Warning - Why HUD May Stop Your Loan From Closing

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Author: Carl Pruitt

Article source: http://www.articledeshboard.com/. Used with author's permission.

Several years ago a problem cropped up all across the mortgage/real estate world and started causing a lot of problems for lenders whenever a mortgage defaulted. Every Tom, Dick and Harry that stayed up late at night wanted to become a real estate investor and "flip" houses. There is a very real market service being provided by legitimate investors who buy distressed property, restore it to market standards and sell it through an arm's length market transaction. Unfortunately, these investors flooding the market didn't quite fit that description. They would make an offer on a property having no possible way to finance it or to pay cash and then go in and sweep it up and mop a little before the closing. Simultaneously, they would find some sap who didn't really understand what was going on, agree to pay all their closing costs and down payment assistance, and get them qualified for an FHA loan. Next would follow a set of back to back closings where they would buy the property and sell it to the new buyer without ever having put up any money of their own. Often at double the price they paid originally!

Of course these "sellers" would offer such easy terms (at a time when it was a seller's market and others weren't making such concessions) that they would have a boatload of potential prospective homeowners to choose from. Unfortunately after this had been going on for a few years, some of these new home owners began to default on their mortgages and HUD would have to pay off the lender from the FHA insurance fund. This is the source of all the HUD houses you see advertised in the weekend papers. Trouble is, when HUD was trying to sell these houses they kept having to take a big loss, endangering the very existence of the FHA program.

Thus several years ago, HUD implemented their "anti-flipping" rule. Now any house that had changed owners within the previous 90 days was absolutely ineligible for any FHA financing. The goal of this rule was to make sure that homes were being sold by legitimate investors who were taking the time to actually bring the property value up before selling it and making a killing.

Of course in HUD's usual inimitable governmental style they overlooked one tiny factor that created a big problem in the marketplace. They failed to create an exemption for homes that had been foreclosed upon and were being sold by the lender. This excluded a large segment of the potential buyers from the picture and caused lenders to take a big hit in the prices foreclosed property would bring. So in 2006, HUD amended the rule to exclude homes being sold by government sponsored enterprises and federally chartered financial institutions. However, they left the rule in place for all other sellers.

Now we arrive at the present. The subprime market has crashed. Foreclosures are setting records every month. Thousands and thousands are losing their homes. But at least, we think, many potential new first time home buyers can now take advantage of this drop in home prices while FHA interest rates are low.

Working with a real estate agent and mortgage lender who are savvy about the rules, these knowledgeable eager new buyers go out into the market and the first question they ask as they look at these foreclosures is whether the owner fits into the financial institution exception. The agent representing the lender says in good faith that, of course, this home is still owned by the bank and the bank is exempt from the rule. They work out their contract, get all the signatures in the right place, get their loan application paperwork signed and in process and everything looks rosy. Just before closing the title examination results are faxed over and at first glance everything looks fine - until the loan processor notices that the owner named on the title policy doesn't exactly match. So a call is placed to the attorney's or title company's office only to find out that now a subsidiary of the foreclosing lender owns the property. The lender always uses this subsidiary to manage its real estate owned after foreclosure.

Unfortunately, this subsidiary, which often receives title to the property months after the foreclosure, is not exempt from the "anti-flipping" rule and has only owned the property a month! Usually even the listing agent is unaware of this and no one at the lender's office thought anything odd about it, but our eager new homeowner who has given 30 days notice on their apartment must now wait 60 more days before they can close on their new home.

Agents and potential new home owners, whatever you do, please remember - this rule is there to protect you . Be sure that you go far above and beyond with questions about the ownership of the home before you put the dates on your sales contract. This isn't much of a problem if you ferret it out at the beginning and plan for it, but can be a devastating blow if it catches you unaware.

Free mortgage reports and advice are available at: fhaloanadvice.com www.24hrmortgagereports.com georgialoanadvice.com/fhasecure_loan_program.htm Carl Pruitt is a 22 year veteran of the mortgage/real estate industries. He helps borrowers with credit problems get mortgages with low fixed rates.