Since the bottom fell out of the housing market, FHA has become the best financing choice for a big slice of homebuyers and home owners (FHA makes up about 40% of the loans originated now). When all the private lenders dropped out of the market, and Fannie Mae and Freddie Mac tightened their guidelines and added big price hits, FHA stepped in to fill the gap. FHA is the only option for home buyers with low down payments (3.5% down, and this can all come from a gift) and though this is a fully underwritten loan, FHA is more forgiving of past credit mistakes if the underwriter can understand what happened, and why it won’t happen again. In many ways FHA has become the new conventional, and the financing terms work best even for many borrowers who could qualify for conventional financing. But all this success has come at a price. Over the last two years FHA defaults are at record highs, and their reserve fund, which they use to pay claims on defaulted loans, is the lowest it has ever been. Last year FHA  moved to bulk up the reserve fund by increasing the Up-Front mortgage insurance by .75%. With a new bill just passing the House, and now fast tracked in the Senate, it looks like FHA is about to restructure their formula again.

We need a little background to explain how this will work. FHA’s mission is to make homeownership more available. This isn’t a government give away or a loan for people who can’t qualify. First of all, FHA doesn’t make loans directly. They act more as a mortgage insurance company insuring the lenders who actually hold the FHA loans against loss if the home does get foreclosed on. This system has been around since the 1930s and has always been self funded, that is, the mortgage insurance they collect has been enough to pay for all losses without any additional government funds. But with true unemployment in the double digits, and home prices fallen, the FHA reserve fund has come under pressure. Compare this to Fannie and Freddie which have been bailed out and taken over by the government, or all the big banks which would have collapsed if Uncle Sam hadn’t stepped in to prop them up. So FHA has been a huge success and a key to any recovery in the housing market.

FHA funds their insurance in two ways: with an Up-Front Mortgage Insurance Premium which is rolled into the loan and financed over the course of the loan, and also with an additional monthly mortgage insurance premium. The last change increased the Up-Front MIP from 1.75% to 2.25%. The new bill will raise the maximum monthly insurance premium to a maximum of 1.55% (divided by 12) but the understanding from HUD (the agency which runs FHA) this number is to give flexibility and the real increase won’t be this much, and there will be some trade offs. HUD has previously said that the plan is to decrease the Up-Front MIP down to 1%, a big reduction, and increase the monthly factor to 0.9%(divided by 12). So this will be giving with one hand while taking away with other. I have a feeling that the law of unintended consequences could kick in and make FHA more attractive for many borrowers who have the choice to go with conventional financing, while making it a little harder for those most in need to qualify (it increase the monthly payments while decreasing the cost in the short run).

We will see how this all plays out, but if this insures that FHA will continue to be available in the market, it is a change worth making.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago FHA Mortgage Company

Mortgage rates have dropped to all time lows. What used to be looked at as super low interest rates (in the mid or even low 5s), are now considered high. You may be able to lower your payment by a lot, often with no closing costs. For homeowners that are able to take advantage of the lower rates, this can mean big savings over time. With home prices lower and tougher qualifying requirements, refinancing is tougher than it used to be. But there are still a number of mortgage programs which make it easier to refinance now. One of the easiest and most beneficial loans available is the FHA Streamline Refinance.

FHA Streamline Refinance Loans

The FHA Streamline Refinance loan program is only available if you already have an FHA mortgage on on your home (Refinancing into a new FHA loan can make sense for a lot of other reasons, including adding improvements to your home and being able to use cash out to consolidate debts, but for these you need to do a fully documented mortgage). The advantage of this loan is that you can take on the new lower rates with out having to go through the full qualifying process, you usually don’t need an appraisal (which is a major headache with refinances today) and we can often structure this so you aren’t paying any closing costs (we pay the closing costs with a slightly higher rate). You will need to have some cash at closing to set up the new escrow accounts (to pay for your property taxes and home owners insurance) but you will get whatever money is in your escrow account with your current lender back after closing, so it will end up as a wash. If you have enough equity in the home, you may be able to add the escrows into the loan amount and come to closing with no cash at all, but we would need a new appraisal for this to work.

