The Check is in the mail - The first batch of economic stimulus checks are going out this week. Anyone who files a tax return up through October of this year is eligible, and with payouts of up to $600 per individual and $300 for each child under 17, this should cover several tanks of gas. What are you planning to do with your check? The idea behind the checks is the hope that if everyone goes out and buys something, this will kick the economy back in gear. There are of course, a few problems with this theory. First of all, not everyone is going to buy something. If you are feeling the economic pinch, you might rest easier putting this money in your savings account or paying off your credit cards. And those who do their civic duty and go out shopping are likely to buy foreign goods which will give a more limited kick. But if the checks make people feel more confident about their own finances, then the plan will have done its job. I think it will take more than this to prime the pump.

Take a ride on the Foreclosure Bus - I live in Dupage County, in the Western Suburbs of Chicago. The other day I noticed a number of small plastic signs set strategically along the side of the road. You’ve seen these kinds of signs before, they are often an ugly yellow that demands attention, and they usually appeal to some basic need, like sex or money. More specifically they tout themselves as the answer to what you need. Two examples are: Real Estate Investor Needs Apprentice - $40,000 per month, or Downers Grove (or Lisle, Wheaton, Glen Ellyn, insert your town) Singles Wanted, with a web site or phone number underneath. This was a new sign, one I hadn’t seen before. This one read: Tour Foreclosures by Bus. Now this got my curiosity going. I know that Hollywood has a tour of celebrity homes, and Chicago has architectural tours and ghost tours and all sorts of tourism related activities. But taking a tour of foreclosed properties seems a little bizarre. I know there are investors who are looking for ways to take advantage of the real estate slow down, and foreclosed properties sound like a natural. It’s not always easy to find the bargains, though. I have an investor client who put an offer on a pre-foreclosed property (a short sale – this is where the lender would have to agree to let the buyer buy for less than the full amount of the mortgage so they don’t have to go to the expense of foreclosing the property) 3 months ago. He’s still waiting for an answer. I called the number on the sign and was referred to a web site. The web site offers several tours in an “air conditioned bus” stopping at a variety of pre-foreclosed and bank owned properties. A Realtor is giving the tour and you will be able to make offers on the homes if you choose. The bus isn’t free, though. A ticket for one tour cost about $100, another tour of luxury homes was priced at over $300. But lunch is included. It is a sad fact of life that foreclosures are on the rise, even in the nicest areas. But if you are looking to invest, you don’t have to take a bus. If you are looking for investment property and need the name of a Realtor who can help you, let me know and I’ll direct you to an expert who can offer personalized service.

The Waiting Game - Tomorrow is a big day for those who are watching interest rates. The Federal Open Market Committee (the Fed) is expected to lower short term rates again by an anticipated .25 point. This cut is already built into the pricing, but the real interest is in what the Fed will say when they announce the cut. The last 2 meetings have ended up with major rate cuts, but some dissent from inside, as some Fed members worry that the rapid cuts in rate will go too far and fuel inflation. The conventional wisdom now is that the Fed is nearing the end of their series of cuts (for now, at least). If they say this in their announcement, look for mortgage bonds to surge and mortgage rates to fall. The Chicago PMI and the GDP (both show signs of strength or weakness in the economy) will also be released, so this should be a wild day for interest rates. I’ve been looking for rates to go lower, and I stand by that prediction.

Illinois Mortgage Rates and New

Welcome to Illinois Mortgage Rates and News week in review for the week ending April 25th, my take on the week’s financial news and how it affected Illinois mortgage rates.

There were a lot of mixed signals in the mortgage backed securities markets this week, and the upshot is that we are back in a battle between inflation and recession. Whichever side wins, we already know who loses – the American consumer. For now, it looks like inflation has the advantage. Commodity prices have spiked higher and oil hit a record high this week. Signs of inflation are easy to find, especially at the gas pump and the grocery store. Any sign of inflation kills mortgage bonds and sends mortgage interest rates higher. The reason for this is that mortgage holders (lenders and loan servicers) know that their loan, if all goes as expected, will pay them back at a set interest rate over a certain number of years (a 30 year loan will pay off within 7 years, on average). Inflation upsets this system because when inflation is raging prices move up and consumers have to spend more to get the same value they used to be able to buy for less. In other words, their money doesn’t go as far and dollars are cheaper. So a mortgage holder is worried that they will be stuck with a long term loan and their borrowers will pay them back with cheaper dollars, lowering the value of their investments. There is no doubt that we are seeing inflation, and it is now a global concern. But this is only part of the story.

Inflation is usually a sign of an overheating economy. When the economy is running strong and inflation is moving up, this is usually the point where the Fed steps in and raises short term interest rates to put on the breaks and bring inflation back in line. That’s not the case now and we aren’t exactly in boom times. In fact consumers as a group are feeling real pain now. One measure of consumer confidence, the University of Michigan Consumer Sentiment Index, came in today at the lowest reading since 1982. Fuel prices and food prices have moved up sharply at the same time that home values have fallen (much more in some areas than in others). This means that most people will pull back, and only buy the things they truly need.

