Rosemary Lankawel on How to be a Short Sale Buyer

Plan Summary: Renovation loan products are designed to provide financing for the repair, remodeling, restoration or rehabilitation of existing homes. The loan includes purchase, or refinance, and repair money in one transaction. It is the combination of a construction loan and a permanent mortgage. We provide acquisition or refinance funds at closing in the same manner as traditional mortgage finance. At the same closing, we deposit renovation funds in an escrow account similar to that used in a traditional construction loan. The Renovation Loan is a fully funded loan with one closing. Repairs are done subsequent to the closing. There is no requirement for a Certificate of Occupancy on the day of closing. As repairs are completed and inspected, draws are disbursed from the renovation escrow account to fund the project.

• Eligible Borrowers: Credit Qualified Owner Occupants (1-4 family properties), and Investors (1 family only).
• Eligible Property: One to four family residential homes. Certain mixed-use (residential & commercial space) property will qualify. Please call for details.
• Eligible Improvements: These will be different depending on the product that will best fit the applicant’s needs. The Standard or Full FHA 203(k) has a minimum requirement of $5,000 in eligible repairs. Eligible repairs include items such as structural renovation, windows, systems (heat, electric) roof, in addition painting and other cosmetic improvements can be financed. The FHA 203(k) Streamline program has no minimum but does have a maximum amount of repairs of $35,000. The Streamline program only applies in certain circumstances. There are  many ineligible improvement categories and situations. (Please call for more details) Our conventional products have no minimum requirement for repairs; however, repairs (both hard and soft costs) should not exceed 50% of the property’s after-improved value.
• Property Analysis: Sales Price + Total Repairs should be less than or equal to the After Improved Value of the property. It is very important to work with qualified numbers. The repair number should come from someone who has inspected the property and is qualified to estimate the amount of repairs necessary. Please contact a contractor, inspector or HUD Consultant to help you with the repair estimate. The After Improved Value should come from a real estate professional that can look at a comparative market analysis (CMA) of similar properties in good condition.

If the numbers are not working there are options to consider.

1. Will the sellers reduce the sales price?
2. Can the plan for renovation be re-worked to reduce costs? Reduce the scope ofrepairs or quality of materials. (Use Formica instead of marble or corian for the kitchen counters)

Choosing a Contractor: You must use a qualified contractor*. Choosing a qualified contractor with the appropriate experience, licenses and insurance, is the most important choice you will make in assuring that your project is completed according to your plan. We will provide you with a contractor’s profile form that will assist you in reviewing a contractor’s documents and references. Additionally, you must execute a contract with your contractor covering the approved renovation plan and pricing. Please make your contractor aware that you are applying for renovation financing and that they understand the details with regards to the inspection and draw process. We are always available to discuss this with your contractor at any time. *Exceptions can be made if the borrower is a professional cont ractor and/or can justify and document that they have the expertise, time and ability to complete the plan.

You must choose a contractor before you can close on your loan. If you do not have a contractor that you want to work with or have not thought about this, you should start looking now. If you do not know any contractors, ask you friends and family if they know anybody they would recommend. You can also call the National Association for Home Builders (NAHB) 1-800-223-2665 or the National Association of the Remodeling Industry (NARI) 1-800-440-6274. Both groups have affiliated local associations nationwide.

A HUD approved Consultant / Inspector will be referred by the lender to make an appointment with you and your contractor to meet at the property. A list of approved FHA 203(k) Consultants can be found on HUD’s website at  https://entp.hud.gov/idapp/html/f17cnsltdata.cfm .

Plan for Repairs: There are three categories of work that must be considered in your planning process.

1. The work you Must do. The ‘Must do’ are items necessary in order to obtain a Certificate of Occupancy (CO) and close out any permits. All health and safety issues or code violations must be included in your plan.
2. The work you Should do. The ‘Should do’ items will improve your living conditions and possibly the energy efficiency of the house systems. Upgrading the utilities, new appliances, etc. These may not be required but if they fit your qualification and the values in the property you should consider them. 
3. The Wish List. Consider your ‘Wish List’ last. You should only consider a wish list if there is room in your qualification, budget and the values. As long as it’s feasible, you may include any items that will remain as a permanent fixture of your property.

The plan is the PLAN. When a decision has been made on the final plan for repairs and the final numbers are calculated for the loan amount, this will be the final plan that must be executed during the project. This includes dollars, work, material and all other issues. You cannot change the plan after closing, with the exception of required contingency items; there can be no changes during the renovation of the property.

A contingency reserve will be added to your estimate of repairs. The amount is from 10% to 20% of your plan’s total. These funds are required in the financing and are there for your benefit. Applicable contingency reserve uses: 

1. Unforeseen health and/or safety issues during the construction. 
2. If no health and/or safety issues, funds can be used for additional renovation or cost over runs toward the end of the project.

As a general rule of thumb, you will be able to  draw from the contingency for health and safety issues at anytime during the project, however, additional renovation and cost over runs can be drawn along with your final inspection. 

If changes to the original repair plan become necessary you must submit a ‘change order’ request PRIOR to doing the work. This applies to requesting funds from your contingency reserve. In order to guarantee payment from your escrow, you always must request approval prior to doing the work.

You are responsible for negotiating any agreements or warranties with your contractor. The lender does not provide any guarantee on your contractor’s workmanship

You are responsible for overseeing the work and insuring that it is done as specified in the contract with your contractor. Construction must begin within 30 days from the closing of your loan. Work should not stop for a period longer than 30 days and all work is to be completed within a six (6) month time frame or less.

There are no disbursements for the repairs on the day of closing. Funds are distributed to the seller or to payoff existing liens and to set up your repair escrow. Disbursements can be made from the escrow after the account has been set up in the draw administration department. This can take 5 – 10 business days.

Disbursements can be made from the escrow up to five times. Through a system of inspections and draw requests there can be four interim and one final inspection as disbursements are made from the escrow account. Amounts can based on total line  items or a percentage of completion by line item.

There is no distribution for work or materials up front. You can draw from your escrow for work in place. It is customary in the industry when construction is being financed that funds are disbursed only for work that has been completed. Knowing the project is 100% funded, and that the funds are in escrow account, a contractor will typically go to their supplier for the materials and then as disbursements are made, pay those accounts within the billing period. 

Funds in the repair escrow account can be used only for work that is in the approved plan for repairs.

You request payment for completed repairs on a ‘draw request’ form submitted to the lender. An inspector will visit the property to verify that a percentage of work is complete and has been done in a workmanlike fashion. The draw request is approved and signed by the inspector, contractor and borrower and then forwarded to the lender to process for payment. The lender will issue a check to the borrower and contractor jointly.

There is a 10% holdback on each draw which will be paid after the final inspection. This is designed to protect you from a contractor failing to complete the work. It is also considered an incentive for your contractor to complete the project in a timely manner.

Funds remaining in the escrow account after the work is completed can be used to pay down the principle of the loan or, after approval from the lender; additional work can be done to the property. Funds are only disbursed for inspected work that supports property value.

Documentation needed for your plan: The ‘Specification of Repairs’ is the primary plan document that details the work to be completed, the materials that will be used and an itemized cost sheet. The Specification of Repairs is executed by the HUD Consultant. Your contractor needs to prepare an estimate or bid for the work you are planning. That bid is submitted to the consultant to review the work and the pricing which must agree in the final plan. You should have a termite inspection before or at the same time that your consultant visits the property. Should there be any termite damage, it will need to be included in your plan for repairs. 

Home Owners / Contractor’s Agreement When the plan is finalized you must have acontract with your contractor. Once you have received the final repair plan, review it with your contractor and sign the ‘Home Owners / Contractor’s Agreement’ and the ‘Draw recap Sheet’.  

After Improved Value Appraisal: Once the ‘Specification of Repairs’ plan is complete it will be sent to an appraiser who’s assignment will be to review the repair plan, visit the property and complete a Comparative Market Analysis based upon the size, scope and condition your property as if it were complete.

Maximum Mortgage Worksheet (MMW): This form computes all variables in your transaction and determines the maximum amount you are able to finance. As your variables adjust throughout the process of your loan from estimates to real figures your MMW will also adjust. Your Renovation Loan Specialist will review the MMW with you so you have a clear understanding of the mathematics in the transaction.