Here are some of the basic requirements of an FHA streamlined refinance:

• The loan must be FHA insured and you have to have made at least 6 payments on the Loan. If the loan is less than a year old, you can’t have any 30 day or more late payments. If the loan is older you need to be up to date on the payments with no more than one late payment in the last 12 months.
• The refinance has to be for your benefit. We need to lower the payment by at least 5%.
• We need to verify that you have enough cash to close the loan (this means enough money in a bank account to pay for the new escrow account and any other cash you may need).
• We need to show that you are employed and have income coming in. We don’t need to do a full underwriting of your income.
• You may be able to change the loan program (if you have an adjustable rate loan you may be able to go to a fixed rate, and visa versa) but we need to make sure that there is a real benefit attached. If you want to shorten your loan term we may need to do a full qualification.
• You can add a spouse or some one else to title without having to go through the full approval process. If you want to delete a borrower we will need more documentation.

Here is the documentation I will usually need for an FHA Streamline Refinance:

• I will need several items from your closing package, including a copy of our HUD1 closing statement, the Note and it makes it easier if I have a copy of your application.
• A current paystub showing you are employed.
• A bank statement showing you have enough cash to close.
• Proof of your Social Security number – this can either be a copy of your social security card or your W2 from last year.
• A copy of your mortgage statement.
• The name and phone number of your insurance agent.

If you have an FHA loan now, this could be a great way to save money. Give me a call and in a short conversation I can let you know how this will work for you, and put together a written estimate.

Peter Thompson                              630-479-6424

Chicago FHA Mortgage Rates          First time home buyer loans

Chicago Mortgage Company

Free Mortgage Pre-approval

FHA may be about to change again. In a vote of 406-4, the House of Representatives passed a bill that, if passed by the Senate, will increase the monthly mortgage insurance for FHA loans. Over the last 2 years FHA has gone from being a bit player in the housing market, to the main choice for most first time home buyers, and now makes up about 40% of the overall loan volume. Because FHA has increased market share so quickly, and as a result of all the stress in the housing market, loan defaults have become a real problem. Some critics of the program have said that the higher default rate is a result of FHA making bad loans. The truth is more complicated. FHA, though it is a government program, has been self sufficient since it started, and uses the mortgage insurance premium that it charges to cover any losses from bad loans. This mortgage insurance (MIP) is broken into 2 parts. One part of is Up-front mortgage insurance which is a lump sum that is financed into the loan. The other part is an annual premium that is paid monthly, just like conventional mortgage insurance. This mortgage insurance has always been enough to keep the program solvent, so unlike Fannie Mae, Freddie Mac and all the big banks that make mortgages, FHA has stood on their own 2 feet and haven’t required a bail out to stay in business. But with the housing market still rocky, FHA management is moving to make sure they keep their reserve levels high, and this means raising their MIP.

Last year FHA raised their Up-front MIP requirement from 1.5% of the loan amount to 2.25% (again, financed into the loan). The new bill focuses on the monthly premium. This bill would allow FHA to increase the annual premium from the current .55% of the loan amount (divided by 12 and paid monthly) to a maximum of 1.5%. This nearly triples the amount they could collect, and if they put this in all at once, would be a major hardship for most borrowers. But it is more likely that they will tinker with the formula, lowering the Up-front premium and raising the annual, but not all the way to the limit. One combination that has been discussed, is lowering the Up-front MIP to 1% of the loan amount, and raising the annual to .90% (again, divided by 12). This approach gives a little on one side, while taking away on the other. An increase from the current .55% to .9% would result in about $30/mo on a $100,000 loan, while reducing the Up-front premium by $1,250. This may not be the intended result, but what this really does is make FHA more attractive for those who don’t plan on being in the property long term, and may make FHA a better alternative for some who would otherwise be able to finance with a conventional mortgage. I will have more analysis on this once we know how this will really shake out.

Nothing will happen until this bill passes through the Senate. No Senator has sponsored the bill yet, but based on the lopsided passage in the house, I have no doubt it will be coming soon. The higher payments will make it more expensive for some buyers, but this is a small price to pay to keep the FHA program on track. In order for the housing market to recover, FHA needs to stay healthy.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

Stocks were off and mortgages are trending in the right direction again. FHA announced some big changes today which will help prop up their reserve fund, but will make it costlier to buy. One more reason why first time home buyers should buy now, rather than waiting until later in the year. Stocks recovered as the day went on. We’ll see tomorrow if this was just a blip, or if declining stocks is a trend. If stocks keep falling mortgage rates could drop lower. Either way, there is no question that these are great rates today.