Here is the question I have. Inflation is here, but will it continue to rise if people aren’t buying at the same rate they have been? A lot of companies released their earnings this week, and overall earnings were better than expected. Is this a sign that the economy is over the worst and ready for a rebound? I think there is a real split between corporate health and consumer health. A lot of the earnings surprises were a result of companies trimming their workforces, and sales overseas. I still don’t think we can have a real rebound until housing comes back. Is inflation a real problem when people are feeling crunched and their overall wealth level is down? I hear a lot of predictions that mortgage rates will continue to rise because of fear of inflation. I think we may have a problem with inflation down the road, but we need to get through the valley first. If consumer spending doesn’t pick up (and with credit getting tighter I don’t see how this will happen) inflation may be bled right out of the system. Rates have risen toward the high point of the range over the last 2 weeks, but they are still in the same range we have been in since before the first of the year. We will see how this all shakes out in the coming months.

New claims for unemployment insurance came in at 342,000, this week. High, but lower than the 375,000 released last week.  Existing home sales fell both nationwide and in the Chicago area. New home sales came in well below expectations, and there isn’t much new housing going up.

All this being said, there is still mortgage money available and we are in a buyer’s market. The contacts coming in show the buyers getting excellent prices compared to what homes were going for last year, and in many cases the sellers are chipping in by paying closing costs or other concessions. Rates are still very affordable and historically low. If you are thinking about buying a home in the Chicago area, or anywhere, and are ready to pre-qualify for a mortgage, let me know, I would love to help.

So where are we with mortgage rates? Rates moved down, then up, ending close to where they were at the end of last week.. Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, or to get pre-approved for a mortgage, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    6.00%     6.164% APR

15 year fixed rate    5.625%   5.754% APR

5-1 A.R.M.               5.50%     5.658% APR      

7-1 A.R.M.               5.75%     5.839% APR

For Jumbo loans over $417,000

30 year fixed rate*  6.75%     6.869% APR – Requires 20% down payment

(*We have one lender at 6.125% for a Jumbo fixed rate - if you meet their guidelines – 75% loan to value, tighter ratios.)

7-1 A.R.M.*             5.875%    6.142% APR *there is a 1 year pre-payment penalty on this option.

FHA LOANS

With 1 point origination fee – 60 day lock

30 year fixed rate  5.75%       6.047% APR

With no origination fee –        60 day lock

30 year fixed rate  6.00%       6.246%

These are just a sampling of the mortgage rates available. Which option is best for you depends on your own specific goals and needs. Next week’s economic news includes Tuesday’s 1st Quarter GDP growth, the FOMC meeting and rate decision on Wednesday, and Friday’s Jobs Report, always a big mover of mortgage rates. Expect another wild week.

Illinois Mortgage Rates and News

In a recent post, I talked about how an underwriter looks at a borrower’s credit history, income and job history to determine how much of a mortgage they can qualify for. The other big part of qualifying for a mortgage is showing how much skin you have in the game, that is how much are you investing in the home, and where the money is coming from. We need to make sure you have enough money for your down payment and closing costs, and in some cases, money in reserve. Again, this all goes back to the idea of risk. Not so long ago it was common to buy a home with no money down. But that was before the real estate market turned down. Conventional lenders have now eliminated 0 down financing and you will, in most cases, need to have at least 5% of the purchase price for a down payment. You still can buy a home with little or no money down, but you have to plan ahead and it won’t work in all situations.

Why does the lender want you to have your own money invested in the property you’re buying? There are a few reasons. First, if you have your own money at stake, you’re more likely to take care of the property and make sure you make your payments on time. An investment in your home strengthens your commitment. Mortgage insurance and 2^nd mortgages allow you to buy with lower down payments while taking some of the risk off the lender. How ever much you are putting down, we need to verify it, know where it’s coming from and be able to prove that you have enough to close.

In order to check for assets, we need to know where the money you need to close (down payment and closing costs) is coming from. Here are some acceptable sources for a down payment:

• Money on deposit in the your checking, savings, money market, certificate of deposit or any other liquid account.
• Money from liquidation of stocks or bonds.
• The proceeds from the sale of a house or other assets (an extra car, a boat or having a garage sale).
• A loan against your current home or other secured asset.
• A liquidation or loan against your 401K or IRA.
• A gift from a relative or a grant from an agency (like AmeriDream or Nehemiah) that doesn’t have to be repaid.
• Cash value from a life insurance policy.

If you are using money from a bank or other cash account, we will need to verify that the money in the account is really yours. We will look at the statements for the last 2 months. If there are any large deposits (not counting your normal payroll checks) we need to show proof with a paper trail of where the money came from. As you can see, there are lots of ways to raise the money for your down payment - here is a bigger list. Where it can’t come form is an unsecured loan (no credit cards). Again, the lender wants to make sure you have skin in the game, and borrowing more money doesn’t cut it.

To make the loan approval process as smooth as possible, it’s important to know where your down payment money is coming from. It’s best not to transfer money from account to account, if possible, but if you have to, make sure you keep records so we can trace the flow of funds. If you have any questions about your down payment, and whether it will be acceptable, discuss it with your loan officer before you are ready to make an offer, to make sure you can structure it correctly and this won’t be a problem later.

Gifts for your down payment - Gifts are a special case, and if you are expecting that some of your money will be from a gift, a little planning ahead of time will make your experience much easier. First of all, gifts aren’t allowed on every program. With some conventional programs, unless you are putting at least 20% down, 5% of the down payment needs to be from your own funds - all the rest can come from a gift. With FHA loans all your cash can come from gift, or a grant from a non-profit agency.

