FHA


The 90 day no flip rule.  HUD typically declares per 24 CFR §203.37a(b)(2) that FHA financing cannot be used if the contract of sale for the purchase of the property is executed within 90 days of the prior acquisition by the seller. 

The February 2010 Waiver of the Flipping Rule.  On February 1, 2010, and lasting for a period of one year, HUD waived the flipping rules with conditions.  The entire terms can be read BY CLICKING HERE .  You need to know the conditions.

Conditions.  These conditions are causing last minute denials by underwriters.  If the buyer is using FHA financing, ensure the Seller is aware of these restrictions to avoid last minute hurdles, cancellations etc.:

  1. 20% Net Sale Price Rule – The waiver DOES NOT apply, i.e. your FHA loan will be denied if the sales price is 20 percent higher than what the Seller paid.  Unless the following hurdles are overcome:
    1. Lender justifies the increase by retaining a second appraisal and
    2. Lender orders a property inspection and provides the inspection report to the purchaser before closing. This can be at the cost of the borrower and FHA approved inspectors are not required.  The details are in the HUD link .
  2. Arms – Length.  The transaction must be arms-length, or you will not be able to gain FHA financing.  There must not be any identity of interest between the buyer and seller or other parties participating in the transaction.  Some ways that the lender can ensure there is no in appropriate collusion or agreements between parties is to analyze:
    1. Seller holds title.
    2. LLCs, corporations etc. that are sellers were established under accordance with applicable law.
    3. No multiple transfers within a 12 month time frame.
    4. Property was marketed openly and fairly (MLS).

 

This is continuation (part 3) of my FHA blogs on flipping. 

Please visit the first installation on flipping: https://ameglegal.wordpress.com/2008/03/28/tgif-legal-tip-fha-loan-anti-flipping-rules/ 

 

Please visit the second installation on flipping: https://ameglegal.wordpress.com/2008/06/27/tgif-legal-tip-fha-update/

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As always, we do not advise on taxes.  But for your personal information I wanted to address a change that will occur with the new Housing and Economic Recovery Act of 2008.

 Housing Tax Exemption.  As you all know under the current law, until the President signs the Housing and Economic Recovery Act of 2008, homeowners can exclude from taxation profits on the sale of their home to the tune of up to $250,000 if they’re single taxpayers, $500,000 if married filing joint returns.

The tax payer, as you also know, must own and live in the property as his/her main residence for two of the five years before they sell it.

Many persons have turned rentals into primary residences by simply moving in and living there for a couple of years (two out of last five), then upon selling they avoided capital gains.

That rule has changed.  When a person sells such a property on or after January 1, 2009, they will have to factor out those periods they did not live there and pay taxes on that portion of the profit.

Here’s an example:

George and Barbara next January buy a vacation home for $300,000. Five Years later, they sell their old principal residence and make the vacation home their new principal residence. Five years after that, George and Barbara, sell the vacation-turned-primary-residence for $800,000. That nets them a gain of $500,000.  Under pre- Housing and Economic Recovery Act of 2008, George and Barbara wouldn’t face any tax on the entire $500,000 gain.

The new law, however, means that George and Barbara can exclude only 5/10, or 50 percent, of the gain. That would give them $250,000 of nontaxable property sale profit and $250,000 upon which they would owe long-term gain taxes.

 This blog is for your use and not so you can give tax advice.  Always have your buyers seek tax advice if they have questions on subjects of tax deductions.  Here’s one I recommend, Diane W. Clough, CPA, Ltd. 6130 W. Elton Ave., Las Vegas, Nevada 89107 (702) 870 0888.

It you did not notice on the comments to my July 29, 2008 entry Housing and Economic Recovery Act of 2008 Part I, a section of the new bill will more or less eliminate, “down payment assistance grants.”  What are these?  Well, they can be government subsidized programs or charitable organizations that utilize a HUD/FHA rule that allows for Down Payment Assistance (DPA) to be given to homebuyers in the form of a gift or grant. 

You know them as American Dream , Nehemiah , City of Henderson Neighborhood Services , Nevada Housing Division  and Sovereign Grants Alliance

They are effectively going to be eliminated.  Some of you have voiced your opinions for and against these programs.  The DPA company’s goal is to allow buyers to buy, so it would seem an obvious plus for our industry if they could remain.  The opposite argument is that these programs should not be present, that eliminating DPAs serves to reduce the default rate on FHA loans which are going to be taking over a significant share of the future loans being originated. 

Historically HUD has fought these programs and in fact lost a law suit to get rid of them.  See the Order here.  The Court viewed the programs as legal.  The new Housing and Economic Recovery Act of 2008 through section 2113, eliminates these assistance programs.

If this concerns you and you want to try to affect it one way or the other, I found the following websites:

Support Home Ownership

Nehemiah Corporation of America

Housing and Economic Recovery Act of 2008

Sponsored by Senator Harry Reid.

