Last month congress passed a bill which restored the temporary high loan limits for FHA mortgages. The news at the time was for the higher cost areas, but last week week HUD made it official and the higher temporary loan limits are now in place across the country and these higher limits  will be set until the end of 2012. This is good news for home buyers who are buying larger homes or smaller apartment buildings (2 to 4 unit buildings), since it allows these buyers to purchase with just a low 3.5% down payment, and it the more lenient qualifying standards FHA offers. It is also good for the housing market in general because more qualified buyers means a stronger and more robust market.

These loan limits were originally put in as part of the economic stimulus bill as a way to increase financing options and help stabilize the housing market. The higher FHA Max loan limits were extended beyond what they were originally called for, but expired earlier this year due in part to concern over the budget deficit. With the housing sector still soft, industry groups pushed hard for this extension.The max FHA loan amount here in the 6 county Chicago metropolitan area (Cook, Dupage, Lake, Kane, Will and Grundy Counties) is now back to $410,000 for a single family home.

Here is the table for the Chicago Metro Area:

The FHA max mortgage is determined on a county wide basis based on the areas median home values. In higher priced areas (mostly California) the max limit extends up to a high of $729,750. The floor in counties where higher limits don’t apply, is $271,050.

This applies not only to all FHA purchase loans, but also FHA 203k rehab loans and FHA refinances.

Here is a link to the HUD search tool which gives the FHA loan limits by County.

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Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

In this installment of the Chicago Video Home Buyers Guide, we talk about income qualifying, and how your income is looked at when you apply for a mortgage. This is one of the major factors of qualifying for a loan, and for how much of a mortgage you can afford. Part of this

comes down to income stability, or how likely is your income to continue and how reliably can we predict what you will earn in the future. The other part of this is affordability, or how you can fit the new mortgage into your budget. For this we look at ratios, or comparisons of how much of your gross income will be taken up by the mortgage, and how much of your income it will take to pay off the mortgage and all your other debts.

If I can help in any way, please let me know.

Other videos in this series -

Credit Qualifying and What You Can Do to Improve Your Credit Scores

Pre-Qualification and Mortgage Pre-Approval

Equity build up – How you build value by paying down your mortgage

How leverage and home appreciation will build value over time

The tax benefits of owning your own home

You can trust in us to get the job done right.

Free- Home Buyer’s Guide

Free Mortgage Pre-approval

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

A fact of life in the housing market today is that a substantial amount of the inventory for sale is made up of foreclosed homes and pre-foreclosed or short sale homes. One of the biggest issues for buyers of these properties is that the condition of the homes can range from move-in ready to ready to be knocked down, and a good portion of the homes available will need some work. Sometimes this work is required before anyone can even get the loan. Other times the home is in livable condition, but needs modernizing and upgrades before most buyers would consider it a place they would want to call home.

Usually the best and often only financing option for these homes is the FHA 203k renovation loan. This loan allows the buyer to buy a home and add the cost of repairs and improvements into the purchase price. Because this is an FHA loan, it only requires a 3.5% down payment, based on the total cost, and credit and qualification standards are not nearly as stringent as conventional requirements. Knowing how these loans work, and how you can use them, opens up properties that wouldn’t have looked like possibilities before as realistic homes for your buyers. This also gives another tool in the arsenal for listing agents with homes that are outdated or have problems that can be fixed with a little work.

Prospect Mortgage is holding an FHA 203k seminar for Realtors on April 7th, 2011 at the Carlisle Conference center in Lombard, IL from 1:00 to 5:00. This seminar will feature Prospect’s National 203k Manager, John Adams, a nationally renowned expert. I’ve heard John speak a number of times, and he not only knows the ins and outs of how to get more homes sold and closed in the real world, but he is tell it like it is speaker who talks about specific strategies that will help you in today’s market.