Gifts also have to be documented in a particular way. We have to be able to show that this truly is a gift, not a loan. To show this, we use what is called a gift letter. This is a form that is filled out by you and the person giving the gift. It states how much the gift will be, what your relationship is to the person (it has to be a family member of some kind), and that this is a gift and won’t need to be repaid.

The next step is we need to prove that the donor (the person giving the gift) has enough money to give the gift. For this we will need an account statement or a letter from the donor’s institution stating that they have the funds available. The last step is that we need to show the transfer of funds from their account to yours. The easiest way to prove this is for them to give you a certified check showing them as the donor and you as the payee. Make a copy of the check and show the deposit into your account, and we’re done. If they give you the gift as a personal check, you will need to allow extra time because then we’ll have to see the canceled check. This whole process is clumsy and redundant, but following each step will make things much smoother in the long run.

One other note, this letter and the documentation are only used for approving the loan. None of the information will be shared with the IRS, or any other government agency.

Your credit, income and assets are what we look at when approving you for a mortgage. The other part of the approval is approving the property. I’ll have more on appraisals in a future post.

Illinois Mortgage Rates and News

Welcome to Illinois Mortgage Rates and News week in review for the week ending April 18th, my take on the week’s financial news and how it affected Illinois mortgage rates.

In last weeks review I said that the calm in the mortgage backed securities market was unlikely to last, and that I

expected rates to make a move out of their range soon. On that count I was 100% correct. I did however think that the odds were that the move would be toward lower interest rates. I blew it on that call. Mortgage bonds tanked this week sending mortgage interest rates higher - though there was an impressive recovery on Friday afternoon which brought rates back from the brink. Last week the consensus was that the economy was softening and we had a ways to go before the credit crunch played out. This week traders are feeling more optimistic on the economy and think that the worst is over. The view now is that we are finished with Fed rate cuts and our biggest worry is inflation. Not a lot has changed over the week to justify such a big swing in perception. There were some better than expected earnings reports this week, and a few economic reports came in better than projections. But most of the news was in line with earlier reports of a soft economy. In fact, most of the news that came out this week showed that there may still be some bumps in the road ahead of us. Credit is still tight and consumers are feeling pressured. The slowdown appears to be spreading beyond our borders and becoming global. We may be at the tail end of the credit crunch - at least from the perspective of the big financial players - but it is going to take a while before this trickles down to the American consumer.

The most anticipated reports this week were the release of CPI and PPI, two measures of inflation. PPI, the producer price index, came in a little hotter than expected, but this was due to high fuel costs. This isn’t always the best measure of inflation because in a soft economy producers aren’t always able to push their higher costs on to consumers, and often take the hit in their profit margins. CPI, the consumer price index, came in right as expected, with a moderate increase, not in the danger zone. Unemployment claims inched higher to 322,000. The levels of unemployment claims are at the level seen in past recessions. The Philadelphia Fed index came in much worse than expected and at the lowest level since 2001, another sign of a slowdown, and the Fed Beige book showed that economic conditions have “weakened” and residential construction is “anemic”.

All this data would normally cause mortgage bonds to rally pushing mortgage rates lower. So what happened that made traders so optimistic? A couple of things. First, some big corporations – IBM, Google and Caterpillar - came in with higher than expected earnings – mostly due to a rise in sales over seas, partly helped by a weak dollar. And then some financial powerhouses – Citigroup and Merrill Lynch – came in with huge losses, but less than expected. Citigroup announced the write down of another $12 Billion from bad credit loans, a quarterly loss of $5.1 Billion, and plans to layoff 9,000 employees. I figured out a long time ago that traders (stock, bond, whatever) live in Bizarro world, so this doesn’t completely surprise me. The thinking is that these losses, while HUGE, are less than what they could have been, so this means we are now near the bottom and we are ready to get back to the way things used to be. It is true that corporations like Citi can make a ton of money quickly. Their cost of borrowing has gone down, but they haven’t lowered the rates that consumers pay for most loans. The question here is whether or not rising defaults on credit cards and car loans will cut into these profits down the road.

Though rates have risen, I still think we are going to see lower mortgage rates before this is all over. Traders are fickle creatures. They jump on a trend and ride it as far as they can, but they are quick to jump off and ride in the other direction at the slightest change in direction. Little changes make big moves, especially now in a time when volatility is so high. Friday afternoon was a good example of this. Mortgage bonds started the day off with a loss of 66 basis points (a huge loss). It looked like bonds were on track to test the worst levels we’ve seen in months, when they switched direction and rallied higher. At the end of the day mortgage bonds closed up 31 basis points, up over 100 points from their low. What news came out to justify this switch? Not a thing. After the fact commentators came up with justifications for the switch, but the truth is it is all about market sentiment and this can switch on a dime. Traders and big investors are thinking that the worst is over, and they can see a time when the housing crunch is over and the economy is back on track. They can see it clearly, but we may have some valleys we have to cross before we get there. When we hit these valleys - or if there is even a hint that these valleys are out there - stocks will tank money will rush into mortgage bonds and rates will improve.

There is still a wide spread between T-bills and mortgage bonds, the market for Jumbo loans is still broken and ARMs are still priced out of the market. Investors still lack confidence in mortgage bonds, and mortgage wholesale lenders are holding back on their pricing to make up some of their losses. All this being said, there is still mortgage money available and this is a great time to buy a home. If you are thinking about buying a home in the Chicago area, or anywhere, and are ready to pre-qualify for a mortgage, let me know what I can do to help.

