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

If you are a first time home buyer looking to buy and close on a condo before the November 30^th tax credit deadline, things just got a little easier. FHA just pushed back the date that the new condo approval process starts from October 1^st back to November 2nd. FHA has been the go to program for home buyers who don’t have a big down payment saved up, and the FHA spot condo has been on fire over the last year. The FHA spot loan is a way for buyers to purchase condos that aren’t on the FHA approved list (most condos aren’t) as long as they meet FHA guidelines. The program has been a great boon to home buyers, but there were a lot of otherwise well managed properties that didn’t fit the guidelines. At the beginning of the summer HUD announced that they were overhauling the process for approving condos. The new FHA Condo approval process means that a lot more properties will be eligible for FHA financing, but it will eliminate spot loans and all the condos on the approved list (except those approved in the last 12 months) will need to be re-approved. The new rules were supposed to take place on October 1^st, and a log jam of applications was expected since all FHA Direct Endorsement lenders need to submit 5 test cases before they are able to approve condos under the new guidelines. Pushing the deadline back a month means condo buyers (and here in the Chicago area, this is a good portion of first time buyers) now have more time to find and close on their condo purchase.

If you want to see what is currently on the FHA condo approval list, here is the FHA condo search tool. (The search works best for if you search by zip code – Search Pre- HRAP/DELRAP to see what was on the old approved list.)

If you are looking at a condo that isn’t on the list, an FHA spot loan may be the best option. This means we will approve the building at the same time we approve your loan. If you’ve identified a property and want to see if it will work, the first thing you should do is talk with your mortgage lender and have them get an FHA condo questionnaire sent out for the building. This way you will get a quick idea of whether the property will work, before spending a lot of time and money trying to find out.

Here is what is needed for an FHA condo spot approval:

• The condominium project must be complete, including all common areas and facilities.
• Control of the common areas must have been turned over to the homeowners
• association for at least one year.
• The owners association must provide evidence that the project has the appropriate
• hazard, liability and flood insurance.
• Individual units in the project must be owned fee simple. The project’s legal documents must provide for undivided ownership of common areas by unit owners.
• The project’s documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is unacceptable. Such restrictions include rights of first refusal and restrictive covenants.
• At least 90% of the units in the project must have been sold.
• At least 51% of the units in the project must be owner occupied.
• No single entity may own more than 10% of the units in a project. The 10% restriction does not apply when the ownership of less than four units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time.
• Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.

This system will be changing soon, and the new process will make FHA financing available for a lot of homes that aren’t eligible now. But there will be some problems along the way until everyone gets the bugs out of this new system. With the extra 30 days now is the time to take advantage of the spot loan, before it goes away for good.

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

We Lend in All 50 States

One of the biggest trends in the real estate market this year has been the amount of sales made up of distressed properties, that is, foreclosures and short sales. These properties are selling for a discount, and I’ve seen some amazing deals over the last year as borrowers buy homes for a fraction of the cost these homes would have sold for just a few years ago. There are some great bargains, but one of the problems with foreclosures (and to a lesser extent short sales) is that the condition of the home can make the property difficult to finance. Foreclosures often suffer from neglect, deferred maintenance and outright abuse. I don’t know how many homes there are in the Chicago area that sat through the winter with no heat and without being winterized, but I guarantee, the number would be big. This means there were a lot of homes this spring with water damage and mold. Add in all the homes which have other problems, maybe they need a new roof or furnace, or a rehab of the bathrooms or kitchen, or maybe they just need to be modernized. Whatever the problem, there are a lot of homes that either can’t be financed because of their condition, or they need work which you won’t be able to afford to do after you buy. The good thing is, there is a solution to this problem, the FHA 203K rehab loan.

The FHA 203K is designed so you include the cost of repairs and improvements into a purchase price and wrap it all into one loan. FHA divides the program into two sections, the full 203k and the FHA 203K streamline, or Mini K. The full program is for major projects and with this you can do anything from a major remodel to a full gut rehab. But the full 203K can be a complicated and expensive loan. You will need to hire an FHA 203K consultant to advise you and help with the paperwork, and getting it all done can be a big commitment. This is the right choice for big projects, but for most home buyers, the better choice is the FHA 203K Streamline.

The Streamline 203k is meant for more manageable projects, and the cap on spending is now set at $35,000. The reality is that you can get an awful lot accomplished with $35,000. I just closed on one loan where the new buyers finished their basement and added a bathroom, and it came in well under the spending limit. The Streamline 203K program is a great alternative because it makes the process simpler and with the scope of work more manageable, this means it is easier to close. This program also fits the reality of the market. Most of the properties out there don’t need gut rehabs, they need specific work done in order to be eligible for financing, or to improve the livability of the home. You can’t change anything structural with a Streamline 203k, but other than that you can tackle almost anything the budget allows.

