9 Lemontree Court

The importance of the FHA (Federal Housing Administration) in the home mortgage market has changed markedly over the years. This has been due less to changes in the FHA itself than to changes in the broader market in which it operates.

In the early 1990s, FHA had about 15 percent of the home-purchase market. In subsequent years through 2006, FHA lost business to the growing subprime market, which took many borrowers who could have gone FHA. In addition, FHA lost business to the prime conventional market, which developed and aggressively merchandised option ARMs and interest-only products, as well as reduced documentation underwriting, none of which FHA offered. In 2006, FHA's share of the purchase market had fallen to less than 4 percent.

Then came the financial crisis. With home prices declining and defaults rising, the subprime market largely disappeared, option ARMs declined to a trickle, and documentation requirements on prime conventional loans were substantially tightened. In addition, FHA loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA's market share of new purchases was back to about 15 percent, and its share of refinances was substantially higher.

The FHA Market Niche: An FHA borrower in early 2009 1) Doesn't need a loan larger than the FHA maximum in the borrower's county; 2) Can't put more than 3.5 percent down, which is the FHA requirement; 3) Is not eligible for a VA loan, which allows zero down; and 4) Can't be approved for a conventional loan but can be approved under FHA's more liberal underwriting rules.

A borrower who can put 10 percent down on a loan smaller than the FHA maximum and can be approved for a conventional loan will usually do better with the conventional loan, but there can be exceptions -- see below.

FHA Loan Limits: The loan limits on FHAs effective until year-end 2009, established on a county basis, were the same as those applicable to Freddie Mac and Fannie Mae. On a one-family house, they ranged from $271,050 to $729,750 in 76 higher-price counties. Loan limits on 2-4 family houses are higher. On HECMs (reverse mortgages), the maximum was raised to $625,500 for the balance of 2009. You can find the limit applicable to any particular county here.

Down Payment Requirements: FHA borrowers in some cities, counties, or states have access to special programs that eliminate the need for a down payment by offering second mortgages at favorable terms. Usually no payments are required on the second mortgage until the house is sold. The public agencies offering these programs have their own eligibility rules that are independent of FHA. The only generally available zero-down loans are VAs and USDA loans in rural counties.

Underwriting Requirements: FHA will accept lower credit scores than are acceptable on prime conventional loans, and are more forgiving of past mistakes. FHA will forgive a bankruptcy after only two years, and a foreclosure after three years.

Mortgage Insurance: FHA borrowers pay a monthly mortgage insurance premium of ½ percent per year (.55 percent on loans with less than 5 percent down), and an upfront premium of 1.75 percent, which is almost always included in the loan amount. In contrast, most conventional loans have only a monthly premium which is higher than the FHA monthly premium but disappears at 20 percent down. Because of the higher mortgage insurance premiums, an FHA will be more costly to a borrower when the rate and points are the same.

Differences in Rate and Points Between FHAs and Conventionals: In shopping lenders who offer both FHA and conventional loans, I have found that, in many cases, the rate and points quoted on FHAs are higher. Lenders often charge larger markups on FHAs, partly because they are more costly to originate, and also because "they can." There isn't as much competition for FHAs because a large proportion of brokers and smaller lenders don't offer them.

On the other hand, I found that some lenders quote the same or even lower rates and points on FHAs. This kind of market fragmentation, which surprised me, appears to be a consequence of the financial crisis. It places an added burden on borrowers shopping for the best deal, as if that weren't already difficult enough.

Comparing Prices: Borrowers should be able to compare the all-in costs of an FHA and a conventional by comparing their APRs. The APR takes account of the rate, points, other lender fees, and all mortgage insurance premiums. Unfortunately, the APR assumes that all loans run to term, which makes it deceptive for any borrower who expects to have the loan for less than 10 years.

Furthermore, most of the lenders I checked are not calculating the APR on FHAs correctly. The most common mistake is ignoring the upfront mortgage insurance premium, which their software was never programmed to accommodate. If you want to make an all-in price comparison over the period you expect to have the loan, you can use my calculator 9c.

by David Applebaum

In this market, selling a house can be more challenging than ever. As a real estate professional, I’m sure you have used many ideas to help make your property look its most attractive to potential buyers. As an architect for two decades, I have suggestions and tips to maximize your potential in selling the home.

Photo Courtesy David Applebaum

Every house and every property is different, and I recognize that a “walk through” can inspire specific ideas for each property. But here are some universal suggestions that will make any house look more appealing for sale.

1.    Clean everything. Eliminate damaged and soiled items, get rid of half of the furniture and rearrange the other half, and remove any personal items. It is important to give the buyers the ability to see themselves in the property.

2.    Accent lighting. This can help make the home more attractive and accentuate the positives by highlighting the homes attributes and diminish the negatives of any setting. The key is to realize that you are playing with contrasts.

Some other lighting tips:

• A light along fabulous furnishings, an architectural element, or detail will show that element off.
• A light behind an object will frame the object in darkness and bathe what is behind it in a wash of light.
• Use highlight and contrast to make a room feel longer, higher, or warmer.
• 

  Photo Courtesy of David Applebaum

  Keep the elements that you do not want seen in darker settings, and the ones you want highlighted in light.

• Set the mood with accent lighting and candles to provide warmth and drama that will set your property apart from all others.
• Accent lighting is the easiest and most effective enhancement.

3.    Paint. This is perhaps the most common enhancement that is done to a property. Because a buyer might have their own ideas about colors, I usually do not recommend a full paint job unless the property needs it. Sometimes, a fresh coat of paint is only required in a few areas to refresh a house. I have found that the front door is a good place for new paint, as it is the first part of the house to be touched by a potential buyer.

4.    Don’t go overboard with fancy flooring. There was a time that new berber carpeting and travertine meant that the FOR SALE sign would be installed the next week. None of the buyers that I shopped with planned to keep any of those inexpensive additions. People were buying houses, not because of the new carpet and new stone, but because the market was hot. Many of my clients would have preferred to restore older tile work, choose the color and quality of carpets, and completely renovate the kitchen. None of them liked having to pay for improvements that would be replaced. The floors and surfaces should be clean and attractive, but unless there is damage, I suggest lovely area rugs that your client can take with them.

5.    Replace the hardware in the kitchen and baths. It’s a fairly inexpensive way to refresh your property. If the cabinets are in decent shape, new knobs can update a room easily. These are little details that can make a huge impact on a potential buyer. If the front door knob is in disrepair, it will be hard to get a buyer’s confidence back.

6.    Spruce up the exterior. Follow the same advice as the interior and apply it to the exterior. Make sure that everything is clean and edit the furnishings. New cushions for the outdoor furniture can immediately make the yard look more comfortable. You might need to replace the light fixtures, since the elements are usually not very kind to exterior accessories. Consider a few nice plants in lovely pots and a wind chime to heighten the outside living experience.

I hope that these suggestions will help you provide inexpensive and effective ways to help you present your client’s properties in the best way.

ABOUT THE AUTHOR: David Applebaum is an architect in Los Angeles, Calif., who has designed homes for such celebrities as Diane Keaton, Frank Sinatra, Bob Hope, Nancy McKeon, Rupert Murdoch, and Cuba Gooding Jr., in addition to numerous home owners throughout Southern California. Visit his Web site: www.davidapplebaum.com

 Thursday, March 26, 2009