So where are we with mortgage rates? Rates are sharply higher than last week, but still historically low. Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, or to get pre-approved for a mortgage, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.875%   6.064% APR

15 year fixed rate    5.50%     5.675% APR

5-1 A.R.M.               5.50%     5.675% APR      

7-1 A.R.M.               5.75%     5.839% APR

For Jumbo loans over $417,000

30 year fixed rate*  6.75%     6.869% APR – Requires 20% down payment

(*We have one lender at 6.125% for a Jumbo fixed rate - if you meet their guidelines – 75% loan to value, tighter ratios.)

7-1 A.R.M.*             5.875%      6.142% APR *there is a 1 year pre-payment penalty on this option.

FHA LOANS

With 1 point origination fee – 60 day lock

30 year fixed rate  5.75%       6.047% APR

With no origination fee –        60 day lock

30 year fixed rate  6.00%       6.246%

These are just a sampling of the mortgage rates available. Which option is best for you depends on your own specific goals and needs. The big question for next week is if the rally on Friday will carry though, or if it is a temporary blip in a worsening market. Stay tuned to find out more.

Illinois Mortgage Rates and News

Are you just starting to look for a home in the Chicago area, and wondering how much of a home you can afford? There are all types of rules of thumb for how much of a home you can qualify for, but rules of thumb are simply estimates, not guidelines. It used to be that there was a hard set formula for how much of a loan you would qualify for, now the underwriting process is more technology driven and in many cases you can qualify for more of a mortgage than you can comfortably afford. But how much you can qualify for is just a first step. The mortgage you choose has to fit your life style and future goals, as well as your current financial situation. To find out how much of a home you can afford, and how much of a mortgage payment is right for you, you need to understand what we look for in the mortgage process, and how mortgage loans are approved.

What lenders are looking for: When qualifying for a mortgage, I look at it as a game of twenty questions. I need to get as much information about you and your finances as possible to make sure we find the best loan program for you. The whole idea behind the qualifying process is to measure the risk, that is, to figure out how likely it is that a borrower will pay back the money they’re borrowing. I ask a lot of questions, but the personal qualifying issues all revolve around 3 areas:

Credit

Income

Assets

Your history in these 3 areas determines what type of loan you can get, how much you can afford, and what your payments will be. All conventional loans (those loans eligible for purchase by Fanny Mae and Freddy Mac, the 800 pound gorillas in the mortgage market) are now put through an automated underwriting process. This is a computerized artificial intelligence program which weighs all of your risk factors and spits out a decision on whether or not the loan is acceptable. In most cases the loan decision is made by computer, but loan officer and underwriter have to make sure that all the information that is put in is true and verifiable. FHA also uses the same programs, but there is more leeway and more chance of an approval if the loan is underwritten manually (that is, by a real live person). Let’s break these factors down a little.

Credit Qualifying – Credit scores are key. With a high credit score you can get approved for a much higher mortgage than someone with the same income and debts, but a lower score. Your credit score is crucial not only for approval, but for how much you pay for your loan. One big change in the mortgage market is the new Risk Based Pricing model. This is the idea that those borrowers with the best credit scores and higher down payment will be able to get mortgages at the best rates, and those with lower credit scores and lower down payments will have to pay more. The people affected by this change are borrowers with credit scores good enough to qualify for Fannie Mae and Freddie Mac based conventional financing. This concept has been talked about for years, but it is only now with the soft real estate market that it is going into effect. Or more to the point, it’s only going into effect now when the big mortgage players are taking it on the chin for all the bad loans they wrote when credit was easy. Those with lower scores and not much equity (first time home buyers?) will be hit hardest. FHA does not have risk based pricing, which makes it a good option for many home buyers. Here is some information on what you can do to make the most of your credit.

Income Qualifying - The second area we look at is your income. Again, we’re measuring risk here. In this case we want to make sure that your income is high enough to comfortably make the payments on your new mortgage and that your income is . To do this, we look at two things: How stable is your income? and, How does your income relate to the housing payment and your other debt? I’ll go over both.

Income stability - When people are trying to figure out how much they can afford, this is one area where it’s easy to get bad information. First we need to determine how much you make each month. We use gross income, not your take home pay. If you’re in a job where you get the same amount of pay each month, it’s pretty simple. But if you have a job where your income fluctuates from month to month, like commissioned sales or construction, or if part of your pay comes from bonuses, it gets more complicated. In these cases we need to go back and look at the history of your income over the last two years and make sure that this income is likely to continue.

The truth is, lenders look more favorably on someone who has been in the same (or similar) line of work for at least 2 years. If you haven’t been working steadily for the last two years, we need to know why. There are many acceptable reasons, including:

· You recently finished school, vocational training, or left the military.

· Your work is typically seasonal and gaps in employment are normal in your industry.

· You have been laid off from your job.

· Frequent employment changes are normal in your line of work (if you are in car sales, for example), but you have been consistently employed and maintained a consistent level of income over the past 2 years.

Besides income from your job, other sources of income can also be used. These can include alimony or child support (we need to see that you have a history of receiving it), pension or disability payments, investment income, trust income, income from a part time job and so on. Again, in order to use this income to qualify, we need to be able to show that the income is likely to continue.