Some of what will be covered includes:

• How the FHA 203k works.
• When to use the streamline FHA 203k and when to use the consultant 203k.
• How to help your buyers stay on track so you can close quickly.
• How to increase your sales with the FHA 203k loan.
• What you can do to help position listings for quicker sale with the FHA 203k mortgage.
• Here are the details:

Prospect Mortgage FHA 203k Realtor Seminar

Time: Thursday, April 7th from 1:00 – 5:00 PM

Location: The Carlisle

435 East Butterfield Road

Lombard, IL 60148

As a bonus, a 3G IPad will be raffled off at the event. To register, give me a call (630-479-6424) or send me an email (peter.thompson@prospectmtg.com). If you can make it, this will be time well spent.

Free Home Buyers Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

Here we go again. Following on the heels of Fannie Mae and Freddie Macs mortgage cost increase, as part of the new budget released this week the cost of an FHA mortgage is going up. Again. Last fall FHA tinkered with their fee structure, lowering their Up-Front Mortgage Insurance Premium (UF-MIP is usually added back and rolled into the mortgage) while increasing the annual premium, which is paid as part of your monthly payment. The new increase goes into effect in April and will raise the cost of buying with an FHA mortgage by .25% per year, or a total of 1.15% of the loan amount each year, divided by twelve. So if you are buying a $200,000 home with the minimum 3.5% down payment, this translates into an increase of about $40 in the monthly payment. An extra $40 per month is probably not enough to push most home buyers out of the purchase market, but it is an added cost which will cut down on purchasing power and strain budgets just a little bit more.

You can look at this cost increase as a sign of FHA’s success. A few years back, FHA market share had shrunk to about 2% of the total mortgage market as private lenders (big banks and brokerage houses, mostly) came in with a whole array of loan products available for anyone who had a pulse. When the housing market imploded all these players dropped out of the market or took government bailouts to keep afloat. FHA now has about a 40%  share of the mortgage market because they are the only option left for most home buyers who don’t have a big down payment saved up. By law, FHA has to be self sufficient. The money from their mortgage insurance premium goes into a reserve fund which pays for loans that go bad. Although FHA didn’t have a lot of bad old loans on the books, and they have tightened their underwriting over the last two years to increase their loan quality, the fact that their volume has exploded means that they need more money to shore up the fund against the risk of future defaults.   

The good news is that this keeps FHA solvent. FHA has started sending signals that they are getting more aggressive in some areas. We have come out with a new program to approve home buyers with lower credit scores, and the rumor is that FHA will be coming out with a 203k renovation loan for investors. There is no doubt that FHA’s success is crucial to the recovery in the housing market.The increase in cost is just a price that has to be paid.

Free Home Buyers Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

One of the peculiarities of the lending environment since the housing bubble burst, is how the idea of what makes up a good borrower has changed. Back when conventional mortgages (those loans made to Fannie Mae and Freddie Mac guidelines) were available for anyone with a pulse, a good borrower, that is someone who can get the best rate on a mortgage, was considered a borrower with a credit score of 620 and above. Mortgage qualification was too easy then, and as the housing market floundered, qualifications have continually ratcheted down, making conventional loans harder to get and more expensive for those who aren’t in the best category. It started out with Loan Level Price Adjustments (LLPAs) or price hits, based on credit scores. Now it takes a credit score of 740 or above to get the best rate, and if your score is below 700 the price hits mean a big increase in the rate you will be able to obtain. There are also LLPA price hits for the type of property, so buying a multi-family home is more expensive than buying a single family home. If you buy a condo with a conventional loan, you now need to have 25% equity or down payment in order to get the best pricing on a condo.

With a new change by both Fannie Mae and Freddie Mac, conventional loans are about to get more expensive again, and this time the changes will affect those borrowers who have always been looked at as the gold standard of borrowers, those with excellent credit who are putting 20% down on a home. The new price adjustments are based on the borrowers credit scores and the loan to value (amount of the mortgage compared to the appraised value of the home) and combined loan to value (which includes the total of mortgages, including second mortgages and home equity loans) The surprising thing about this is that there are now price hits for those who up until now have been considered the top credit risks with both top credit scores and down payments of 20%, but less than 25% equity. The price hits get bigger if your credit scores aren’t perfect, and if you have more than one mortgage the price hits will make a big, big difference in your loan pricing.