Here are the current Chicago Illinois Home mortgage rates for an A+ (740 Fico or above), full doc single family home purchase or rate/term refinance on a 45 day rate lock, with 0 points, and no origination fee. Mortgage rates in other states may be slightly different, give me a call and I will give you an accurate quote for your particular situation. The conventional and FHA rates 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 (Illinois mortgage company) and I’ll take the time to find the rate and program that is best for you:

Conventional loans up to $417,000

For Jumbo loans over $417,000

(Another option is to break your Jumbo loan into 2 parts – conventional to the limit of $417,000 and a HELOC or fixed second mortgage for the rest. The blended rate is usually much better than a single loan would be.)

FHA LOANS – 3.5% down payment – FHA Maximum varies by County

FHA APR reflects 3.5% down payment and the effect of mortgage insurance on the loan. Call for information on no-cost FHA streamlined Refinances

FHA 203K Rehab Loans

Call for Quote

VA Veterans Administration 0 Down Loans

Call for information on no-cost VA Streamlined Refinances

These are just a few of the mortgage programs and mortgage rates available. Which option is best for you depends on your own specific goals and needs. If you have any questions or want to go over your situation in depth, let me know how I can help.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

FHA is making changes to insure their long term survival and increase their reserve fund, and these changes mean it will be more expensive for home buyers. FHA has  been talking about these changes over the last several months, but now it is official. The biggest change is an increase in the Up-Front mortgage insurance FHA charges on every loan. FHA doesn’t make loans, they act as a mortgage insurance fund insuring lenders against loan losses through the mortgage insurance charged on each loan. FHA handles this in two ways, a small (compared to conventional mortgages) monthly charge, and a large chuck up front, which is usually financed into the loan. The up-front MIP (mortgage insurance premium) is currently 1.75%, but with this announcement it will soon increase to 2.25%.

The way this works, if a first time home buyer or other buyer buys a home at $100,000 with a minimum 3.5% down payment, they will have a mortgage of $96,500 plus the new Up -Front MIP (2.25%) of $2,171, so the actual mortgage will be based on the adjusted price of $98,671. If the interest rate on the mortgage is 5.25%, the mortgage payment would be about $545 per month, $21 more than the payment with the current premium . This change is due to go into effect this Spring.

The other major change is a reduction in the FHA allowed seller concession from 6% of the purchase price down to 3%. This brings FHA in line with conventional guidelines,. The seller concession is usually used to pay for the buyer’s closing costs, and allows buyers to buy a home with out having a lot of extra costs beyond their minimum down payment. This change won’t have much of an impact on most home buyers. Even in higher cost areas like Chicago (which has a high buyer paid transfer tax) 3% is enough to pay for most costs the buyer will take on. The people who this will affect the most, are those who are buying lower priced homes. If a first time home buyer is buying a $250,000 home with a 3% seller concession this is $7,500. If they are buying a $50,000 condo it is only $1,500, which when you figure in bank costs, title charges, attorneys fees transfer tax and the like, this won’t be nearly enough to cover the costs. So buyers of lower priced units will need to save more before they can buy. This change is not likely to happen until Summer.

Other changes include an increase in the minimum credit score required for FHA to 580, but almost all the lenders have already increased their FICO requirements to 620, so this should have little or no effect. FHA also announced that they will enhance monitoring to increase enforcement on FHA lenders to make sure they are adhering to all the rules and guidelines.

FHA still offers a 3.5% down payment and it still offers terms which are better for most first time home buyers, or anyone else who is buying with a lower down payment. These are all common sense guidelines, and though it will make financing a little more expensive, the health of the program for the long term makes this a good trade-off. But if you are a first time home buyer in the market to buy, this gives you one more reason (along with the $8,000 first time home buyer tax credit and record low mortgage rates) to buy now, instead of putting it off until later.

,Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

If you are a first time home buyer just starting to look around and explore your options, you’ve probably  heard that FHA is the way to go. If you have friends or relatives who bought their first home recently, chances are they bought their new home with an FHA loan. FHA is the best and most popular option for most first time home buyers here in the Chicago area, but in many ways FHA still gets a bad rap. On a regular basis I have clients who start the process excited to know they can buy a home they can afford, only to grow hesitant when older friends or relatives tell them they should get a conventional loan. Over Christmas a client’s Uncle told her she was making a mistake and FHA mortgages were only for poor people. Another couple’s Realtor told them not to use FHA for a home with some property damage, and that they would be better going with a conventional loan. In both cases these people were well intentioned, but wrong. Most FHA home buyers are middle class and just starting out, and if the property needs repairs they will have to be taken care of whether it is FHA or a conventional loan.

