Q & A with Dottie Herman

Q & A with Dottie Herman

» Featured Columnists | By Dottie Herman | December 29, 2011 9:30 AM ET

Q1 - Which is better -- A piggyback, or a traditional loan with MI?

A - Either method has both advantages and drawbacks. For example, MI may be cancelable after a fairly short period of time through no effort on your part, aside from making your regular monthly payments. That is, if the value of your home has risen sharply, you may be able to cancel MI in just two years. You have no such option for the second lien arrangement, though; you signed on for a given number of payments to retire the lien, and that cannot be changed without a slug of cash to pay off the loan (or a refinance).

Of course, if you're not diligent about making your payments on time, your mortgage lender can refuse to cancel your MI. You could always refinance, of course, although rates may not favor you. On the other hand, even if you're late occasionally with payments on your second lien, it will still have a fixed termination date and a known cost.

As we mentioned above, there may be tax benefits for a second lien versus MI situation, at least on a comparable basis, but only if you itemize on your tax return.

In the case of a 'convenience HELOC' arrangement, we suggest that there's nothing inherently wrong with this, provided that you get a deal no worse than what is available to you in the open market. Do keep in mind that should you select this feature, you might be hit with recurring annual or "low-or non-usage" fees even if you don't borrow any money against your home right away.

Q2 - What Is a 203K Loan?

A - The FHA 203K loan lets you purchase or refinance and rehabilitate a property with one loan closing. The projected rehabilitation costs are held in an escrow account and disbursed as work is completed and inspected. The loan amount is based on the lower of the projected market value following repairs or purchase price plus renovation costs.

Benefits of a 203K Loan

  • Properties that are sold "as-is" often would not qualify for a standard FHA loan. However, 203K loans are designed to improve, update and modernize the home.
  • The loan enables you to purchase foreclosure properties that require repairs. Most HUD Foreclosure properties could benefit from a 203K loan.
  • You can purchase a home that does not require repairs and finance the cost of "modernization" or cosmetic repairs.
  • The loan allows for 1-4 unit dwellings, including condominiums.
  • Where zoning allows, a 203K loan can be used to convert a single family dwelling to 2-4 units and vice versa.
  • Up to 110% (100% on condominiums) of the "as-is" value of the home may be used as basis for mortgage calculations. (The appropriate LTV factor is then applied.)
  • Up to six months of PITI (principal, interest, tax and insurance) payments can be financed to assist those who would otherwise be required to make double-housing payments. A Consultant will determine the number of months the house will be uninhabitable, for financing of payments.
  • Buyers who purchased a property with cash can use the 203K program to complete repairs/modernization and replenish funds used at the time of purchase. The Mortgage must close within 6 months of cash purchase.
  • The loan can be used for complete reconstruction of a home on its original foundation.
  • Properties in "below-average" condition can be upgraded through repairs and maintenance (i.e., new roof, fix broken windows, and lead paint abatement), Increasing square footage by building an addition, building a second floor, or finishing a basement or attic space.

Q3 - Can nonresidential (storefront) property be eligible for a 203(k) insured loan?

A -
Yes. Mixed-use residential property is acceptable provided the property has no greater than 25% (for a one story building); 33% (for a three story building); and 49% (for a two story building) of its floor area used for commercial (storefront) purposes. The rehab funds can only be used for the residential portions of the dwelling and areas used to access the residential part of the property.

If you have a real estate question for Dottie, please send it to;

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