Most consumers won’t end up paying these price hits in cash. As a rule, they will be built into the loan price and when you are quoted a rate on your mortgage these will be built into the rate. In other words it may not cost you more in fees, but for most conventional borrowers, the rates just went up. These changes go into effect for loans delivered to Fannie Mae and Freddie Mac as of April 1st 2011, but in order to deliver these loans on time, lenders are starting to implement these fees now, or will be soon. The frustrating thing about this is that with the housing market still so weak, why are we (both Fannie and Freddie are government owned entities now) making it harder and more expensive to get financing? The long term plan is for Fannie and Freddie to become self sufficient again, and the plan here is to reduce risk and increase their fee income. Everyone is concerned with reducing risk and it makes sense that if you add more fees and toughen requirements this will help lower your risk. But when borrowers with virtually no risk are targeted, this means we have gone too far.

FHA loans are becoming more attractive for more borrowers – even those who can qualify for a conventional mortgage

As conventional mortgages become more expensive and harder to qualify for, FHA mortgages are becoming an even better option for many borrowers. FHA loans aren’t for everyone, if you have 20% for a down payment, even with the price hits, buying conventionally is a better option because it eliminates the mortgage insurance (FHA has mortgage insurance no matter how much of a down payment you put down). But the truth is, most borrowers now, especially first time home buyers, are scrounging just to get the minimum down payment. FHA is now a great option for many borrowers who could be approved for conventional, and if you are buying a home, you should have your loan officer run your situation with both scenarios – FHA is often the better option when you look at the full situation.

Here are some of the features and advantages of buying a home with an FHA mortgage:

• FHA mortgages require only 3.5% down payment.
• With FHA financing you can use a gift for the entire down payment and all the closing costs.
• FHA mortgages allow up to 6% of the purchase price as a seller concession, which can be used to pay for closing costs.
• FHA mortgages rates are comparable to conventional loans.
• FHA allows much lower credit scores than conventional mortgage require, (640 is the required score unless there is a larger down payment). The focus is on the entire credit profile, not just the score, and FHA is more lenient of past problems once you are back on track.FHA has minimal loan level price adjustments or price hits.
• Most borrowers can qualify for more with an FHA mortgage.

Free- Home Buyer’s Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

You don’t need to look at a calendar to know we are starting a New Year. My gym is crowded again, a regular January occurrence. Diets are in again after a December of eating way too much. And my phone is ringing with renters just testing the water to see if they are in shape to buy their first home later this year. This is expected in January because buying a new home is consistently one of the top financial resolutions. This year, with a combination of low interest rates and low home prices, buying a house is more affordable than it has been in decades, so I expect buying a home is on a lot of peoples list of resolutions for the year.

If you are even thinking about buying a home this year, even if you don’t plan on buying until later in the year, there are some steps you should take now.

Make out a budget – Buying a home is a big step, and you need to make sure the new payment will fit into your budget before you even start looking. Too often home buyers skip this step, and then are stressed later on when the cost of home ownership takes up more of their income than they expect. When you put together a budget, make sure that you include not only the direct costs of owning a home (the mortgage payment, taxes, insurance and association fees) but also the costs of maintenance and repairs. Often after buying a new home you will buy new furniture and appliances, lawn mowers or other items. If you are planning on buying stuff for the home, and will use credit to do so, make sure you include the costs in your budget. Also, if you know you will have a big expense coming up, like a new car payment, allow for this in the budget, too (if you aren’t sure how to start a budget, give me a call and I can send a sample form over to you). The good thing is, you can afford a higher payment when you buy a home than if you were renting. This is because the interest you pay on the mortgage and your real estate taxes are tax deductable. For many people, the mortgage payment seems easier to pay over time as they get used to the payment and their income increases. But don’t make the mistake of stretching too far and buying more than you can afford

Start thinking of what is important to you in a home – The more thought you put into what you want before buying a home, the better off you will be. Buying a home is often an emotional decision, and when you find the home that feels right to you, may not meet all your needs. But if you do your homework upfront and think about what features of a home are important, what is absolutely necessary and what you would like but could do without, you are more likely to find a home that is right for you in the long run. Things to think about may include what type of home you are looking at (single family, condo, townhome or whatever), as well as features of the home, location and whether you are looking for a home that is in great shape or one that might need some work. 