Fees: The following fees can apply in your transaction and are financable if you choose. Please be sure to review your good faith estimate and maximum mortgage worksheet in detail. Inspection fees, title update fees, Architectural and Engineering Fees, Independent Consultant fee, Permits and other fees, Plan Reviewer, Supplemental origination fee or draw administration fee.

Lock Procedure: The Operations department will lock your loan 3 days prior to closing unless special lock-in arrangements are made to lock in earlier. The Renovation Specialist will contact the borrower and offer the rate and options from the current rate sheet.

 You are responsible to begin making the mortgage payments starting the first day of the month after one full month following your close. Provided you qualify, you may be able to finance mortgage payments during the construction period of your project. Ask your Renovation Loan Specialist for details.

http://www.irs.gov/newsroom/article/0,,id=205004,00.html

Ten Facts for Mortgage Debt Forgiveness

IRS Tax Tip 2011-44, March 3, 2011 If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.    1.  Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.    2.  The limit is $1 million for a married person filing a separate return.    3.  You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.    4.  To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.    5.  Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.    6.  Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.    7.   If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.    8.  Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.    9.  If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.    10.  Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7. For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov.  A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. You can also use the Interactive Tax Assistant available on the IRS website to determine if the cancellation of debt is taxable. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions Taxpayers may obtain copies of IRS publications and forms either by downloading them from http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676). Links: Form 982 Form 1099-C Publication 4681

This Time We Are Sounding the Alarms

by Steve Harney on October 12, 2011 ·

Occasionally, Steve Harney, our founder and lead content creator, asks us permission to share his personal feelings on a current real estate issue. Today is one of those times. – The KCM Crew

One of the things I often hear from people I meet is that real estate and mortgage professionals should have seen the current housing crisis coming and done something to prevent it. We should have realized that easing lending practices would lead to millions of families buying a home they could never afford. We should have warned our neighbors not to use their homes as ATMs. We should have realized that the economy could never withstand such growth and was about to crash.

Maybe these people are correct. Looking back, perhaps we could have been better stewards of the home buying process. We are committed to not making that same mistake again. Now, if we see a possible challenge in the future, we will speak up. That is what caused the writing of this blog post.

WE MUST SOUND THE ALARMS!

ALARM: Homeownership Percentage Has Dropped Dramatically!!

MSNBC.com, in an article entitled Housing Bust Worst Since Great Depression reported:

“The analysis by the Census Bureau found the homeownership rate fell to 65.1 percent last year… analysts say the U.S. may never return to its mid-decade housing boom peak in which nearly 70 percent of occupied households were owned by their residents.”

ALARM: People Are Losing Hope in the American Dream

In the same article, Patrick Newport, economist with IHS Global Insight is quoted saying:

“The changes now taking place are mind-boggling: the housing market has completely crashed and attitudes toward housing are shifting from owning to renting. While 10 years ago owning a home was the American Dream, I’m not sure a lot of people still think that way.”

ALARM: The Safety and Well Being of the Family Being Sacrificed

If we look at Fannie Mae’s quarterly National Home Survey, as far back as we can go, the top four reasons for buying a home are the same. The top four reasons people buy a home are:

Are children no longer important? Is safety less of a consideration today? Is the pride of homeownership soon to be forgotten? We must look at the long range consequences of being a renters’ society.

ALARM: Building Family Wealth Being Threatened

Let’s look at homeownership as an investment. The Federal Reserve does a survey every 3 years. In 1998 the average Homeowner’s net worth exceeded that of renters by 31 times. In 2001 it was 36 times and eventually in 2007 it was all the way up to 46 times that of renters. Now, homeownership isn’t about a guaranteed financial short-term return – the market goes up, down and back up again. We have to be prepared for the long-term and a key component to wealth is homeownership. Even in these toughest of times, the wealth of the homeowner is over 30 times that of renters.

At a time when we are discussing the gap in wealth between the top 1% and the other 99%, how does the less fortunate paying rent to pay off the mortgages of the more fortunate make any sense?

Bottom Line 

Homeownership is important to the American family. If we lose this as a basic concept, what else do we lose? We didn’t realize the consequences when it was too easy to buy a house a few years ago and we are paying a price for that. We will pay an even larger price if we don’t realize the consequences of it being much too difficult for many to own a home today. SOUND THE ALARMS!