Housing and Debt Ratios -This is a big factor in how much you qualify for, but one that has changed a lot recently. There are actually 2 ratios we look at. The first, the housing ratio, is a measure of your total housing cost compared to your monthly income. The housing figure includes all the normal monthly costs of owning a home: the principal and interest payment, the monthly taxes and insurance, mortgage insurance, and the association fee if it’s a condo or townhouse. The second ratio is the total expense ratio. This measure includes not only your housing expenses, but all your other monthly debts, too. So this takes into account all your minimum credit card payments, car payments, student loans, any alimony or child support, and the like. (There are some obligations that you are required to pay, things like car insurance and day care for children, that don’t count in the ratio. You do, however, need to keep these items in mind when budgeting.)

For years, the maximum ratios were 28/36; that is, no more than 28% of your income could go toward your housing payment, and all your debts combined couldn’t be above 36% of your income. This isn’t the case anymore. As I mentioned before, credit scoring changed everything. With good credit, it’s now common to qualify for a much larger payment than you would have before. You still need to budget and make sure that the payment you qualify for is one you are comfortable with.

What if you can’t prove all the income you receive? This is another area where the underwriting guidelines have changed a lot. Not so long ago, there were lots of loans that didn’t even ask about how much you made, or if they did, they didn’t try to verify it in any way. These programs went under a variety of names such as, no income verification (NIV), no ratio loans, stated income and ‘No Doc’ loans. These opened the system to a lot of abuse. Some people bought houses they had no hope of making the payments for, and foreclosures in these loans skyrocketed.

Because of these problems, lenders have pulled most of these loans off the table. Still, if you are self employed, or if you know that you’ll be able to make the payments, but there’s income that we can’t use for qualifying, and you have good credit, there are some options available. It all depends on the amount of your down payment and your credit score. If you have questions about whether we can use all of your income to qualify, give me a call and I can find the program that works best for your circumstances.

I’ll go over the third area, asset qualifying, in my next post.

Illinois Mortgage rates and News

Welcome to Illinois Mortgage Rates and News week in review for the week ending April 11th, my take on the week’s financial news and how it affected Illinois mortgage rates.

Over the last few months, the mortgage backed securities market has been extremely turbulent, moving back and forth in a wide range. This week we still had our ups and downs, but the range has narrowed. There were still a few days where wholesale lenders sent out intra-day re-prices, but overall this week was the flattest week we’ve seen in ages. We are sitting up near the top of the range for mortgage bonds, which means that mortgage interest rates are near the low point of the trading range. The question is, how long are we going to stay in these calm waters? Will we stay in this range, or are we about to break out of the range, either higher or lower?

The major mover in both stocks and bonds this week was the release of quarterly corporate earnings reports. The week started out with some rumors in the financial markets that the worst of the credit crunch was over. As one example, Washington Mutual, a big mortgage lender who has been hit hard by the credit crunch, was recapitalized with a $5 billion dollar cash infusion. This was looked at as a sign that good times were ahead and optimism reigned. But optimism can be a fickle thing in a soft economy. As companies released worse than expected earnings, the view switched back to concern that we still haven’t seen the end of the problems associated with the crunch. Washington Mutual did get their money, but later in the week they announced they were closing their wholesale mortgage division and many of their retail locations will be shuttered. The earnings releases were a mixed bag. Some corporations came in with better than expected numbers, but many were worse. The biggest surprise was the release Friday of corporate giant General Electric, the world’s second largest company. Their profit dropped 6% in the first quarter and they expect the whole year to be challenging. The mood in the markets turned from optimism at the beginning of the week to pessimism at the end.

In other news, initial jobless claims came in better than expected with 357,000 new claims compared to the 383,000 projected. But the 4 week average spiked higher, which means the job market is still in the dumps. A sure sign of a recession. The Consumer confidence index came in at a 26 year low. This is a sign that consumers are worried tapped out, and unlikely to pull any cash out for big purchases. Consumer spending has been the engine driving economic growth. This reading says that they are not about to pull out their wallets in order to rescue the economy. Another sign of a recession. The state of the economy and the housing situation has now become the biggest issue in the presidential campaign and in the halls of congress. Even John McCain, a free market Republican, has now insisted that the government get involved in a solution. It’s not clear what will come out of all this, but we are sure to see more plans to stimulate the economy and get the housing market on track.

As I have written before, with all the news on the economy pointing to a slowing economy, odds favor that when we do break out, it will mean that rates will drop lower. By all economic measures mortgage interest rates should be lower now than they are. The reason they aren’t is because the mortgage bond market is still broken. Investors still lack confidence in mortgage bonds, and mortgage wholesale lenders are holding back on their pricing to make up some of their losses. At the same time, rates are excellent now, and they may drop lower. If you are thinking about refinancing your mortgage or are looking at houses and are ready to pre-qualify for a mortgage, let me know what I can do to help.

So how did all this activity affect mortgage rates? Again, relatively calm waters. Rates moved around but ended up close to where they were at the end of last week. Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, or to get pre-approved for a mortgage, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.625%     5.746% APR

15 year fixed rate    5.25%     5.324% APR

5-1 A.R.M.               5.25%     5.324% APR      

7-1 A.R.M.               5.625%     5.789% APR

For Jumbo loans over $417,000

30 year fixed rate*  6.50%     6.613% APR – Requires 20% down payment

(*We have one lender at 6.125% for a Jumbo fixed rate - if you meet their guidelines.)