Research the areas you are interested in – Before starting to look or even putting much time in searching on the internet, narrow down the areas you are interested in buying in. One common mistake when starting to look for a home is having too broad of a search area. If you want a home on the north side of Chicago, or in the western suburbs, this covers a whole lot of ground. By thinking of what are the key features for you, this can help you narrow down the best area to look. Are you looking for something new, or something in an older area? Is the school district important? Is being close to work or public transportation one of your key needs? How ever you do it, narrowing down the areas you are looking in early will make the home search easier and less stressful.

Run your credit report and make sure there are no mistakes or problems that need to be worked on –Credit is more important know than it has ever been. You need to meet minimum standards just to be able to qualify for a mortgage, and having a lower score can cost you money when you get the loan. Too often home buyers assume their credit is good, and don’t find out about problems until they have already found the house they want to buy. Even if you always pay your bills on time, you can still have issues on your credit report. Sometimes these are mistakes, other times they can be small items that can easily be fixed, as long as you know about them in time. Make sure you get a copy of your credit report early. This is part of a normal pre-approval, and a good loan officer will not only run your credit report, but will help advise you on what you can do to present yourself in the best way. If more extensive work needs to be done, a good loan officer can help you with that, too.

Start planning for where the down payment and cash needed to close will come from – You don’t need a lot of money to buy, but you will need some cash. FHA loans are available with as little as 3.5% down payment. But even if you have the money for the down payment saved up, you will also need money for closing costs and to set up the escrows. This may mean more cash than you expect. But if you know what to expect and you plan ahead, these are obstacles you can get around. For example, you can ask the seller to pay for the closing costs as part of the negotiation to buy the home (if you wait until you already have the contract it could be too late). Maybe you can get a gift from a relative? This is a common option for first time home buyers. If you don’t have all the savings now, will you be getting enough from a tax refund? Is a loan against your 401K an option? There may be ways to structure the purchase, but you need to give some thought to this early.

Talk with a good loan officer and get pre-approved for a mortgage – This should be one of the first things you do when you are getting ready to start looking for a home. Getting pre-approved can start with a short phone call, or you can fill out a free and confidential on-line pre-approval form. Either way, a mortgage pre-approval is a way to look at what you are hoping to do, and matching your needs and goals with the best mortgage options for your personal situation. A true pre-approval will require the same documentation we would need if you already had a home, paystubs, tax papers, bank statements and the like. It will also require a full credit report.  A good loan officer will not only tell you how much of a loan you can qualify for, but will be a guide throughout the entire home buying and mortgage process. If you have any questions or are ready to start with a pre-qualification or mortgage pre-approval, give me a call, I would love to help.

If buying a home is one of your New Year’s resolutions, don’t put it off until you are ready to buy. Starting the process early and putting some thought and effort into this now will make for a better decision later on.

Free- Home Buyer’s Guide

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

As part of the new FHA condo approval process adopted earlier this year, all condominiums on the FHA approved list had to go through a recertification process to make sure they still met the FHA condo approval guidelines. The deadline for the recertification was this past week, December 7th. As it turns out, many associations didn’t even start the process until the deadline was almost on them. Part of this is the normal human tendency to procrastinate, and I’m sure another big factor was lack of communication and not knowing what to do or how to do it. But in today’s market, having an FHA condo approval is more important than ever. Mortgage underwriting is much tougher now than it has been in recent years, and if you are buying a condo it is even tougher. Not only do you have to qualify, but the building has to hit all the guidelines. Many mortgage insurance companies won’t insure a condo purchase without at least a 10% down payment, and conventional loans have a price hit when the equity is less than 25%. This has made FHA a bigger factor in the condo market than ever before. With FHA condo mortgages, you only need a 3.5% down payment, and the underwriting guidelines are considerably less stringent than with conventional financing. But in order to get FHA condo financing, the condominium project has to be on the FHA approved list. The re-certification process has now been extended, but the dates of the extension are staggered depending on when the condo project was first approved. The extension for the oldest approvals, those condos which were approved between 1972 and 1985, the extension is a short one, just through the end of the year. More recently approved projects have a little more time. 

