers.