Thanks to Mark Anderson from Pulaski Bank for writing this post! Mark has been a great resource for me and my clients. If you have any further questions about this post or other financing options, please contact him directly. All his info is on his site.

The Missouri Housing and Development Commission, or MHDC, has an excellent new program for buyers purchasing foreclosed homes. First-time and repeat buyers will receive funds up to 20% of the foreclosed property’s sales price, with a maximum of $14,999. This amount can be applied to the purchaser’s down payment and closing costs. The money does come in the form of a 2nd mortgage (as opposed to being a grant), but the loan has 0% interest and is forgiven after 5 years of occupancy.

In order for buyers to qualify, the following conditions must be met:

• In St. Louis City and County the total household income must fall at or below limits based on household size. For one person, the limit is $57,000. A family of two can earn up to $65,150 and still qualify. From there, you can add about $8,000 to this limit for each additional member of the household.
• The buyer’s first mortgage must be an MHDC First Place Loan, which is an FHA 30-Year Fixed product at 6.0%. The interest rate is currently above normal FHA loans by about .5%, but the higher rate is almost undoubtedly worth it given the cash incentive.
• The buyer must go through approved homebuyer education.
• The purchase price for the foreclosed property must be discounted by at least 5% from the appraised value.
• The buyer must live in the property as their primary residence.
• If the foreclosed property was rented, it must have been clear of tenants for at least 12 months.

The best thing about this program is that first-time buyers can still take advantage of the $8,000 federal tax credit, for a total maximum benefit of over $22,000 for purchasing a foreclosed property. One thing to keep in mind is that MHDC has a limited pool of resources to fund this benefit - as compelling as it is, I suggest moving quickly!

Mark Anderson is a lender with Pulaski Bank that I work with quite often. Lately I have heard a lot of concern from some of my clients who are just at the beginning stages of looking for a home. The general concern is that they won’t be able to qualify for a loan or they will be required to have a huge down payment. Below is Mark’s response to that concern.

Despite what we’re hearing on the news, very little has changed with access to financing for average home buyers. It is true that the credit markets have tightened. It’s also true that some banks have gone out of business. But these changes have had very little impact on basic approval standards for home loans. Chances are, if you have at least fair credit and are able to afford the house payment you are looking to take on, you can be approved for a mortgage. And again, despite what you may hear on the news, you won’t have to take a high interest rate, or an adjustable loan just because you don’t have a 700 credit score.

The one major change that has affected home buyers over the past 12 months involves down payment requirements. You used to be able to take a 30-year conventional mortgage and not have to make a down payment at all - as long as you met certain approval standards. These days, you will have to make a down payment, but the amount is not as much as you may have heard. No one waived a wand and required all borrowers to make 20% down payments, regardless of the credit crunch. In fact, the minimum down payment available, through FHA, is 3%. What’s even better is that this 3% can come from gift sources or from the State of Missouri first time home buyer program, MHDC. Using either a gift from family, or funds from MHDC, you can actually still purchase a property with minimal out of pocket cost.

Dawn and I recently closed with a client who took advantage of MHDC. After negotiating for the seller to pay closing costs, our client only had to come up with enough funds to cover her home inspections and a couple other optional add-ons like a home warranty plan.

To take advantage of MHDC, you need to have not had an ownership interest in a Missouri property for the last 3 years. Your income also needs to be under a certain level depending on how many people are in your household and in what area you are intending to buy. MHDC is called a ‘no interest, forgivable second mortgage’, meaning that you don’t make payments on the money and that over time, the loan balance diminishes. Every year you remain in the property after the purchase date, one-fifth of the balance is ‘forgiven’. After 5 years, the balance goes away entirely.

MHDC goes through periods of availability. Right now there are still funds available. Once they are gone, you can be added to a waiting list. Feel free to contact me anytime for up to the minute details on availability and on qualifying guidelines.”

First a little history: FHA stands for Federal Housing Administration, an entity created by the The Housing Act of 1934 which was desinged to increase homeownership by operating different loan insurance programs. So when someone says you have an FHA loan, it doesn’t mean the Federal Housing Administration gave you the money, it means that the FHA is insuring the principal amount that your chosen bank lent you.

With an FHA a buyer can finance up to 97% of the sale price meaning a potential buyer will only need a 3% down payment. The borrower must meet standard FHA credit qualifications. Additionally the home being purchased must also pass an FHA appraisal and meet the other FHA guidelines.

Now that the 80/20 and other creative financing options are off the table I have seen a rise in the number of borrowers utilizing an FHA insured loan. Out of 8 contracts I have that are scheduled to close between September and October, 5 of the borrowers involved are using an FHA loan.

If you are using an FHA loan these days, it is important to choose a home that will pass an FHA appraisal. In this market that can be kind of tricky. There are so many foreclosures, short sales and handyman specials to sift through. Obviously everyone is looking for a good deal and foreclosures can be a good options, but they won’t all pass an FHA appraisal. If you are using an FHA loan there are may hurdles you can run into in terms of the home meeting the guidelines. Does it need significant repairs? If so, can the current owner of the property have them repaired prior to close? If it is a condo, is there enough money in reserves to meet the FHA guidelines? If it is condo, are enough of the unit owners, owner-occupants?

I am not suggesting that you avoid Bank Owned properties and condos altogether. But I do think it is important that you do a good amount of investigation prior to making an offer. By working with your lender and Realtor you should be able to get a good idea before you ever write an offer if the house will conform to the FHA guidelines.

It is very possible to find a foreclosure that will pass an FHA appraisal. But the risk is having something called out on the appraisal and then not being able to have it repaired prior to close. Most banks state in the MLS listing that NO REPAIRS will be done to the property.

If, however, the home is owned by an individual that is willing to address any FHA predications, even if it needs a new roof or electrical panel, you are much more likely to have a smooth transaction.

I think FHA loans are good products and I believe that the contingencies built in are really in the best interest of the buyer, but I think it is important that you do your due diligence prior to writing a contract so that you don’t find yourself out $800 (inspections) and in love with a house that simply will not fit your financing package.

This was sent to me a from Kelly Dent a lender at Wachovia. Her contact info is below, if you have further questions.

Mortgage Rates

To understand why mortgage rates change we must first ask the more general question, “Why do interest rates change?” It is important to realize that there is not one interest rate, but many interest rates!

Prime rate: The rate offered to a bank’s best customers.
Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
Federal Funds Rate: Rates banks charge each other for overnight loans.
Federal Discount Rate: Rate New York Fed charges to member banks.
Libor: London Interbank Offered Rates. Average London Eurodollar rates.
6 month CD rate: The average rate that you get when you invest in a 6-month CD.
11th District Cost of Funds: Rate determined by averaging a composite of other rates.
Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.
Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

This leads to a fundamental concept:

Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity––typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

Kelly Dent
9717 Landmark Parkway, Suite 101
St. Louis, Mo. 63127
314.729.3904 Direct
314.729.3952 Fax
314.954.7735 Cell

This article was on the Business Journal website this morning. Apparently Bank of America will purchase Countrywide for “roughly 31 percent of the company’s common stock book value.” Since the announcement Bank of America’s stock has dropped nearly 1%. Probably in anticipation of the upcoming hurdles given the current condition of the housing and mortgage markets.However, the article states, as a long term investment Bank of America just bought a lot of assets for a very discounted price. Bank of America will operate its new acquisition under the Countrywide brand but will no longer be offering subprime mortgages.