Changes to Lending Practices in North Carolina

There are so many changes in lending practices and several that have had an impact on my clients lately that has effected their ability to obtain a loan I thought I'd share legislation that went into effect this past fall. I know several buyers that are trying to get in under the wire but the timing is very tight given loan approval on the different types of loans, especially FHA.

This is the readers digest of the summaries:

Bankruptcy and Foreclosure - The timeframe for getting a mortgage after a bankruptcy and/or foreclosure has been dismissed/discharged has changed. Each situation is different and will need to be evaluated on a case by case basis with the lender.

Short Sales - Fannie Mae is establishing a 2 year elapsed time period for reestablishing your credit following completion of the action. As my lender says - going through a short sale vs. bankruptcy is like the difference in being in a train wreck or a plane crash - one is devastating and the other is painful.

Monthly and Lender Paid PMI - PMI premiums for these 2 options have been raised significantly higher on conventional loans.

Increase loan limits - Currently, the conventional loan limit is $417,000 - this most likely will not be changed in October. Raleigh-Durham area is not considered a "high cost" area and we do not foresee our loan limits increasing.

FHA loan limits - There is a possibility that this loan limit in Wake County may be decreased to $271k on October 1st - we have not received 100% confirmation on this from HUD yet.

Seller Down Payment Assistance - Seller down payment will no longer be allowed as of October 1st on FHA loans.

NC Housing Down Payment Assistance - NC Housing offers a $7,000 down payment to 1st time homebuyer in Wake County using an FHA loan. NC Housing will be repaid the $7k once the person sells their home. This is essentially an interest free 2nd mortgage.

The income limits for Wake are:

1 person - $41,950
2 people - $47,900
3 people - $53,900
4 people - $59,900

$7500 1st Time Homebuyer Credit - The housing act is giving a $7500 tax credit to 1st homebuyers (or someone who has not "written off" mortgage interest in the last 3 years) for homes purchased on or after April 9, 2008 and before July 1, 2009. The credit begins to phase out for taxpayers with adjusted gross income in excess of $75k for individuals & $150 for joint return. The IRS is NOT giving the $7500 credit as cash at closing. The individual must claim the credit on a '08 or '09 tax return. However, a buyer who purchases a principal residence in '09 after filing a 2008 return has the option of filing an amended '08 return to claim the credit.

REPAYMENT: They will have 15 years to repay the credit, interest free. Repayments start 2 years after the year in which the residence is purchased. Example: If a married couple purchases a home in June 2009. They may file an amended '08 return to claim the credit. Repayments of the $7500 credit would begin in 2010 and end in 2024.

ACCELERATED RECAPTURE: If a taxpayer sells or no longer uses the home as his or her principal residence before repaying the credit, the unpaid balance becomes due in the year in which the residence is sold or is no longer used as the taxpayer's principal residence. The amount of recaptured credit may not exceed the amount of gain from the sale of the residence. Special rules exist for an involuntary conversion and for a residence transferred in a divorce and the credit does not have to be repaid if the taxpayer dies.

PMI on FHA loans - The upfront mortgage insurance premium (MIP) and monthly premiums will be based on the individual's credit score. Anyone with a score of 680 or better will be in a group and anyone with 640-679 will be a little more expensive and then 639-600 will again be higher and 560-599 will be the highest. We cannot go below 580 credit score on an FHA loan at this time.

2nd homes in Raleigh - We are no longer permitted to do 2nd homes in the Raleigh-Durham area. The banks want a 2nd home to be in a resort, beach, or mountain area of the state. If someone is moving to this area their primary job needs to be in this area for it to be considered primary residence.

Investment & 2nd home property purchases - Max number of properties allowed is now 4 (was 10) including the subject property (does not apply if subject is a primary residence)

Converting your home to a 2nd home - Both the current and proposed mortgage payments must be used to qualify the borrower for the new transaction. 6 months of PITI for both properties is required to be in reserves. Lender may consider reduced reserves of no less than 2 months for both propeties if there is documented equity of at least 30% in the existing property.

Converting your home to an Investment property - We can continue to permit up to 75% of the rental income to be used to offset the mortgage payment in qualifying if there is documented equity of at least 30% in the existing property. Rental income documented with: executed 12-month lease agreement and Receipt of a security deposit from the tenant and deposit into the borrower's account.

If there is NOT 30% equity in the property, rental income may not be used to offset the mortgage payment. Both the current and proposed mortgage payments must be used to qualify the borrower for the new transaction AND 6 months of PITI for both properties is required to be in reserves.

The changes that have been made are necessary for banks to survive and assure that what happened with the sub prime mess will not happen again. In the meantime it will be a bumpy ride as consumers realize how tight the lending market has gotten.