FHA has grown in popularity because in many cases it is the only option available for most first time home buyers. Conventional mortgages are loans backed by the big GSEs, Fannie Mae and Freddie Mac. Not long ago, when the housing market was booming and home values were skyrocketing, conventional mortgage guidelines were so easy that almost anyone (literally anyone) could qualify for a mortgage. It turned out that letting unqualified people buy over priced homes wasn’t a good idea in the long run, and ever since then, conventional mortgage guidelines have been in a continual tightening process. There are still conventional mortgages available with a 5% down payment, but most home buyers won’t qualify for these loans, and if they do, loan level price adjustments (pricing add-ons) and high mortgage insurance premiums will make the cost prohibitively high. FHA has taken up the slack by offering loan products that first time home buyers can afford and qualify for.

Here are some of the advantages of financing your Chicago area home with and FHA mortgage:

1. Low down payment – FHA requires only a 3.5% down payment. So if you are buying a $200,000 home, the required down payment is just $7,000. With tax refunds in the mail soon, this is a number that is do-able for many young singles and couples.
2. The down payment and all the cash needed to close can come from a gift – If you haven’t been able to save up a down payment, or you are close but still short, you can get all the cash you need from a gift from a relative. We will need to show the paper trail on where the money came from and how it got into your account. Don’t transfer any money until after you consult with your mortgage loan officer.
3. FHA allows up to 6% of the sale price as a seller concession – In addition to the down payment, you will need to have money available for closing costs and to set up the escrow accounts. This comes out to thousands of dollars, more in areas like Chicago which charge a buyer transfer tax (.75% of the sale price here in Chicago). But you don’t need to save up for this or come up with it from your own funds. It is now common with an FHA loan to negotiate for the seller to pay the closing costs. Find out how much your costs are and what you need to ask for before making an offer on the property. You won’t need anywhere near the 6% (you can also use this credit to structure the purchase or lower your interest rate), but this is a great way to save cash when you need it the most.
4. Credit guidelines are more lenient and common sense – FHA is not a sub-prime mortgage, and if you have bad credit you aren’t going to be able to qualify. But most first time home buyers pay their bills on time, but it’s not uncommon that they have had a few dings in the past. Some times they’ve had serious issues they had to overcome. But FHA looks at the big picture, not just a number. FHA doesn’t have credit score requirements, but all the wholesale lenders now require a minimum 620 score. If you have had problems in the past we will need to understand what happened, why it happened and what you did to fix it. If we can show that the problems are behind you, you can qualify for an FHA mortgage.
5. Competitive interest rates and terms comparable to conventional – FHA mortgage rates are  surprisingly low. In most cases FHA rates will be with in an 1/8 or a ¼ of conventional rates, and if you have less than a 700 credit score, FHA rates are probably better.
6. Most borrowers can qualify for a higher amount with FHA – FHA allows higher housing and debt ratios than with conventional mortgages. You still need to do your own budget and make sure you feel comfortable with your payment, and we have to see that you can afford it, but with FHA you will be able to buy more home for your income.
7. More condos are financeable through FHA – one of the biggest advantages of FHA here in the Chicago area, is that it is much easier and less expensive to buy a condo with an FHA mortgage – especially if you have a low down payment. The FHA condo approval process is being changed now (spot loans are still available up through the end of January), but as the new process takes hold, more properties will eligible for FHA finance.
8. Multi unit homes (2-4 unit buildings) are easier and cheaper to buy with FHA – If you buy a 2 flat or a 3 or 4 unit building to live in one unit and rent out the others, you will pay more and need a higher down payment with a conventional loan. FHA treats small apartment building better. FHA lets you use more of the rental income to offset the mortgage payment (even if you have no experience as a landlord) and lets you buy with the same 3.5% down as you would with a single family home. Also, there are no hits to the pricing with FHA for 3-flats and 4-flats – with conventional you pay a lot more.
9. Allows non-occupant co borrowers (co-signers) so you can blend income – I’ve seen many cases where a couple is buying a home together, but for one reason or another, one partner isn’t able to qualify for the mortgage. FHA allows a relative to come on to the loan and blend their incomes in with the occupying borrowers, letting them buy a home where they otherwise couldn’t. This is also a good program where parents can help their kids who are just starting out.
10. FHA max mortgages have increased almost as high as conventional mortgages – For years, FHA was hardly used in the Chicago area because the loan amounts were too low compared to the values. That has changed. The maximum mortgage here in the greater Chicago area is now $410,000, right in line with the conventional mortgage limits. This means more buyers can take advantage FHA, even for higher priced homes.
11. 203k program is available for homes that need repairs and remodeling – Many of the homes for sale now are short sales or foreclosed properties. Foreclosures often have been neglected, and it is common that they have issues, sometimes minor, but often serious. Minor problems can be fixed before the close, but if it is a big problem like busted water pipes (because the big didn’t winterize the home), a new furnace or putting on a new roof, that isn’t possible. With an FHA 203k loan you can put the cost of the repairs into the loan and do the work after closing. This is a great way to buy a home in a distressed shape and add value with the repairs. You can also use the HA 203k for remodeling or putting in a new kitchen or bath.
12. FHA mortgages are assumable – This means that years from now when you sell your home, the new buyer can take over the loan under the same terms as you have. If interest rates go up in the next few years (and it’s a good bet that they will) you will e able to offer new buyers a mortgage with interest rates much lower than the market is offering. This means it will be easier to sell your home and your home is worth more than a home without low interest financing.