Here is how the project works:

First step, get pre-approved for an FHA mortgage – This program is different in how it treats the property, but your credit approval will be the same as with any other FHA approval. This means a down payment of only 3.5% (based on the purchase price plus the repairs), credit scores of 620 and above, and all the other first time home buyer friendly features that FHA is known for. You need to know how much of a loan you can afford and how much cash you will need to close on the loan. One of the great features of FHA is it allows the seller to pay your closing costs (when negotiated in your contract, up to a max of 6%). Knowing how much cash you will need up-front helps when it comes time to structure your purchase in a way that works for you.

Find the house you want to buy – This sounds like the easy part, but that’s not always the case. If you are looking at distressed properties this means the bank that holds the mortgage has to approve the contract. This can take some time, and some banks are more responsive than others. Either way, when putting the contract together, make it subject to approval as an FHA 203K loan. Decide what work needs to be done, and get a rough idea of what it will cost.

Find a contractor that will do the work, and get the bid in writing – Getting the bid is the crucial step. You need a contractor who will put in a detailed bid showing exactly what work will be performed and with specifications and cost break downs for everything, including both materials and labor. We aren’t able to order the appraisal until the contractors order is in. The appraiser will use this bid to determine what work will be done, and what the value of the home will be once all the work is completed. Along with the bid, we will need to approve the contractor, this means your contractor will need to furnish us with a package showing his business licenses, a resume showing similar work done, and proof of insurance.

Get the appraisal – This is the biggest difference between an FHA 203k and a normal FHA mortgage. We order the appraisal through one of our FHA approved appraisers. They are actually doing two appraisals at the same time. The first part of the appraisal is based on what the property’s value is now, in its present condition. The second part values the property as it will be once all the work has been completed. The appraiser will take the detailed contractor bid and incorporate this into the appraisal. After the close, the work will have to be completed as laid out in the appraisal.

Underwriting and closing – Once we have the full file with the completed appraisal, the loan is underwritten like any other FHA loan. There is more paperwork on our end, and we need to make sure that everything conforms to the guidelines and all the pieces of the puzzle fit right. Once we have a clear to close approval, the loan is ready to close. The closing of a 203K is similar to any other closing. One thing to keep in mind, though, is you won’t get the money for the rehab at the closing.

After the close – It takes around 30 days before the loan is set up in the system. At this point you will get a check, made out to you and the contractor (or each contractor if you are using more than one) for half of the rehab amount. This is to cover the materials and to get the work started. You will also get a check list which tells you exactly what needs to be done from that point on. Once the work is completed an inspector comes in to confirm that everything was done according to the original bid, and once you have the sign off you get the rest of the money to pay the final bills. If the work comes in under the budget, the balance will be used as a principal pay down on your loan. All the work has to be completed within 6 months.

The FHA 203k rehab loan is a great way to take a rough home that you can buy for a bargain price, and turn it into a finished gem. This loan is a way that many buyers are using to add value to their home and gain instant equity. This is obviously a simplified rundown for the FHA 203k and if you don’t do things exactly right, there are a lot of little obstacles that can trip you up. But if you have a good experienced loan officer as your guide, the process is easier than you might think, and the best way to improve a home while keeping your investment and payments low.

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

We Lend in All 50 States

FHA condo spot approvals have been one of the best things going in the real estate market over the last few years. Most condos have traditionally been financed with conventional loans, but once the financial markets imploded, conventional mortgage options for condos quickly dried up. Mortgage insurance became harder to get and underwriting guidelines tightened so that many other wise strong borrowers, couldn’t meet the new requirements. Conventional condo loans are still available, but FHA financing means a lower down payment, and for most borrowers, a lower interest rate. The only issue was that condos have to be approved by FHA to show that the condo project is financially viable and doesn’t discriminate. With so much conventional financing available when times were good, few developers applied for FHA approval over the last 10 years, so most buildings in the city, and especially the newer, more desirable buildings, weren’t FHA approved. The FHA spot loan filled this gap. FHA spot loans are a way to finance a single unit in a well run condominium without going through the FHA condo approval process. FHA spot loans have become one of the biggest benefits for condo buyers, but that is about to change.

Starting on October 1^st, the FHA spot loan will go away. This is part of a new FHA condo approval process which in the long run will help a lot of home buyers. The new program will allow Direct Endorsement FHA lenders (like my company) to approve the entire building or project when they approve the individual loan. Once a project is approved by one lender, all other FHA approved lenders will be able to use that approval. This new program will also allow buildings with as few as 2 units to be financed through FHA (the minimum is a five unit building now), and by eliminating the ban against first right of refusal language in the decs and by laws (as long as the projects don’t actively discriminate) if will mean a lot more condos will now be eligible for financing. This new process will be a big improvement in the long run, but in the short run, it is going to make it harder to buy and close on a condo, especially for those first time home buyers who want to use the $8,000 tax credit and must close by the end of November.

