FHA … more that meets the eye !

fha

So much as changed in a few short years. It seems like only yesterday that buyers were coming through the office door wielding approval letters that far out paced their ability to pay. In those days, buyers found no doc, no verification, no down payment, no interest, no common sense loans available from anyone that had a dime to lend. They filled open houses, created a buying frenzy that rivaled filenes wedding dress rush and created a demand that spiked housing prices across the country.

Then the bills came due, rates went up, resetting occured, the economy stalled and that large housing bubble popped like a prom night pimple. We are reeling as the market returns to normal. I think most people feel that there must be pent up demand out there. All the life events that created a need in the past continue to occur.

Yet, homes remain unsold.

So, I thought something is amiss. We keep hearing the phrase that interest rates are at historically low values. Money is cheap. We keep reading about the wave empty homes. Supply is there. We keep hearing that based on all the financial data, now is a great time to buy.

Yet, homes remain unsold.

If you put the situation under a microscope, you find that one of the problems that exists today is related to the lack of information being provided buyers. For some crazy reason, the NAR and others keep harping on the INVESTMENT value of a home. In my opinion, too much is focused on the “long term” gain and tax advantages of home ownership. People buy homes because they want to own a home. They want to have the security and well being provided by all the rights of ownership that are inherent in a deed of trust.

magnifying-glassBut let’s look at the obvious.

Most loans being made today are FHA loans. It was a culture shock for the industry when the change was made from sloppy sub-prime, state income, 80-10-10, 80-15-5, 110%, teaser rate, etc. loans that had become the standard. Agents were uneasy. No one had been writting FHA loans. Behind closed doors people feared it would be the end of us. Au contrare, it may be the very thing that saves us and the industry. Not just today, but down the road as well.

You see, no one is focusing on one of the sweetest features of an FHA loan. Oh, they talk about the modest down payment and ease of underwriting. They talk about a certain comfort level that the loan will close. We don’t hear many folks mentioning the biggest asset about FHA loans.

They are assumable!

Stop for a minute and think about 3 years or 5 years or 10 years from now. What do you think mortgage rates might be in 2012 or 2014 or 2019? Do you really believe that in the face of increased government spending, increased inflation, increased devaluation of the dollar that rates will hold around 5%.

You won’t find many economists that agree with you.

two-houses-copy

Let’s just suppose that one of those buyers waiting to purchase bought the house on the right for $255,000. The neighbor on the left bought their home two years ago and paid $300,000. Now that chap on the right got a good deal. He put 20% down and has a mortgage of $240,000. The new owner put his 3.5% down and has a FHA mortgage of $246,075.

Fast forward 5 years. Both owners have outgrown the home and decide to sell and move up. They both have good agents and the market value of the homes are about $320,000. They both put their home up for sale for $320,000. Fair enough, but the fellow that paid $255,000 will have more to put down on his next home as he moves up. You might say he will move farther.

Oh, and why might the lad on the left sell sooner? His 5% mortgage rates is assumable. Now, the new buyer will have to get a “wrap around” mortage for the difference between what is still owned on the FHA loan and the sales price and yes, that loan will carry the going rate at that time. The seller on the left will have to try to move his home at time when money surely will cost a bit more. It doesn’t take an MIT grad to discern that 5% on the bulk of a loan is much more attractive and affordable than the 8%, 9% or 10% or more that will be the rate in five years.

Why buy now? Seems to me that not only are you buying a home at a very good price, you are also buying an interest rate that will only become more attractive as rates go up in the future. You see, this really is a great time to buy but it is also a dynamic time to borrow at a rate to day that you can sell in the future.

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