7-1 A.R.M.*             5.625%      5.789% APR *there is a 1 year pre-payment penalty on this option.

FHA LOANS up to $410,000

With 1 point origination fee – 60 day lock

30 year fixed rate  5.50%       5.784% APR

With no origination fee –        60 day lock

30 year fixed rate  5.875%       6.246%

These are just a sampling of the mortgage rates available. Which option is best for you will depend on your own specific goals and needs. Next week retail sales will be released on Monday, and the expectations are for a bad number. The PPI and CPI, two big measures of inflation will also be released. This week has been calm, next week may be more choppy.

Illinois Mortgage Rates and News

In the mortgage industry, the present is looking more and more like the past. Back in 1992 when I first got into the mortgage market, George Bush was finishing his last year in office (though he didn’t know it at the time), a Clinton was running to take his spot and Brett Favre had just been picked up by the Green Bay Packers. A lot has happened in between, but another George Bush is finishing his time in the White House, another Clinton is running for president and now that Favre has finally retired he is threatening to un-retire and continue his reign of terror against our beloved Chicago Bears. In the mortgage industry the future is looking a whole lot like the past, too. Back when I first started there were two types of loans which covered the majority of lending options – conventional and FHA. Conventional mortgages were for those home buyers who had strong credit and a good down payment. FHA was for everyone else.

Back in the day, we put together loan packages which highlighted the strengths of the borrower, and showed that they met all the guidelines in regards to credit, income, job stability and having enough money to close, as well as a full detailed appraisal. With changes in technology and a strong national real estate market, mortgage underwriting loosened up a lot. The credit score became the biggest factor in the approval process. With a high FICO score lenders would overlook weaknesses in other areas. It got to the point where some of the biggest wholesale lenders were doing most of their business taking on loans where the borrower stated their income and assets without proving the figures were true. (Even the appraisal guidelines loosened and many loans were approved with just a drive by appraisal, or a computerized estimate of value.) These loans were sold as a way for well qualified borrowers to cut down on their paper work and to streamline the loan process. Unfortunately, this opened the way for abuses and led to “Liar’s Loans”, and some people who bought way over their heads, and couldn’t afford to make their payments.

It wasn’t until property values declined (not so much here in the Chicago area, but very sharply in some areas of the country) that the abuses in the system really showed. When home prices were moving up borrowers found a way to make the payment, even if it was by borrowing more against their home. Now loan defaults are up and mortgage lenders have found that old time religion again. This means we are back to the old ways of doing things, tighter underwriting for everyone, and FHA is again the best option for many borrowers and first time home buyers.

So what can you do if you are planning on buying a home or refinancing your mortgage and you want to make sure you present your self in the best light? Here are a few things you can do ahead of time to improve your chances of getting a loan at the best rate and terms:

1. Focus on your credit – One thing that hasn’t changed is that your credit score and your credit profile are still a crucial part of the loan approval. Make sure you review your credit before you need a loan. If you have problems, work on them when you still have time to get them fixed. Here is a series on credit that will help you understand your options, and show you how to increase your credit score.

How to understand and improve your credit score-part1

How to understand and improve your credit score-part2

How to understand and improve your credit score-part3

How to understand and improve your credit score-part4

2. Address problems up-front – If you have had problems of some type in the past, don’t try and hide them. In the mortgage process we look into all the information you present and verify everything. But some things that you may think are huge problems we may be able to work around. For example, if you have credit problems from the past that are hurting your credit score, FHA can still be an option. The key here is to show that you have moved beyond these problems and they are no longer an issue. To show this you will need to write a letter addressing any credit problems that show up on your credit report. In the letter you need to explain what happened, what you have done to correct the situation and why this isn’t a problem anymore. If you have any documentation to help your case, provide it. The same applies for other problems like job gaps and

3. Put together your documentation – The days of the no-doc loan are gone, so you will need to have documentation proving you make enough income to afford the mortgage payments and you have enough money or other assets to pay for the down payment and closing costs. This usually means putting together some simple documentation. In some cases we can get by with less, and in others we will require more, but this is a good list to start with -

W2s for the last 2 years (in some situations we will need full tax returns),

Your pay stubs for the last 30 days

Bank and investment statements for the last 60 days with all pages attached.

4. Have a plan – Do you know how much of a payment you can afford? Do you know how much cash you can come up with for a down payment and closing costs? There are still ways to buy with little or no down payment required, and there are ways to buy with no closing costs. If you have money to put down, where is it coming from? Will you still have money left over afterwards for other purchases or emergencies? You need to think about these things before you look for a home and applying for a mortgage. The answers to these questions will help you to decide what to look for and how you will finance it.

5. Get pre-approved for a mortgage – With all the changes in the mortgage market this step is crucial. A mortgage pre-approval will tell you how much of a loan you can qualify for and how much of a home you can afford. A good loan officer will take it a step further and help you to figure out the best way to structure your financing so it meets your long and short term needs. And if there are any problems, a good loan officer can also give you advice on how to put yourself in the best position to buy a home, if not now in the future.

The mortgage industry might have gone back to the past, but if you make a plan and follow through, there could be a new home in your future.

