One of the great things about blogging is that it sets up a conversation with my readers. I regularly get questions on what is happening in the mortgage market, both general mortgage and real estate questions, and things that are specific to their situations. But it seems that I do get a lot of questions that come up regularly. These questions relate to many situations, so this is the first in what will now be an occasional feature on frequently asked questions. I hope the answers will help you and your specific needs.

Do I have to pay all collection accounts in order to get a loan approved?

Maybe, but not always. This is up to the underwriter’s discretion. Part of it depends on how old the collection accounts are and how serious they are. You will automatically need to pay any debt that will be or could turn into a lien against the home. But small, and especially older collection accounts may not be an issue.   

We are really looking at a couple of separate issues here. The first is whether or not the collections will hurt your qualifying for a mortgage, and the second is whether you will have to pay the collection off at all. The best thing you can do is talk with a good loan officer early, before you are going to need the mortgage. If you have a lot of collection accounts this is probably bringing down your credit score, which will make it hard to qualify for a loan. If you pay off old collection accounts it will probably lower your credit scores at first. This is because you are taking old information with no activity and bringing them up to the present day (new information counts more than old info). Over time this will change and your credit scores will improve, but if you plan on applying for a mortgage soon, it may hurt more than it will help. If your credit is good enough to be approved, you are better off waiting for the underwriter’s decision. If you need to pay something off they will let you know. Be sure to allow plenty of time so that you can negotiate with the creditor and get everything paid at the best terms possible.

Here is more information on how you can fix mistakes and get your credit in the best shape.

Can you still buy a condo with no down payment?

In most cases no. Condos have been hit harder than other types of property by the changes in mortgage guidelines. It used to be no problem to buy a condo with no money down. But the default rate on condos was higher than that on single family homes, and lenders pulled back and even more importantly, mortgage insurance companies pulled back on what they are willing to accept. Conventional mortgage guidelines now require a 10% down payment.

There are still a few options. FHA allows a 3.5% down payment on a condo. The condo either has to be approved by FHA and show up on their list, or you can do an FHA spot approval. FHA is in the process of changing their condo guidelines and making it more standardized so more condo units are able to be approved. I will post information on that once it is official.

If you are a qualified veteran you may be able to buy a condo with no money down through a VA loan. This is a great loan and a great option, but the problem here is that like FHA, you can only use this for condos that are on their approved list. Unlike FHA, VA has no spot loan process, so if it isn’t on the list, it isn’t eligible for VA mortgage financing. In real life, here in the Chicago market, this means your options are limited. Most of the condos available under the VA approved list are older properties. During the last several years when the market was booming and new condos were being built and rentals were being converted into condos, there were many conventional options, so the developers didn’t need to go through the extra cost and paperwork of getting their buildings VA or FHA approved. So this can be a great way to buy with nothing down, but your options will be slimmer.

What banks offer FHA mortgages in Chicago?

FHA loans are generally available through mortgage brokers and mortgage bankers, not regular banks. Maybe the more important question is, how experienced is the loan officer and their mortgage company in dealing with FHA loans? FHA used to be the best loan option for first time home buyers and other home buyers with a low down payment. But over the years FHA got a reputation as being hard to work with, and conventional options came out for buyers with first low down payments, then no down payments. As mortgage underwriting guidelines loosened, FHA Mortgages became less and less of a factor in the market. That has changed completely over the last year as conventional guidelines swung around 180 degrees and are now much more restrictive, while FHA has increased their max loan amount to $410,000 and have better pricing for many buyers with good but not perfect credit. This shift means that FHA mortgages are the hottest thing out there for new home purchasers.

The problem here is that so many of the loan officers and mortgage companies are now dealing with FHA for the first time. FHA is a great program, but it has its quirks. Conventional loans have gotten more and more automated over the years, and up until recently the documentation has been lighter. FHA requires not only more documentation and more forms but also a different mind set from how conventional loans are put together. I have a friend who is an FHA underwriter for a large wholesale company processing mortgage broker submitted loans, and she is amazed at how many loans are sent in that don’t even come close to FHA guidelines.

If you are about to buy a home and you are thinking of using an FHA loan, do your self a favor and do some extra checking on both your loan officer and the mortgage company. How long have they been in business? How long have they been doing FHA loans? Are they familiar with FHA guidelines? How many FHA loans have they actually closed?

FHA can be a great program, and is usually the best option for first time home buyers, but it takes more experience to get it right. If you want to close on time and at the best terms, make sure you work with an expert, not someone who is learning at your expense.

I’ll answer more questions in later posts.

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