May 2014 Archives


This is a temporary program, launched by President Bush and Congress at the beginning of 2008. Its goal is to prevent as many homeowners as is reasonable from losing their homes through foreclosure. It won't help you if you bought a property that was far beyond your real means, but it is likely to help a lot if you didn't stretch very much.

In order to qualify for FHA secure, you need to have a non FHA ARM that has "reset," which is lender talk for "passed the end of the fixed period, if there was one." FHA Secure probably isn't going to help you anyway if you already have a fixed rate mortgage. The limit on the loan is the current conforming limit ($417,000 unless you're in one of the high cost areas like mine).

FHA Secure mortgages are not like those "free magazine - take one!" offers. You do have to qualify for the mortgage under the normal FHA rules. This means full documentation of income on a fully amortizing loan with a debt to income ratio of 43% in the textbook case. They also have Loan to Value limits of 97.15%. The programs that refinance to 125% of value are different, and require that your loan already be held by Fannie Mae or Freddie Mac. FHA Secure is something that even people who got subprime and Negative Amortization loans are theoretically eligible for.

The ONLY "normal" mortgage qualification that the FHA Secure is willing to overlook is whether you were current on your loan after it hit the adjustable period. You must have been current on your existing mortgage for six months before it hit the adjustable period, but if you made late payments or no payments after the loan hit the adjustable period, FHA is willing to waive the usual requirements to have your loan current. They're even willing to consider your loan if you are currently in default.

Another way that FHA Secure mortgages are different from most FHA mortgages is that there is no CLTV limit, and the FHA will allow secondary financing for FHA Secure loans. The primary form this takes is second mortgages carried by previous lenders for amounts over the FHA limits, either in terms of Loan to Value or absolute dollar value. Be aware that in some states, this is going to change your loan from a non-recourse loan into a full recourse loan.The protections given by non-recourse loans are generally over-rated, but it's something you should be aware of. Since the FHA normally funds up to 97% Loan to Value ratio, and conventional lenders and second mortgage holders don't want to go that high right now, they are not going to agree to fund the difference unless they understand the choice they have is between funding the difference and going straight into foreclosure. For example, let's say you've got a $500,000 loan on a property that you purchased for $500,000 with 100% financing on an interest only 2/28. You still owe $500,000, but the property may only be worth $440,000, and the FHA will only fund to $417,000 until the new limits are implemented. This leaves $83,000 (at a minimum) that the new loan is short. If the prior lender can be convinced that it's a choice between write a loan contract for that $83,000 and go straight to foreclosure, where they'll lose a lot more than $83,000, they may agree to carry that second mortgage. Of course, they also may not. It's their money and their choice, and there's no way to compel them if they won't listen to logic.

FHA Secure is otherwise similar to "regular" FHA loans, and it's not free. There's a funding fee of 1.5% charged up front, and an annualized half a percent charged on a monthly basis. The FHA's "Naughty List" also applies.

FHA Secure is not any kind of a cure-all. You do have to qualify for it as regards both Debt to Income Ratio and Loan to Value Ratio. If you stretched way too far beyond your real means - as evidenced by income documentable by tax returns and W-2 forms - this program is not going to help you. If you were late on your mortgage even before it hit reset, this program is not going to help you. If you're a member of that group that's always with us, people who have lost their jobs, careers, or otherwise seen a decline in income, it may not help you even if you originally qualified full documentation. It's also not going to help you if your loan was for $900,000, which is way over any FHA limit. But if you're a middle class borrower who only stretched a little, figured you'd be okay with a hybrid ARM because of it, and now you're not, this may be the program that saves you.

Caveat Emptor

Original article here

A few years ago, I wrote up a spreadsheet for buying versus renting a home.

I got reminded of it a couple days ago with a nonsense article out of an alleged financial paper, so I went back and found that, yes, indeed, I did still have a copy.

I just uploaded it for those who might want to play with the numbers themselves.

BuyHomevsRent.xls

It's in Excel 97. I suppose I could convert it forward, but my current copy of Excel had no problems with it.

It compares cost of renting and investing the difference versus a home purchase. I wrote three different scenarios into the spreadsheet: Never refinance, refinance every five years but keep making payments with an eye towards having zero balance thirty years after you originally bought, and refinance every five years and make the minimum payment on the new thirty year loan.

The sheet "Front" should be where you start, in case one of the others comes up. You enter your own values for the numbers down the left side of the sheet.

Purchase Price and down payment should be self explanatory
value adjustment was a feature I put in to adjust to what other, equivalent properties might sell for
assumed appreciation of the property
interest rate of the first mortgage (TD=Trust Deed)

interest rate of the second mortgage: given the market at the time, I assumed anything over 80% of value (Lesser of Cost or Market, i.e. lower of appraisal or purchase price) would be on a second trust deed. These days, second mortgages over 90% CLTV are not available.

property tax
yearly property tax increase

monthly cost of Homeowner's Association dues plus insurance (add in things like Mello-Roos payments here too),
Assumed rate of inflation
what it would cost to rent an equivalent property instead

the cost of refinances I wrote about earlier (I assumed a standard closing cost figure - no points, no rebate from yield spread)

your standard deduction on federal taxes based on your filing status. The year I wrote this, the standard deduction for married filing jointly was $10,100. For 2014, if I recall correctly, it's $13,200. If your status is something else, you can look up your standard deduction any number of places. The point is, you get this much of a deduction anyway - it's not accurate giving benefits from the home ownership deduction until you have actually exceeded the deduction everyone gets.

Value of your other federal income tax deductions. Just as it's not accurate giving benefits until you exceed the standard deduction, it's not an accurate comparison to withhold other deductions over the standard amount that you'd get.

Your marginal federal income tax rate - what you paid on your final dollar of income for the year. The spreadsheet does lose accuracy if your marginal rate changes due to the deduction - or would change without it - but that's a small effect and trying to compensate would have been extremely speculative, especially given how much playing with where certain deductions and credits peter out on the income scale.

Finally, the assumed rate of return of an alternative investment into which you would put 100% of the difference between the monthly payments of buying versus renting (as well as the down payment money). Speaking as someone who still had financial planning clients at that point, that's a ridiculously generous assumption, but you might be one of the exceptions.

Caveat Emptor

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This page is an archive of entries from May 2014 listed from newest to oldest.

January 2014 is the previous archive.

September 2014 is the next archive.

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