If you are buying a condo in the Chicago area and it is not currently on the FHA condo approval list, this doesn’t mean the project can’t go FHA. The new FHA condo approval process allows all condominiums to be approved in one of two ways, directly through HUD (HUDRAP), or by a qualified direct endorsement FHA lender (DELRAP). Going through HD is likely to take some time. They have a lot on their plate, and re-certifying all the old units means a bigger backlog. But a lot of the new FHA condo approvals in the Chicago area are by passing HUD and being done directly through the lender as part of the mortgage approval process. In these cases, when a buyer submits the offer it is contingent on the property getting the FHA condo approval. The key to this is that the association has to submit all the paper work required, and this is done side by side while the borrower’s loan is going through the normal approval process. Once the project is approved for the borrower, it is added on to the FHA condo approved list, which means other borrowers can then buy in that project with FHA. In the Chicago area the FHA maximum mortgage is $410,000, so FHA isn’t only for low end properties. Having an FHA condo approval is now a big factor in making condo units more salable.

Here is the extension list based upon the original approval date:

1972 – 1980                                          December 7, 2010                 December 31, 2010

1981 – 1985                                          December 7, 2010                 December 31, 2010

1986 – 1990                                          December 7, 2010                 May 31, 2011

1991 – 1995                                          December 7, 2010                 July 31, 2011

1996 – 2000                                          December 7, 2010                 August 31, 2011

2001 – 2005                                          December 7, 2010                 September 30, 2011

2006 – 2008 (Sept)                               December 7, 2010                  March 31, 2011

If you have any questions about buying an FHA approved condo in the Chicago area, or what it takes to get your Chicago area condo project approved by FHA, give me a call.

You can trust in us to get the job done right.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

The other day I met with a client who had just gotten a contract on a new home. She was excited about being a first time home owner, and she’d just found a home in a great neighborhood at a price and mortgage payment that would have been a fantasy a few years back. As we talked, she told me some of her plans for the home. It was a well maintained home, in great shape, but it was an estate sale and hadn’t been updated in years. In order to make the home the way she wanted, she planned on ripping out all the carpet, replacing it in some areas and refinishing the hardwood floors in others, updating the kitchen, and doing some work on the bathrooms, too. Once this work was done she felt the home would be transformed into an up to date, beautiful home. This sounded like a great plan, and by having the vision and imagination to look beyond the current state to see what it could become, the home was likely to be worth much more once the work was completed.

We then talked about financing options. She had saved enough for a full 20% down payment, which would give her a low monthly payment with no mortgage insurance. But the down payment would use up all of her liquid savings. I asked how she planned to pay for the improvements once she closed. With no savings left over, she figured she would put some of the costs of improvements on her credit cards, and the other projects she guessed she would do a little bit at a time as she saved up for it. Doing it this way would increase her debt and spread the rehab over the next several years. I asked if it would bother her living with the kitchen the way it was until she had saved up enough to get it done. She wrinkled her face, and said she could live with it, if she had to.

The truth is, there is a better way to do this. The FHA 203k rehab loan is usually thought of as a way to take damaged properties (often foreclosures) that can’t otherwise get financed, and making them good, livable homes. This is a great use for the FHA 203k loan program, but only one way to use the program. Using the FHA 203k to do improvements you plan on doing after you buy not only means you can enjoy the house the way you want sooner, but it can actually save you money while improving the value of your home.

Here is how this would work: (this is just an example, feel free to call in for current rates and an accurate quote)

Let’s say you are buying a home for $200,000 and it needs $30,000 of work. Let’s say you were able to put the full 20% down and were able to qualify for a conventional mortgage at 4.5%.

The mortgage payment for a 30 year fixed conventional loan of  $160,000 would be $810. So far, so good. After the closing, if you borrowed all the costs of improvements on your credit cards with an average interest rate of 12%, the minimum payment would be an additional $300 each month. So doing it this way (this doesn’t include the taxes and insurance you would have to pay, as this would be the same with either case) costs you $40,000 up front, and $1,110 per month.