Illinois Mortgage Rates and News

Welcome to Illinois Mortgage Rates and News week in review for the week ending April 4th, my take on the week’s financial news and how it affected Illinois mortgage rates.

This week was a good example of how bi-polar our financial markets have become. At the beginning of the week UBS, one of the biggest investment houses on Wall Street and a big player in mortgage backed securities, announced a loss of 19 billion dollars from its sub prime holdings. To me this would be looked at as bad news. This is a huge loss and a scary reminder of how Wall Street feasted on this junk, and how vulnerable these outfits are now to the risk from it. But that was just my take, and I am after all just an amateur. The professionals looked at it differently. They looked at this as great news. If the big players were writing down huge losses, this must mean the worst is over and we are about to turn the corner and happy days are ahead of us. The stock market had a huge rally (for a couple of days) and mortgage bonds tanked, sending mortgage interest rates higher. I hope they are right, but this seems like Alice through the looking glass, magical thinking. Some times bad news is just bad news.

By the end of the week we saw the other side of the coin. The monthly jobs report is usually the biggest mover in mortgage backed securities, which relate directly to interest rates. This report monitors employment, and the more people who are employed at good wages, the better the overall economy is. The opposite holds true, too. When employment is down consumers hold back spending and the economy suffers. I’ve talked before about how bad news for the economy is good news for mortgage rates, this is a prime example. The market was expecting a loss of about 50,000 jobs, and some news released earlier in the week showed a possibility that the number would come in much better than expected. The real number was a loss of 80,000 jobs, and the mortgage bond market skyrocketed, which meant that rates are again coming down. The other news in this report was a revision downward of jobs created in January and February to show another 67,000 jobs lost. So don’t be surprised if this month’s number turns out to be larger than expected when it is revised next month.

So what was the real difference between the optimism on the economy at the beginning of the week and the pessimism at the end? It was all perception and market sentiment. Mortgage bonds, and mortgage interest rates, are trading within a wide range. Volatility has been high, but there has been a ceiling and a floor, and the trading has bounced back and forth between these points. With the big run up in mortgage backed securities over the last few days, we are now starting to get close to the top of the range (which means the low end of the range for mortgage interest rates). In the past, as we hit that ceiling, mortgage bonds would bounce off of it and head back in the opposite direction, meaning mortgage interest rates would go back up. Chances are that at some point we will break through this range. With all the news on the economy pointing to a slowing economy, odds favor that when we do break out, it will mean that rates will drop lower. If you are thinking of refinancing your mortgage or are about to place an offer on a home, be sure and get your documentation into your mortgage lender ahead of time (or contact me, I welcome the business). You want someone who follows the market to help you time the best time to lock in your rate.

In other news, conventional ARMs are still out of the market, but some lenders are starting to test the waters again. Hopefully we will see more of a difference between fixed rates and adjustables in the coming weeks. Also, as FHA mortgages take up more and more of the slack from the tightening of conventional underwriting, we are seeing underwriting times get longer. If you are planning on buying a home or refinancing a mortgage and FHA is your best option, be sure to allow extra time for processing and closing your loan. We have some investors who are now taking up to 3 weeks for underwriting an FHA loan.

So how did all this activity affect mortgage rates? Although rates have moved a lot over the course of the week, they ended up close to where they were at the end of last week. Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, or to get pre-approved for a mortgage, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.625%     5.746% APR

15 year fixed rate    5.125%     5.274% APR

5-1 A.R.M.               5.375%     5.587% APR      

7-1 A.R.M.               5.625%     5.789% APR

For Jumbo loans over $417,000

30 year fixed rate*  6.875%     7.126% APR

(*We have one lender at 6.125% for a Jumbo fixed rate - if you meet their guidelines.)

7-1 A.R.M.*             5.625%      5.789% APR *there is a 1 year pre-payment penalty on this option.

FHA LOANS up to $410,000

With 1 point origination fee – 60 day lock

30 year fixed rate  5.625%       5.897% APR

With no origination fee –        60 day lock

30 year fixed rate  5.875%       6.246%

These are just a sampling of the mortgage rates available. Which option is best for you will depend on your own specific goals and circumstances. Check back regularly to keep up to date on any changes in the market.

Illinois Mortgage Rates and News

In my last post, I talked about how it is still possible to buy a home here in the Chicago area with no money down with FHA financing combined with a Down Payment Assistance program like AmeriDream or Nehemiah. But even if you are able to buy with no money for the down payment, there are still other costs you will need to come up with at the closing. You will need money to pay for the bank closing costs which include the appraisal and credit report, a commitment fee for FHA financing and underwriting and processing charges for conventional loans. Then there are title charges, transfer taxes, pre-paid interest, insurance and the money to set up your escrow accounts. The truth is, real estate is a high cost transaction. Even with out the down payment a typical real estate purchase will cost you thousands. So what happens if you are ready to buy now, but your pockets are empty and your wallet is still a little light? There are a couple of ways to buy with no money out of your pocket, but you need to plan ahead.

One way is to ask the seller to pay for your closing costs through a seller concession. You need to ask for this as part of your initial negotiation, once you have a signed contract it is too late. Most conventional loan programs allow the seller to contribute up to 3% of the value toward the buyer’s costs, and with FHA you can get a 6% seller concession. You will need to talk with your lender and have him put together a Good Faith Estimate of what all your costs will be to close. Once you know how much you are going to need, you can ask that the seller to pay that amount at the closing. From the seller’s standpoint, this is part of the price. Any money that he pays out is deducted from the sale price. If the contract for the home is $300,000 and they are paying $3,000 for closing costs and pre-paids, the true sale price is $297,000. It is important to phrase it so that the seller credit will be “toward closing costs”.