FHA loans aren’t the best option for everyone, if you have a good down payment and great credit a conventional loan is probably going to be right for you. But if you don’t have a lot to put down, have good but not perfect credit, want to buy a condo or for a host of other reasons (most first time home buyers here in Chicago), then FHA is the way to go. Remember, if you buy now along with all the other benefits of buying a home, you qualify for the First Time Home Buyer $8,000 Tax Credit – You need to have your contract together by April 30th. If you want to know if FHA is the best option for you, give me a call and we can see what works best for your personal situation.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

Foreclosures rule the mortgage world. With home prices way down from where they were a few years ago, and  unemployment so much higher, foreclosures are still surging. The sad fact is that a record number of homeowners are in default and can’t pay their mortgages. A home foreclosure is a tragedy for the home owner and a problem for the community. The wave of foreclosures has also wreaked havoc in the mortgage industry. I don’t have much sympathy for the banks that made the loans because they knew what they were doing, or should have, and they made too many risky loans when the housing market was riding high. But the foreclosure wave has also had a big impact on the buyers who want to buy a home now, and it is effecting what they can afford and how they can qualify.

Everything moves in cycles, and if the pendulum swings too far in one direction, you can be sure it will swing too far back in the other direction. The fog the mirror underwriting of a few years ago has been replaced by underwriting where you need everything but a blood sample in order to qualify. Conventional financing just got another round of tightening with the release next week of DU 8.0, and it looks like FHA’s time is coming up soon. There has been a lot of press lately about how FHA has gone below its 2% reserve level and that the program is in trouble. I think we need a little perspective here. It wasn’t FHA loans which caused the economy to blow up, and all the big banks, as well as the big GSEs (Fannie and Freddie), have already either been taken over by the government or are only around because they took government TARP money. FHA still has billions in reserve, and is still supporting the housing industry.  

HUD Chief Sean Donovan talked about the future of FHA the other week, and came up with some possible ways to grow the FHA reserve fund.

Some of the ideas mentioned included:

• Increasing the down payment from 3.5% to 5%.
• Minimum credit score standards.
• Increasing the up-front mortgage insurance premium from 1.75% to 2.25%.
• Lowering the amount that sellers can contribute toward closing costs from 6% of the sales price down to 3%.

I doubt if raising the down payment a bit would have much of an impact, and even though FHA doesn’t have minimum credit scores, all the lenders that administer the program already do. The other ideas may make more sense (especially if the up-front mortgage insurance increase is based on risk). There is a lot of political pressure to do something, but they could raise the down payment to 20% and require perfect credit and foreclosures will still be a problem if the unemployment rate stays high (this is the problem with conventional loans). Without FHA financing available the housing market would be in a lot worse shape. There has to be a balance between keeping the reserve fund high and still keeping mortgage funds available for the average home buyer. If they tweak the program too hard, home sales and home values will go down, which will cause greater problems to our fragile recovery

I expect that FHA will tighten in some ways (hopefully not too much), but even if they do, FHA mortgages will still be the go-to program for a good portion of the home buying public.

Here are some reasons FHA financing will continue to be the best financing option for many home buyers:

• With FHA the down payment and all the funds needed to close can be a gift.
• FHA still has a common sense approach to credit, and past credit problems are not an obstacle if you can show you have put the problems behind you.
• Under the new rules, FHA offers more flexibility with condominium financing allowing buyers to purchase with minimum down financing units that can’t even be financed conventionally.
• FHA qualification ratios are more flexible than conventional, allowing more buyers to qualify.
• FHA allows non-occupant co-borrowers, so income can be blended in order to qualify.
• FHA offers better pricing for most borrowers with less than a 700 credit score.
• FHA offers better pricing for condos (with less than 25% down payment) and 2-4 unit buildings.

