Loan Modification

Should investors be allowed to use FHA financing?

By Gina Pogol

Adam Quinones at Mortgage News Daily threw out a suggestion that may have some merit and solve a couple of problems.

We have a serious problem with housing inventory that needs work –  foreclosures, rentals, and reverse mortgage property that went unmaintained or has been vandalized.

There is a dearth of construction financing in the U.S. Fannie Mae and Freddie Mac no longer touch it. Lenders like CTX Mortgage are out of business. This down-at-heels housing could be converted to safe shelter for the folks who need it (perhaps after losing their own homes to foreclosure).  And those best equipped to take on these projects are the experienced investors who have fixed and flipped or fixed and rented for years.

I’m not saying that they should get to finance investor homes with 3.5 percent down, or that they shouldn’t pay a higher rate for insuring their mortgage. But if such financing were available, it would go a long way toward relieving the blight on the landscape of many of the hardest-hit cities in the country. While government agencies and charitable organizations are about to purchase rental housing with HUD funds, they aren’t the most efficient delivery system for large-scale housing solutions.

Non-FHA government rehab loans for rentals

FHA is not the only game in town. Many local governments have programs in place for encouraging affordable housing availability. For example, the city of Baton Rouge, LA offers rental housing rehab loans. The units must be rented to low-income tenants when the project is complete. The loan terms are highly favorable:

• Lending is at 3.0 percent interest (annual percentage rate). Properties having at least 50 percent ownership by non-profit corporations may be eligible for no interest loans.

• Loan amortization terms of up to 20 years.

• No application fees, loan origination nor discount points are charged to borrowers. All costs of closing the loan are those of the borrower.

• Total mortgage debt on the property may not exceed 95 percent of the after-rehab value of the property, established by appraisal prior to loan closing.

• Loan financing not to exceed 95 percent of eligible rehabilitation costs. Owner required to invest at least 5 percent of the rehabilitation costs.

Local programs mean difficulties

The problem with this patchwork of local programs is that funding is subject to budgeting (the Baton Rouge program accepts applications all day long but only funds projects when there is available money). So, you’re supposed to buy property and then just wait until money shows up? The FHA model is better — the insurance is funded by premiums paid by buyers, and the money is lent by mortgage companies and does not get bottlenecked by government agencies.

No free ride for investors

I’m not suggesting that real estate investors get a free ride on the back of taxpayers, but that loans that could help clean up neighborhoods, provide safe rental housing where needed, and help dry up the inventory of foreclosed should be welcomed with open arms. Just make sure that the insurance cost and underwriting requirements are sufficient to keep the program in the black.

Full post as published by FHA Mortgage Guide on February 22, 2011 (boomark / email).