You can’t walk away from the closing with any extra money, so make sure you have a use for all the money you get as a concession. One of the great things about this program is that you can use it in different ways. Not only can you pay for the normal closing costs, but you can also use a seller concession to pay for points to lower your interest rate, or for more creative financing options like an interest rate buy-down. Remember though, the seller is looking at this based on how much they will net from the sale, but the appraiser is basing the value on the contract sale price. So it will need to appraise out at the full contract price. This can be more of an issue if you are asking for substantial closing costs along with a seller donation to pay for a grant from Nehemiah or AmeriDream.

Another way to pay for closing costs is through a lender credit. This is more common with refinances than it is with purchases, but it is a great option in some situations. As a mortgage banker, I can offer loans in a variety of price and cost variations. For people who are strapped for cash, it is possible to offer a slightly higher interest rate, but use some of the premium to pay for the loan costs. Whether this will work for you depends on your whole situation. But it is an option, and one more way to reduce the cash you need to close.

Illinois Mortgage Rates and News

Now that it’s April, I think it is finally safe to say winter is over here in the Chicago area. It’s been a long hard winter, and spring couldn’t come a moment to soon. But the baseball season has officially started, the sun is out and my phone is ringing with first time home buyers who are ready to take the plunge into home ownership. Yep, this is springtime in Chicago. First time home buyers generally have two things in common. One, they are nervous about the home buying process and whether they will be able to qualify for a mortgage (especially now with all the economic uncertainty and the tighter underwriting from the mortgage mess), and two, they don’t have a lot of money saved up for a down payment. This wasn’t a problem a year or two back. Over the last few years 100% financing loans were the norm for first time home buyers. Now, with mortgage guidelines tightened (strangled?) and mortgage insurance companies running scared, no money down conventional loans have disappeared. So the question is, can you still buy a home here in the Chicago area with no money down?

The answer is yes. You can still buy a home with out any of your own money, but you will have to plan ahead. The best way left to buy with zero down is with an FHA loan combined with a grant from a down payment assistance program. (There are plenty of reasons to buy FHA in our present mortgage market, even if you could qualify for a conventional loan). Most conventional loans now require a 5% down payment (it could be more in areas marked as declining markets). FHA only requires a 3% down payment. But even a 3% down payment can be a huge obstacle. The down payment can mean the difference between buying now, and waiting a few more years until you have put enough cash aside to buy. This is where the Down Payment Assistance programs (DPAs) come in.

FHA guidelines say that you can buy a home with no down payment if the money comes as a gift from a relative or a grant from a charitable or non-profit organization. The gift from a relative is always an option, but if you don’t have a rich uncle to call on, there are plenty of non-profits that want to help you out. The DPAs take advantage of a loophole in the FHA guidelines. In a way, this is a legal form of money laundering. The home seller is actually paying for your down payment.

Here is how it works. When you find the home you like, you negotiate the contract so there is a concession on the price upfront which allows the seller to donate the amount to the DPA. The two biggest DPAs are Nehemiah and AmeriDream. With AmeriDream, the donation from the seller needs to be 3% of the sale price plus $500. The 3% will go for the down payment; the rest goes to pay for the organization’s administrative costs. The seller then agrees to give this negotiated concession to the DPA at the closing table out of the proceeds from his home after the loan has closed. The DPA in turn give a grant to the buyer for their down payment at the closing table. So the grant is from the DPAs own funds and the donation from the seller goes into their coffers to pay for the next home buyer.

Why would the seller go along with this? Sellers are concerned with how much they will net, not how the loan is structured. So let’s say you were buying a home listed for $300,000. One way you could do this is offer a purchase price 3% ($9,000) below the list price. This means the seller is selling the home for $291,000. Another way you could do it is by offering the seller the full asking price of $300,000, but conditional on the seller donating the 3% to the DPA. Either way he nets the same amount, $291,000. (This is simplified because the administrative fee needs to be in there too). The important thing is to do this when you are first negotiating the offer. If you are negotiating on the same $300,000 home and the seller agrees to sell it for $290,000, you are going to have a hard time coming back later and asking him for more of a concession to pay for your down payment.

There are a few things to watch out for with this home buying strategy. First, the property has to be able to appraise out. You need to negotiate a price which will stand up to what comparable homes are selling for. Also, you need to make sure you follow the guidelines and get all the proper documentation. You will need to put the right phrasing in the contract, and get a few extra forms signed. Here is the wording for AmeriDream:

Seller agrees to contribute 3% of the purchase price ($ ), plus $500 (total $_______) to the AmeriDream Downpayment Gift Program.

There were some questions about whether these DPAs were legal and if the program could continue. But a court ruling last year kept the down payment assistance option open, so for now it is the best option for first time home buyers or anyone who wants to buy a home with no money down.

Keep in mind, the down payment assistance program takes care of the down payment, but you will still need money for closing costs, pre-paid interest and to set up the escrow accounts. There is a way to buy with not just no down payment, but with no money out of your own pocket at all. I’ll cover that in my next post.

Illinois Mortgage Rates and News