The mission of FHA is to make it possible for more people to afford homes. They may tighten the requirements some, but if they make it too hard, they are defeating their stated purpose. FHA will still be the best loan choice for many home buyers.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

We Lend in All 50 States

The new FHA condo approval process is being pushed back another month, until December 7th. The new process will make FHA financing available for a lot more units, but get ready for a long wait for closings until the kinks are worked out.

New FHA Condo Process

Chicago FHA Spot Condo Loans

FHA Approved Condo Search Tool

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

We Lend in All 50 States

FHA has been getting a lot of bad press lately. A former Fannie Mae executive recently testified before congress that he expects FHA will need a government bailout within the next 24-36 months. A new bill has been introduced in Congress to raise the FHA minimum down payment from 3.5% to 5%. I have read a whole bunch of articles on why FHA loans are a ticking time bomb, the new version of sub prime, and how the government should stop trying to prop up the housing market and leave financing to the private market. Are these critics right? Is FHA the next disaster in the making? Should FHA clamp down and make it tougher to buy a home?

As a mortgage lender who has worked with FHA home buyers for over 18 years, I admit that I am biased in favor of the program. But it seems to me that these critics aren’t looking at the bigger picture. The fears of an FHA collapse are all based on the idea that FHA loans are inherently risky. To an extent, they are right. FHA was set up to help low and moderate income borrowers get a chance to own a home, and it has always made low down payment loans to borrowers who might not have qualified for privately funded conventional programs. But FHA isn’t now, and never has been a sub prime program. There is no doubt that FHA defaults will rise, but with the unemployment rate high and rising, foreclosures are growing throughout all loan classes and price ranges – including Jumbo mortgages where the borrowers originally put down 20% or more for their down payments. The truth is, FHA has increased its market share because Fannie Mae and Freddie Mac (now owned by the government) have made their financing much tougher and more expensive (especially for first time home buyers) and there are almost no private lenders left. FHA’s defaults will grow, because its market share is growing, and it is now the only game in town.

Here are some things to consider the next time you hear someone ripping on FHA:

• FHA loans are not like sub prime – FHA loans are fully underwritten and the borrowers have to prove their income and assets and show that they have the ability to afford the payments. While FHA doesn’t have minimum credit score standards, all the lenders who make FHA loans now do. For most lenders you will need at least a 620 credit score, the same score that was considered an A loan in conventional financing just 2 years ago.

• A loan made today is safer than older loans – FHA loans have gone from a market share of about 2% two years ago to about 40% now. This means that there were very few FHA loans being done during the bubble years (when 0 down financing was available to anyone who could fog a mirror, good credit or bad). This means that FHA doesn’t have the big inventory of underwater loans that is the norm with conventional portfolios. Which loan has a less risk of default? A mortgage where the borrower bought at the height of the bubble with 20% down with no income verification? Or an FHA loan underwritten in today’s market, bought at current (lower) value, with income and employment fully verified? I’m going with the second scenario. Property values may fall lower, but if we are not at the bottom we are a whole lot closer to it now, which means less risk.

• Many of the FHA borrowers now would have been conventional buyers in the past – Conventional loans, those covered by Fannie Mae and Freddie Mac guidelines, used to be priced the same for all borrowers who qualified for a loan. Over the last 2 years, as loan losses mounted, these organizations not only made it more difficult to qualify for a loan, but they raised the cost of financing for many of those who do qualify. This means price hits not just for lower credit scores, but things like having less than a 25% down payment when buying a condo. Mortgage insurance guidelines are much more restrictive now, too. It now makes sense to compare FHA pricing to conventional for anyone who is putting less than 20% down, and there are a lot of FHA borrowers who could qualify for conventional if they were willing to pay more for the loan.

• FHA loan quality is higher now than at any time in recent years – FHA has tightened its requirements in several ways over the last few years. The minimum down payment has increased from 3% total investment (which used to include a combination of down payment and closing costs) to 3.5% down payment. They did away with the down payment assistance programs which allowed the seller to pay for the borrowers down payment so the borrower was coming in with no money down. The up-front mortgage insurance premium increased, which means more money goes into the reserve fund. These changes have all increased the over all loan quality, but a bigger change has been how the loans are now underwritten. A few years back, underwriting (for all loans) was loose. Now underwriters are scrutinizing files for anything that even hints at a problem. Wholesale lenders are doing the same, and FHA will cut off any company that tries to bend the rules (Taylor Bean, a large FHA lender wholesaler was cut off by FHA due to quality issues, and was out of business shortly after).