Another option is to buy with the FHA 203k rehab loan. The advantage here is that you can put as little as 3.5% down for the down payment and finance all the improvements into the loan. With this program you will have a higher interest rate (the FHA 203k rehab loan is usually about a half point higher in rate than a normal FHA loan) and FHA mortgage insurance is added to the loan. This means that the payment is quite a bit higher right from the start. So with an FHA 203k the loan amount is based on 3.5% of the $230,000 (purchase price plus repairs), or an $8,050 down payment. If the rate is at 5.0%, the initial payment is $1,203. Add in the monthly mortgage insurance, another $168, and the total payment is $1,372. That is $262 more, but this way you still have an extra $22,000 in the bank.

Let’s take this a step further.

The mortgage interest and mortgage insurance are tax deductable (property taxes, too, but we aren’t including that in this example). So the after-tax payment includes the savings they will be able to write off on their taxes. If you are in the 28% tax rate, the first example (20% down conventional) gives you $168 of tax savings each month (285 of the mortgage interest), or an after tax payment of $942 each month. In the 2nd example with the FHA 203k, there is $308 of tax savings each month (28% of the interest and monthly mortgage insurance) for an after tax payment of $1,064 per month. That means the real cost difference is down to $122, and you still have the $22,000 in your bank account.

Let’s take this one step further still.

After the closing you can refinance the loan (we usually need to see you have made your first 6 payments). One way to do this is through an FHA streamline refinance. Mortgage interest rates fluctuate, but if rates are the same as when you bought, you will probably be able to save about 1/2 a point in rate, or about $70 per month by changing from the FHA 203k to a straight FHA 30 year fixed. It depends on the situation, but you can often do streamline refinances with no closing costs. But in many situations there could be a bigger pay off. If the property condition is poor, or if the property shows poorly because it hasn’t been updated in years, you may be buying at a discount compared to comparable but more desirable homes. By doing the extra work on the property, the value may increase much more than the amount of the repairs. If the value is higher, this could be a way to get into a conventional mortgage, and depending on the new value,eliminate or reduce your mortgage insurance, which could be a huge savings. If you have extra money that you didn’t invest before (like the $22,000 in the example) this could be used to pay down the mortgage.

A few things to know about FHA 203k rehab mortgages -

• You can buy with as little as 3.5% down payment
• All the funds needed can be a gift
• Qualified under common sense FHA guidelines
• The seller can pay all closing costs (current maximum is 6% of the sale price)
• Repairs and remodeling costs are added back and financed into the loan amount
• Streamline FHA 203ks are for repairs up to $35,000 – we can do consultant FHA 203ks for any amount of repairs up to the FHA lending limit
• In the Chicago area the FHA lending limit is $410,000

This can be a great way to go. Make sure you work with professionals who know how to structure the loan to work best for you. Here is some more information on uses of the FHA 203k rehab loan -

FHA 203k rehab loans – the solution to homes with property issues

Chicago FHA streamline 203k rehab loans – a way to turn a rough foreclosure into a finished gem

You can trust us to get the job done.

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

FHA credit score requirements are moving up again. We, and most other lenders, now have moved to a minimum 640 middle score for FHA approval, and some wholesale lenders now require a minimum of 660. If you read the FHA guidelines, the minimum score is only 580 (though there is no way you will get a loan with that score), and with the economy soft and the housing market down, cutting off otherwise well qualified buyers doesn’t seem like a good way to achieve their goal of offering more families a chance to buy a home of their own. So what gives?

The problem is that this tightening of credit standards is a direct result of FHA success (I’ll get into this more in a minute). As anyone who reads this blog regularly knows, I am a big fan of FHA mortgages. FHA has always offered common sense, fully documented loans to middle class and low income borrowers. FHA is often thought of as a first time home buyers loan because you only need a small 3.5% down payment and their philosophy on credit was more realistic in that they were willing to work with people who had mistakes in the past.  The key with FHA credit issues is that they needed to understand the situation – what caused the problems, that the borrower is back on track and that the credit problems aren’t likely to continue. FHA was never a score based loan, it was a loan that looked at each situation individually. As someone who reads and analyzes credit reports every day, I can tell you the credit score is just a starting point. For example, 2 of the credit reports I looked at this week from different borrowers had almost identical scores, both in the low 600s. One was a single parent who went through a divorce and had some uninsured medical issues which stained her credit, but is now paying everything on time and trying to rebuild her good credit. The other was from a single guy who makes a great income but travels regularly and doesn’t have a system to pay his bills on time. He can afford to pay when the bills come due, but hasn’t gotten in the habit of doing it. To me these people, even with the same scores, should be looked at differently.