 

The Housing bill includes a number of provisions that will be beneficial for Nevadans

Click here to read the text of the Bill.

Click here to see a detailed display of the provisions:

First-time homebuyer credit– a new, temporary tax credit for first-time homebuyers. (A previous version of the bill limited the tax credit to buyers of unoccupied houses — newly built homes and foreclosures, but now it’s any primary residence).  The credit available is the lesser of 10% of the home’s purchase price or $7,500. The credit serves as an interest free loan which is paid back by the home buyer over the subsequent 16 years or when the home is later sold.  Here’s how it works.  Buyer purchases home for $200,000. The following year, when she files her income tax return, she has a $7,500 credit.  This is not a deduction, but a credit.  So she is allowed to reduce her income taxes by $7,500.  But she has to pay the money back over 15 years.  So if she buys a house today July 29, 2008, she would get the $7,500 tax credit for the 2008 tax year.  She would commence repaying one-fifteenth of that amount, or $500, every year for 15 years, starting with the 2010 tax year.  NOTE:  if she sells the home prior to then, she has to repay the remaining balance in a lump sum.

Mortgage Revenue Bonds– $11 billion in mortgage revenue bonds, which are tax-exempt bonds that can be used to finance affordable rental housing, loans to first-time homebuyers or refinance subprime loans. Nevada can expect to get $99.8 million in additional tax exempt bond authority to use for these purposes.

 Low Income Housing Tax Credits– a temporary increase in the amount of Low-Income Housing Tax Credits that are allocated to the states for 2008 and 2009. This temporary increase will provide more than $500,000 in additional credits to the State of Nevada to use to develop affordable housing.

 Standard Deduction for Property Taxes– a new standard deduction for 2008 for property owners who do not itemize their income tax deductions. The maximum amount that can be claimed is $1,000 for joint income tax filers ($500 for single filers).

Refinancing via FHA – Provides mortgage refinancing assistance to families from losing their homes.

Example 1

Home bought in 2005 for $200,000 – now worth $150,000. Loan is $200,000.

FHA PLAN

Borrower: Shows he can afford a loan for 90 percent of the home’s value: $135,000.

Lender: Agrees to lower the principal of the loan by 15 percent of the reassessed value: $127,500 (a 36 percent loss).

Borrower: Monthly payment of $1,470 at 8 percent balloon rate falls to $875 at 6.75 percent fixed rate.

FORECLOSURE

Borrower: Loses home.

Lender: Seizes home and pays foreclosure expenses, leaving $110,000 (a 45 percent loss).

Example 2

Home bought in 2006 for $150,000 – now worth $120,000. Loan is $150,000.

FHA PLAN

Borrower: Shows he can afford a loan for 75 percent of the home’s value – $90,000.

Lender: Agrees to lower the principal of the loan by 30 percent of the reassessed value: $84,000 (a 44 percent loss).

Borrower: Monthly payment of $1,200 at 8.9 percent adjusted reset rate would fall to $600 at 7 percent fixed rate.

FORECLOSURE

Borrower: Loses home.

Lender: Seizes home and pays foreclosure expenses, leaving $87,600 (a 41 percent loss).

Source: House Financial Services Committee.

FUN FACTS:  A provision that extends Section 8 federal housing subsidy eligibility to residents of specific properties in San Francisco, the “Nihonmachi Terrace (FHA No. 121-44284), in San Francisco, California,” and the, “property known as The Heritage Apartments (FHA No. 023-44804), in Malden, Massachusetts.”  Also there is the “Application To Certain Automotive Partnerships,” for Chrysler to ensure that it can benefit from a corporate tax incentive. The bill does not name Chrysler but rather describes an unnamed automobile manufacturer “that will produce in excess of 675,000 automobiles” from Jan. 1 to June 30, 2008.  Neat!

AUGUST 17, 2008 UPDATE:  Gordon Miles, COO for Prudential, Americana Group has provided this email update based upon H.R. 3221.  [Click here for the entire H.R. 3221 text]

This is continuation of my FHA blogs.  Please visit the first installation on Flipping Rules , my follow up to Flipping Rules and also my blog on FHA Fees.

Can the earnest money on an FHA loan purchase be forfeited?  Yes, but not often.  If the buyer’s loan is denied, then the earnest money deposit is to be returned.  Your buyers must be careful, just because they are doing a federal insurance loan (FHA), doesn’t mean they are bullet proof in receiving their earnset money back.  If a buyer elects to cancel the transaction without reliance on a contingency and/or has already rendered his/her/their earnest money deposit nonrefundable and again the loan is not denied, the earnest money can be forfeited, even on an FHA loan.

From the, “100 Questions & Answers About Buying A New Home,” we find question number 31

“31. WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?

Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you may forfeit the entire amount.”

HUD Home Purchases – this blog is NOT addressing HUD Home Purchases and (homes owned by HUD and sold through HUD) and how HUD earnest money forfeiture  is dealt with in those sales, also known as HUD-9548 sales.

