The Spring home buying market has officially started. Conventional thinking is that the Spring real estate market starts after the Super Bowl is over. The reason for this isn’t that home buyers are all huge football fans who can’t be bothered with looking at homes because they are perfecting their guacamole recipes (I’ve got a great one if you want it). The real reason the market starts now is more coincidental. In a typical year it is the first time home buyers who start the real estate sales rolling when they come into the market to buy homes at the lower price levels. The reason they are coming into the market in early February, when the weather is nasty and it is probably the worst time of the year to look at houses, is because they have just filed their taxes and have tax refunds which can be used for down payments on a new home.

I expect this to be a big year for first time home buyers for a number of reasons:

1. There is pent up demand from buyers who have sat on the sidelines the last 2 years.
2. There is a bigger inventory of homes for sale this year than any time in the recent past.
3. Bargains abound. The sellers are motivated to sell, and with much of the inventory made up of foreclosure and short sale properties, buyers can get much more home for their money than they ever thought possible.
4. Mortgage rates are low which means more home for the money you pay each month, and with FHA financing, first time home buyers can still buy with low down payments (and this can all be a gift from a relative).
5. They need less cash to close because contracts are now commonly written with the seller paying the buyer’s closing costs.
6. The first time home buyer’s tax credit is worth $7,500 off their taxes when they file or amend their taxes (and provisions in the proposed stimulus package could make this better), but there is an expiration date of July 1^st (though this may be extended in the new bill – more details once it passes).

So there are a lot of good reasons why first time home buyers will be a big force this year. But the mortgage market is still tightening, and home buyers need to be aware of how these new changes will affect them. Here are the 3 biggest changes that will impact first time home buyers:

• Fannie and Freddie (the 2 big movers in the conventional market) have now adopted guidelines which put a surcharge on loans to condo buyers who buy with lower than a 25% down payment, effectively raising the interest rate. The idea here is that they are charging more for the loans which have more risk. New Condos and condo conversions have come on the market at a feverish pace over the last few years, and the loan default rate on condos is higher than it is with single family homes. So in a way, this is aligning financing guidelines with the reality of the market. But condos are a big part of the housing stock in the Chicago area, and the first step for many first time buyers. With add-ons and restrictions from PMI companies you will need at least a 10% down payment to buy a condo with a conventional loan, and the rates and fees will be higher. This means that FHA will be the best option for more condo buyers (3.5% down payment), but not all condos will be eligible. Most condo complexes never applied for FHA project approval, but you can get an FHA spot loan if the condo meets the guidelines.
• Mortgage insurance guidelines are tightening, again. One of the largest private mortgage insurance companies came out with new guidelines recently as to what they are now willing to insure. They are now requiring a minimum credit score of 680, but in a declining market, which includes much of the country, they will now require a 700 or better credit score. They are also requiring a maximum debt to income ratio of 41%. In the past when one PMI company made a change, the others would quickly follow. This is just more proof that they want only the very best qualified borrowers. This means that FHA is going to be the best alternative for more buyers with less than a 20% down payment
• FHA credit score requirements are tightening. FHA does not have a minimum credit score and they don’t base their decisions on credit scoring. But FHA doesn’t make the loans directly, they insure loans made by wholesale banks and mortgage bankers. These lenders make the loans according to FHA guidelines, but their biggest concern is that FHA won’t kick back any loans, making them responsible. So even though FHA doesn’t credit score, most lenders had a minimum credit score requirement of 580. Recently lenders have increased the required score to 600. This means there are borrowers who may have qualified for a loan before, but won’t qualify now.

If you are looking to buy a home this year, you should plan ahead. If you have had some issues with credit in the past, you still have time to improve your credit score and credit profile. Here is a link to a series on how credit scores are determined and what you can do to raise your credit score. It also makes sense to talk with a lender and get pre-approved for a mortgage before you are ready to buy. This way you can make sure you are ready to buy and there won’t be any unpleasant surprises when you have already found a home.

Illinois Mortgage Rates                   First time home buyer loans               

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