Up until a few years ago FHA never had a minimum score requirement. The score requirements are now coming from the lenders who take on the FHA loans (FHA doesn’t make loans themselves, they insure the loans that meet their requirements) and again, they are raising the scores because of the program’s success. A few years ago, before the financial melt down, FHA accounted for about 2% of the loans originated. 100% financing and sub-prime loans had taken away most of the borrowers who would normally be FHA buyers. Now, most of the companies making these riskier loans have gone out of business or been bailed out by the government, and FHA market share is in the 30 to 40% range. As conventional mortgage guidelines have gotten tougher, more borrowers who would have otherwise been conventional buyers are now better served by FHA. One result of this is that the average credit scores for FHA loans has increased a lot over the last years, from the low 600s to near 700.

But with their market share increasing so dramatically, this has also put pressure on the FHA reserve fund. FHA insures against losses by collecting mortgage insurance premiums on every loan they insure. This has been enough to keep the program solvent since its inception back in the 1930s, but with unemployment high and home values decreasing, this has increased loan defaults and decreased their reserve fund. Although Fannie Mae and Freddie Mac and all the big banks have had to go to Uncle Sam to keep their doors open, FHA is doing this on their own. In order to protect their fund, they have taken several big steps. Earlier this month they changed the way they collect mortgage insurance in a way that will build funds quicker. They also have put more pressure on lenders who make the FHA loans, shifting more risk from FHA to the lenders, and this has spurred the increase in score requirements.

The lenders who approve and fund the loans have always been responsible for making sure that the loans conform to FHA guidelines, they are now being held to a higher standard. Now the lenders are also held accountable for the default rate, or the percentage of loans that go into default (missed payments up to foreclosure). This means that FHA could force a lender to buy back loans that go south, even if the loan met all the guidelines and everything was done according to the rules. The truth is that you never know for sure what loans will go bad, because so many of the problems arise when an unforeseen life event happens to a borrower. It doesn’t matter what your credit score is, if you lose your job, have a death in the family, a medical emergency or another traumatic life event, your finances will be under stress.

From the lenders standpoint, the worst thing that can happen is being forced to buy back a loan. Lenders make money by originating loans and then selling them off and collecting their profit upfront. When they are forced to buy back a loan, this is a big loss. Since lenders aren’t in the habit of doing anything that will cost them money, raising the credit scores is a logical way to cut the risk in their portfolio. This isn’t what FHA was hoping for, though. This move by FHA to hold lenders accountable, is having the unintended consequence of making it harder to qualify for those who FHA is meant to serve, and by taking otherwise well qualified buyers out of the housing market it is making it harder to build a housing rebound. FHA Commissioner David Stevens recently said that he though some lenders had gone overboard on the credit tightening, and "You won’t help communities recover if you limit lending to just the top tier borrowers." But without specific action from FHA the lenders are going to continue with a tighter credit policy, because this is the safest course for them.

What this means to new home buyers or anyone thinking about getting FHA financing.

Credit is now more important than ever. If you are thinking about buying a home, the best thing you can do is to start the process early, have your credit run and get pre-approved for a mortgage. Sometimes there are problems on your credit report which you may not even be aware of. If you start early you have time to make sure you address the issues and get mistakes cleaned up, before it’s too late.

Here are links to past articles which cover how credit scores are determined, what you can do to improve your credit and how to remove mistakes on your credit report.