You might have also seen this type of language:  “buyer shall not be obligated to complete the purchase of the property … or to incur any penalty by forfeiture of earnest money … unless the seller delivers … a written statement issued by the Federal Housing Commissioner setting forth the appraised value of the property …”  Don’t be confused by this form HUD 92900-A;  it is all part of the loan package as created by the loan officer procuring the FHA loan and does not give the buyer a right to an earnest money refund unless, again, the buyer did not qualify for the loan or the loan could not be issued.

This is continuation of my FHA blogs.  Please visit the first installation on flipping: 

https://ameglegal.wordpress.com/2008/03/28/tgif-legal-tip-fha-loan-anti-flipping-rules/

Please visit the following on fees:

https://ameglegal.wordpress.com/2008/04/04/tgif-legal-tip-what-to-know-about-fha-fees/

As you know from my previous blogs, FHA has unique requirements that prohibit the seller from having owned the home less than 90 days.  Remember “flipping” is when property is resold in a short period of time after it is purchased.  Key point to remember: know what the sale date is.  It is not close of escrow, rather the date of execution of the sales contract.  You cannot “clean up the title” at close of escrow.  The seller must be on title at time of contract.  Finally these rules do not apply to new construction.

HUD has Announced an Exemption to its Anti-Flipping Rule. 

On June 9, 2008, HUD expanded the categories of properties exempt from this anti-flipping rule.  This new exemption is for property acquired through foreclosure by mortgagees that are not state or federally chartered to become eligible for FHA-insured financing during the 90-day period and is effective for a period of one (1) year. 

What does it mean?

SHORT VERSION:

It makes it easier for your clients to use FHA loans when buying most any  REO property.  So don’t stress if it’s confusing.  This will occur behind the scenes and prevent the few hiccups that have been occurring recently. 

LONG VERSION:   

The new exemption is explained here: 

For the curious, the long version is as such: when a home is foreclosed upon, it is sold within the REO arena right?  Well what was happening was the Lender foreclosed and then often transferred the property to a third party and THAT third party sold it to your client and your client was running into trouble getting an FHA loan due to the 90 day rule.  Also lenders were not federally chartered (think hard money lender).  HUD found that the current exemptions from the 90-day restriction in the law failed to accommodate sales of properties acquired as the result of foreclosure by mortgage lenders other than those currently exempted, and do not accommodate exempt institutions that use subsidiaries and vendors to sell their inventory of foreclosed properties.  So, both un-chartered lenders can break the 90 day rule AND this exemption flows to properties foreclosed on by the lenders, their subsidiaries, as well as vendors hired by exempt entities to sell their real estate owned.  I highlight “exempt” because if the lender is hard money, for example, or a non state/federal-chartered lender and forecloses and transfers the property to another entity this exemption does not appear to apply.

Today’s FHA loan is not your father’s FHA loan!

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 Can a Buyer Broker Fee be charged to an FHA loan?  Yes.

The HUD HANDBOOK 4000.2 REV-3 – 51L – Real Estate Broker’s Fees (Buyer Broker) [http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4000.2/40002hbHSGH.pdf] as issued May, 2004 is attached hereto.  I suggest you read it.  The Handbook instructs that borrower may be charged real estate broker fees.  However, the borrower must engage broker independently and the fee must be “reasonable and customary.”  Unearned fees are not permitted, unless a service is actually performed.  As you are all aware the amount of commission charged and paid is not an industry standard per NRS 598A.060; 15 U.S.C. § 17.  The historic goal of antitrust laws has been to protect economic freedom and opportunity by promoting competition in the marketplace.  [See blog on commission https://ameglegal.wordpress.com/category/commissions/]  Significant opportunity relates to the ability of real estate brokers to successfully charge and collect certain administrative fees or commissions in transactions with affiliated lenders.

Would this rule allow for what is commonly referred to as Transaction Fees or  Administrative Fees?  Yes.  The rule allows buyer broker fees if “reasonable and customary,” therefore if a buyer broker fee agreement specifies that the broker is engaged and will provide specific services in consideration of a fee the FHA rules allow the charge of a Transaction Fees or Administrative Fees.  Prudential®, Americana Group, REALTORS® Broker Administrative Fee [Americana Doc Fee Invoice] is the result of is a focus as each transaction has a great volume of paper and individual importance.  The Americana Broker Administrative Charge is assessed by Prudential, Americana Group, REALTORS® to its buyer and seller clients in exchange for real estate services provided and actually performed. [Doc Fee Explanation] The Fee is the result of the client engaging Americana for these services and is in excess of the listing, cooperative and/or buyer broker commissions typically paid by sellers and buyers.  It is a form of commission for the real estate services provided by Americana for a buyer and/or seller.  It is for services actually performed and is the result of the client engaging Prudential®, Americana Group, REALTORS®.

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