Financing Options for REO Properties
Real estate-owned assets provide a unique opportunity for first-time homebuyers to purchase a home and pick up a value, especially those taking advantage of the buyer tax credit as it exists now, according to speakers at the Five Star Default Servicing Conference & Expo in Fort Worth, Tex.
“Fannie’s properties tend to be in the lower-price ranges. They’re around $120,000 plus or minus. What we see is a lot of opportunities for someone to buy a home in a market that they might not have been able to do so two to four years ago,” said Jane Severn, director, new business initiatives at Fannie Mae, during a panel on “Financing Options for Your REO Buyers.”
“In markets like California and parts of the Northeast, other parts of the country where prices are more expensive, an REO property can be a chance for a homebuyer to buy a home where they couldn’t afford one otherwise.” Relative to short sales, she said, an REO property is not occupied, which means REO agents don’t have to coordinate another family moving out before their buyers can move in.
“The incentives are lining up for first-time homebuyers. Also, with a lot of the funds that are being given out to communities, Neighborhood Stabilization Funds, those have a time limit on them. We’ve seen a lot of activity particularly in the last month or two around those entities understanding how to use those funds. There are processes in place to start to use and disperse those funds. There are a lot of things lined up for buyers.”
From the REO agent side, in many cases they are able to negotiate the buyer’s closing costs to be paid for, added Jim Gallagher, senior vice president of REO Financing at Champion Mortgage.
“Combine that along with the $8,000 tax credit and it’s a fantastic tool to enable quite a few first-time homebuyers who are able to come up with the downpayment. These programs are available in all markets,” said Mr. Gallagher. “I can’t think of any servicers or outsourcers we deal with that don’t offer closing-cost assistance.”
For Fannie Mae-owned REO, financing is offered through HomePath, which is unique because no appraisal is required, LTV is at 97% and there is no private mortgage insurance required. “We try to make it easier and faster to finance a Fannie Mae-owned REO,” said Ms. Severn.
“We identify all of our properties based on the types of financing they are eligible for. We list all of them on our site at HomePath.com. Every property will have a logo by it that will say either HomePath Mortgage or HomePath Renovation Mortgage. About 60% are eligible for both mortgage and a renovation mortgage for a buyer who wants to do some repairs on a property. Another 30% are eligible for a renovation mortgage only. That leaves you with about 10% of our properties not eligible for any financing.”
On the website, lenders that offer HomePath are also listed. Agents can click on the logo and it will show which lenders offer those products. Ms. Severn did say her company is having trouble finding lenders that do construction lending now and who have the skill set to oversee renovation projects in local markets.
Jeff Gideon, vice president of REO at Residential Credit Solutions, said his organization is well aware of all the government financing that is currently available to borrowers, including FHA and VA. He did say it’s very difficult to take the standard REO property and make it go through FHA without any hiccups.
“We do try to identify those items that will be a lender-required repair and we’ll try to fix those things upfront so we can have an easier time once we get the property under contract and into closing, we don’t get halfway through and have the appraiser come back and have things come up. We try to know our markets and eliminate some of that timeframe.”
As a lender today, Mr. Gallagher said there has never been a time when mortgage programs are “very vanilla” and there are some select programs to deal with REO. There are some properties that are just not eligible for financing.
“That’s where an experienced REO agent working with that servicer or asset manager can identify those and they are going to be cash-only deals. There’s a lot of that going on today.”
Investors are buying these one-to-four family homes at a discounted price with cash, making some repairs or improvements and then renting them out. REO shops are not dumping these properties on the market. They provide a good deal for renters an income stream for the investor, especially in a declining market the speakers said.
“The secret is out. REOs are hot. When it hits the market, we may have 10 offers on the second day. It’s becoming so competitive from the buyer’s side. If you put two properties side by side, one’s an REO and one’s an owner-occupied for sale that REO is going to command. It will be sold first.”
When an offer comes in, Mr. Gideon said it is important to have a good, strong prequalification. There is typically a 30% fallout rate. Sixty days down the road the loan falls out based on something that could have been identified on day one. During that time the carrying costs on a lot of these properties is excessive.
“The servicers want to know the strength of this buyer. They need to know it’s a solid deal,” he said.