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

Free Home Buyer’s Guide

No-Obligation Mortgage Pre-approval

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

FHA is now the big dog in the mortgage market. FHA allows a low 3.5% down payment, and with conventional guidelines ratcheting consistently tighter, more and more home buyers are choosing FHA as the way to buy. But over the last few years, as FHA has increased their market share, a chorus of doubters have been crying about how FHA is the next subprime, and with the low down payment the program is a ticking time bomb waiting to explode. I’ve pointed out before that though it is a government program, FHA has been self supportive since it started way back in the 1930s. While Fannie Mae and Freddie Mac and all the big banks have required bailouts to stay in business, FHA has kept on chugging along. FHA doesn’t make loans directly. It acts more like a mortgage insurance company guaranteeing loans made to their guidelines and covering losses with the mortgage insurance premiums it collects. Up until now the insurance has been enough to cover all losses and so far they still have about two billion dollars in a reserve fund. But because FHA has increased its market share so much and the housing market and economy are still so stressed, FHA is now making changes to make sure the program stays financially sound. Over the last year FHA has tinkered around with their structure and come up with a variety of plans to shore up the reserve fund. Starting on October 4^th, FHA will be changing the way they charge the insurance, and this will mean some home buyers will have a harder time qualifying, but it may work out better for others.

FHA breaks their mortgage insurance into two parts. One is an up-front mortgage insurance that is a percentage of the mortgage amount and added back into and financed over the life of the loan. The other part is an annual insurance paid each month (like private mortgage insurance). Currently, this breaks down to an up-front payment of 2.25% of the mortgage financed into the loan, and an annual payment of .55% per year, divided by 12 and paid monthly. The new changes will give with one hand, while taking away with the other. The good news is that the up-front increase will drop in a big way, down to 1% of the loan amount. The bad news is that the annual factor increases up to .90% (again, divided by 12) for those making the minimum down payment.

To see how this will affect new buyers, let’s compare the new version with the old (we won’t count taxes or insurance to keep this simple).

To compare, we will base this on -

• Purchase price $200,000
• 30 year fixed rate at 4.5%
• 3.5% minimum down payment of $7,000
• Base mortgage amount of $193,000

Under the current program it will look like this:

Up-Front mortgage insurance – $4,342 – Total mortgage amount of $197,342 – This gives a payment of just under $1,000. The monthly mortgage insurance premium (.55% divided by 12) adds $90 per month for a total payment of $1,090.

This is how it will work with the new plan:

Up-Front mortgage insurance – $1,930 – Total mortgage amount of $194,930 – This gives a payment of $988. The monthly mortgage insurance premium (.90% divided by 12) will add $146 per month for a total payment of $1,134.

With the new plan you will save $2,412 in the up-front charges, which mean more initial equity since this won’t be added on to your mortgage. But the flip side is that your monthly payment increases by $44 per month. For most home buyers $44 isn’t going to make or break a deal, though it will tip the scales for some. This is still the most affordable loan available. One thing to keep in mind is that the mortgage insurance decreases slightly every month because it is based on the current balance of the loan. So as you pay down the loan balance the monthly insurance will decrease. Another thing to keep in mind is that FHA mortgage insurance is tax deductable (as is conventional mortgage insurance, at least through the end of 2010). If you are in the 30% tax bracket, this means an additional $15 per month after tax savings with the above examples (the current break down spreads the benefit over a much longer time).

For many, even though the monthly payment will increase, this will turn out to be a better structure in the long run:

• For those who don’t plan on being in the home long term, the lower up-front MIP is more important than a slightly higher monthly payment. Most home buyers won’t stay in their home for ever, 7 years is the average.
• If you are buying a home that is undervalued (maybe a foreclosure that needs work and you are doing it with an FHA 203k rehab loan) you may be able to refinance it later and get rid of the mortgage insurance entirely. 
• I am also advising buyers I work with to ask the seller to pay the 1% Up-Front MIP. Seller concessions are common now, and this will cut the payment down a little further.
• This will also work out better for many home buyers who could qualify for a conventional mortgage, but would be subject to Loan Level price Adjustments (price hits, for everything from credit scores to property type).

The bottom line is that this will hurt some borrowers and those will be the ones who are already stretching to get into a home. But by lowering the cost of getting into an FHA mortgage, the unintended consequence may be that it pulls in more borrowers who could go conventional if they wanted to. This may not be the result they were looking for, but my guess is that this change will bring in new buyers to FHA will add to the market share. If this change makes the program more stable, it will be worth it.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company           Chicago FHA mortgages