Over fifteen years ago while employed by a New York mortgage banking company based on Long Island, I discovered that people were able to purchase mixed-use properties (buildings consisting of commercial as well as residential units) and finance the purchases using 97% financing through a unique program known as 203(k) which was insured by the Federal Housing Administration.
It took me some time to understand the true value of such an innovative program because I believed then that the government was seldom innovative; but when I finally did grasped the real importance and came to understand what a program like the 203(k) could mean to business owners, neighborhoods and communities, I became a staunch supporter of it and was bitterly disappointed when, in 1996, the investor-purchaser feature of the program was discontinued; but the owner-occupant portion remained in-tact and that was a good thing for everyone, and still is.
Today the program is still available to anyone who wants to purchase a mixed-use property or a one to four family residential property that may need a little repair (five thousand dollars minimum repair work needed to qualify). In-fact, the repair requirement part of the program that makes it as unique as it is applies to any property being financed with 203(k) funds, not only mixed-use.
It is my opinion that, in today’s real estate market, it is very important to recognize the facts as they exist and make adjustments necessary to accomplish the goal of homeownership. The goals haven’t changed because people still want to own homes, but they just have to go about purchasing them in a slightly different fashion, and that’s where the FHA programs (both the 203(k) and 203(b)) can be intergral parts of the buying process. Qualifying for these loans are pretty straight-forward and the guidelines are flexible enough such that any serious-minded mortgage applicant can qualify.
The basic requirements for any person to qualify for a mortgage of any kind are that the person is employed for two consecutive years, have the required down payment, possess a reasonable credit history as testament to meeting past obligations satisfactorily and is able to support these qualifying requirements with acceptable documentation; e.g. W2 forms, paystubs, bank statements and so forth. Those are the basic requirements.
The other important consideration is how much of a house the person can afford to purchase and this goes directly to the question of how much of a mortgage he or she can qualify for. At this juncture is where the lender or broker must provide guidance and assistance. The mortgage professional should understand that most homebuyers are expecting a very attentive and diligent ally throughout the process and must be prepared to be that person, even if the homebuyer has done the research necessary to educate himself/herself on the process.
Here is an example of what the numbers in a typical FHA mortgage application may look like with variations and approximations for property taxes and hazard insurance:
The purchase of a single family dwelling at a price of $350,000.00 Down payment under current regulation is 3% or $ 10,500.00 the mortgage amount applied for would be 97% or $339,500.00 the monthly payment at an approx. int. rate of 6.5% over 30 yrs.would be $ 2,145.87 add 1/12 of the annual tax bill of approximately $3,000.00 which is $ 250.00 and 1/12 of the annual property insurance bill of approximately $1,800.00 which is$ 150.00 and finally add 1/12 of the annual mortgage insurance premium (MIP) of $1,697.50 which is $141.46. The total monthly payment would be $ 2,687.33.
Based on the above example, the combined annual income needed to qualify for this FHA mortgage, whether it be 203(b) or 203(k), would be $104,026. Bear in mind that if the applicant under this scenario has other monthly obligations like credit card payments, car payments or student loans, those payments must be added and then the result would be calculated using a different ratio to determine the applicant’s qualifications for the loan. The point of this example is to reinforce the practical and common sense approach that is used to determine whether or not a homebuyer can afford to buy the home of his or her choice.
What if he can’t?
It seems to me that if the answer is clear then the available options should be just as clear. We can almost be certain when qualifying a borrower for FHA financing, that there are enough safeguards built into the process to help protect homebuyers from attempting to purchase homes that they cannot afford and this feature serves the best interest of Borrower, Lender, Broker and, ultimately, industry.
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