• FHA is self funded and NOT financed by the treasury – FHA doesn’t make the loans themselves, they insure loans made by private lenders according to their guidelines. The FHA program is really a mortgage insurance program. FHA gets a funding fee (currently 1.75% of the loan amount) upfront on every loan (this is usually financed into the loan amount for the borrower) as well as a monthly mortgage insurance premium. This insurance fund has worked well in the past. FHA is solvent, and has reserves of about $30 billion dollars, the highest on record. The problem isn’t that FHA is paying out too much now, but that it has grown so quickly and would be in trouble if the loans on its books turn sour. Compare this to Fannie and Freddie and all the big banks, who have already needed bailouts.

• FHA may be saving the real estate market – If FHA made it harder to get a loan, what would this do to the real estate market? I’ve heard commentators say that no one should be able to buy unless they have a 20% down payment. Saving up for a down payment is the biggest obstacle to buying a new home. Raising the cost of entry takes most of the first time home buyers, the biggest group, out of the market. Even an increase to 5% down payment would take a big group of buyers out of the market. Making it harder for first time home buyers to buy means less move up buyers. The law of supply and demand says that if you have less buyers, home prices will go down.

FHA has grown so much over the last 2 years because they are fitting a need in the market. Loan defaults aren’t caused by low down payments. Bad loans usually occur because of other factors like medical problems, divorce and the loss of a job. As long as the economy is still rocky, unemployment will be high and that means there will be more loan defaults and foreclosures coming. But that isn’t an FHA problem, this is happening with all loans. Owning your own home is a big part of the American Dream. There is a societal benefit to home ownership, too. High ownership rates stabilize neighborhoods and give people a vested interest in their community. The typical first time home buyer using FHA is young, usually in their 20s or 30s. Their earning power is still on the upswing, and they are in the early stages of their careers. I have a long list of clients who bought their first home with a low down payment, then moved up to larger more expensive homes as they built up equity (I fit that category myself). This is a different market, and no one knows what the future holds, but my guess is that the people who are buying now, are getting good bargains, and at some point the housing market will stabilize. If we make it so that only the most qualified are able to buy, it hurts everyone.

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

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The FHA Streamline refinance is one of the easiest and most beneficial loans available. This program lets borrowers who are have an existing FHA loan refinance into a lower rate mortgage without having to get a new appraisal or prove their income. The idea behind the program is that these borrowers have already qualified for the loan, and if they could afford the higher payment, they would be in better shape with a lower rate and a lower payment. The FHA streamline refinance or FHA refinance loan has always been a good program, but in this market, with home values down and appraisals a consistent problem, it has been a God send for many, allowing some borrowers to save up to hundreds of dollars each month. But FHA has come under pressure as a result of all the problems in the housing market, so they are making moves to cut their risk and save money. This means that as of loans assigned case numbers after November 17^th, the FHA Streamline refinance as we know it will be gone.

Here are the changes coming in November:

1. Verification of income and cash to close – These are the two biggest changes. The streamline is considered a streamlined refinance because you don’t have to go through the normal mortgage approval process where everything is verified. The new regulations will require a letter from the lender stating that they have verified that the borrower has enough income to qualify and has sufficient cash to pay for the closing costs and escrows needed to close the loan.
2. Seasoning – borrowers will need to have paid 6 payments on their loan before they can refinance. In most cases this won’t make a difference, but in times when the interest rates have dropped sharply, like earlier this year, the borrowers couldn’t take advantage of the lower rate and lower payment unless they already had 6 payments under their belt.
3. Payment history – As it stands now, all the FHA streamline requires is that the mortgage is paid up to date and current. The new regulations require that mortgages with less than a 12 months of payment history have made all mortgage payments within the month due (no late payments). For mortgages older than one year, the borrower can’t have more than one late payment in the last 12 months, and none in the last three months.
4. Net tangible benefit for the borrower – This means that the mortgage lender has to show that the borrower is benefitting from the refinance by getting either a lower payment, reducing the time he will pay on the mortgage or converting from an ARM into a fixed rate mortgage. This only makes sense and has been put in as a consumer protection because too many loans have been made where the borrower is lowering their interest rate, but because of all the upfront charges, they aren’t getting any real benefit from doing it (the mortgage broker is, though). This is already the law in Illinois.
5. Maximum combined loan to value – As the program is set up now, FHA will let you subordinate your second mortgage or home equity loan (keep it in place with the banks permission), no matter how much the combined value of the 2 loans is compared to your home’s value. With this change they are now capping it at 125%, or the loans can’t be over 25% more than what your home is worth. In the real world this won’t make much of a difference. Most second mortgage lenders don’t want to offer subordinations over the home’s current value anyway, and even if FHA allows it, the lender funding the mortgage may not.
6. Appraisal guidelines – One of the big advantages of the FHA streamline refinance, especially in this market, is that the borrower can in most cases roll the closing costs and escrow charges into the new loan amount, reducing the cash they need to come up with at closing. The new rules will require that if you want to roll in costs, you will need a new appraisal. If property values are down, as is the case for many borrowers, they will need to come up with the cash upfront and show that they have the funds available.
7. Discount points – After the changes take place, borrowers won’t be able to roll discount points into the new loan to buy down the rate. This is another rule that makes sense to me. I’ve seen too many companies that prey on borrowers by offering below market rates, but then piling on the points (which increases the loan amount and the payment) in order to get the lower rate. This rarely makes sense for the borrower, even if they will stay in the loan for the full 30 years.

Here is a breakdown of how the FHA Streamline Refinance Program works now. If this loan will work for you, do it now, time is running out.

The FHA streamlined refinance is only available for borrowers who currently have an FHA mortgage (if you don’t, you can still refinance into an FHA mortgage, but it will be a fully documented mortgage). Because FHA is a government program, and its mission is to increase home ownership, they have designed this program as a way to make it easier for borrowers who are already paying their mortgage on time to lower their payments without going through the entire qualifying process.

There are two types of FHA streamlined refinance, one where you can add in all your closing costs and pre-paids, but it requires a new appraisal to show you have enough equity to support the new loan amount. The other is an FHA streamlined refinance with no appraisal. This program does not require a new appraisal (which makes a difference if your property value has gone down). You can still add closing costs and escrows into the new mortgage amount, but your new mortgage is capped at the amount of your initial loan.

Here are some of the features of the Current FHA streamline refinance:

• No credit qualifying. This is not credit score based and it is not even necessary to pull a full credit report. Your mortgage does need to be up to date, and current and we will look at your payment history over the last 12 months.
• No income qualifying. When we take a streamlined application, we don’t even look at your employment, income or debts. The logic behind this is that if you are able to handle your mortgage payments and other debt now, you will not have any trouble when the payment is lowered.
• FHA mortgage refinance Loan. The mortgage needs to be an FHA loan, and it has to already be insured by FHA (If the lender who made the loan hasn’t gotten the loan insured yet, you will have to wait until it is in their system).
• You can’t receive any cash at the closing.
• In order for the loan to be approved, you will need to show that this loan is helping your situation. This means a reduction in your payment by at least $50 per month.
• The actual closing costs on these loans are low, the FHA commitment fee and title charges are the only costs needed. With most of the streamlines I have done, we have paid these costs through the premium we receive from the lender, so the borrower isn’t paying it directly.
• With FHA there is always an up-front mortgage insurance fee that needs to be paid. Depending on when you bought the home, you may get a refund of a portion of the fee you paid initially. This works on a sliding scale. You will get a large portion of the fee back in the first year, but it is all gone by the end of the third year. If you get a refund it will be applied against the new fee, with the balance financed into the new loan amount.
• One other thing to keep in mind is that you want to close your loan as near the end of the month as possible. FHA, unlike conventional mortgages, charges interest on their payoffs on a monthly basis, not per day. So you will pay the same amount of interest if you close on the first day as you would on the last day. You still have to allow for the 3 day right of rescission, and in a market like this getting a title spot and closing within your lock term is more important.

FHA used to be a major loan option, but it all but disappeared for a number of years as all sorts of low down payment plans came out on the conventional side. With conventional loans tightening, FHA made a resurgence last year. This means that older loans will likely be eligible for streamlines with the appraisal, but most of the newer loans will be doing the loan without the appraisal. Even if there are no closing costs involved, when you close on a loan you will need to set up a new escrow account and pay interest to the end of the month. Some of this will be able to be added in to the new loan amount, but without an appraisal you are capped at the original loan amount. Keep in mind that you will skip your next month’s payment and get the money in your escrow account back from your current lender in the next several weeks after closing, so it will be a wash in the long run, but if you bought with the minimum down payment you will probably need some cash at closing.

The FHA streamlined refinance is a great deal for most borrowers, and a quick and easy way to take advantage of the low rates we can now offer.

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

We Lend in All 50 States