With the new change, any building that hasn’t been approved by FHA in the last 12 months (from October 2008) will have to be submitted to FHA for a new project approval. So even buildings currently on the approved list will be affected. As part of the new program, in order for an FHA Direct Endorsement Lender to approve the project, they will have to gather more information than what is now required on the spot loans, and it is unclear how to collect some of the required information. The lender is taking on more responsibility and the paperwork and documentation is more extensive. This will put a bigger burden on the lenders to make sure they get everything right, because they will be held responsible by HUD (Department of Housing and Urban Development, the agency behind FHA) for making sure the project fits all the guidelines. HUD will insure that everyone is following the same rules by requiring that each lender submit their first 5 project approvals as test cases to HUD, before they are allowed to approve projects on their own. What does this mean to any buyer looking to buy a condo in a building not approved in the last twelve months? Expect gridlock.

HUD isn’t staffed up to underwrite and approve the volume of loans that are about to come their way. Every FHA Direct lender in the country will be sending out their 5 test cases in early October (those who can will try and have all the test cases on HUD’s desk October 1^st). HUD will go through these files as quickly as they can, and as a project is approved it will be placed in a data base showing that that project is now on the FHA approved list. Once a company has passed all their test cases, they will be able to handle the flow by itself. But no one knows how long it will take to get through the back log, and it could take months to work through all this. HUD won’t be looking at commitment or closing dates on the contract, they will just be trying to get through the flood of applications as fast as their system will allow. So, if you are looking to buy a condo, and time is an issue, be prepared. If you are looking at an FHA spot loan or an FHA approved condo, get your offer in now. Everything changes on October 1^st.

Call me if you want to check on whether a condo is on the approved list now. Here is what is needed to approve a spot loan in the Chicago area:

• The condominium project must be complete, including all common areas and facilities.
• Control of the common areas must have been turned over to the homeowners
• association for at least one year.
• The owners association must provide evidence that the project has the appropriate
• hazard, liability and flood insurance.
• Individual units in the project must be owned fee simple. The project’s legal documents must provide for undivided ownership of common areas by unit owners.
• The project’s documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is unacceptable. Such restrictions include rights of first refusal and restrictive covenants.
• At least 90% of the units in the project must have been sold.
• At least 51% of the units in the project must be owner occupied.
• No single entity may own more than 10% of the units in a project. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time.
• Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.

There has been a lot of news lately about the $8,000 first time home buyer tax credit, and a lot of disappointed home buyers when the news was released that you won’t be able to use the credit as part of your minimum down payment. I get calls every day from renters who want to buy a home now, and many of them are well qualified for an FHA mortgage here in Chicago Illinois based on their income and credit situation, but they fall short when it comes to having saved up enough money for the down payment and closing costs. Saving cash is always a struggle, and the no money down loans have all disappeared. So if you want to buy a home, you will need to come up with some cash. For many wannabe first time home buyers this is a cruel twist. Once they buy the home the government will give them a check for $8,000. But now, when they need it most, they can’t get a thing. But with a little creativity and ingenuity, there are ways to come up with the cash to close without resorting to loan sharks or placing your hopes on lottery tickets.

Here are some ways to accumulate cash now, when you need it most:

1. Gift from a relative. With FHA, your entire down payment can come as a gift from a relative. Maybe you don’t have any one relative with the means to give a big gift, but you can ask several relatives for several smaller gifts? We will need to document the gift showing a paper trail of the money from the gift donor to you. We show this as a gift, and the gift letter states that this isn’t a loan and there is no expectation that it will be repaid. At the same time, when you have closed on your loan and the government sends you your $8,000 check, if you want to show your gratitude to someone by giving them some money, that is entirely up to you (And the truth is, it happens all the time).
2. Use your 401k or IRA. Do you have any money in a 401k retirement account? How about an IRA? You don’t want to use your retirement savings unless you have to, but for many first time home buyers this is the best option for funds. Most 401k plans allow you to borrow against up to half your savings in order to purchase a home and doing this means you will pay yourself back and keep the savings intact. Another option is to cash in the 401k or IRA. Doing this means you are getting rid of the retirement savings, which is a problem down the road and you may have to pay taxes on the money you withdraw. There is usually a 10% penalty when you withdraw your funds, though that doesn’t apply if you are a first time buyer using the funds to pay for the purchase of a first home (up to $10,000). One way to get around the taxes and penalties is by paying the money back within 60 days (once you have the $8,000 credit). Make sure to talk with an accountant before you make a decision on this.
3. Sell something – If you’re like most people, you probably have more stuff than you know what to do with, and if you are willing to part with some of it, this could be the basis for a down payment. This could be a car or a motorcycle, a musical instrument or collectables like baseball cards or comic books. Check out EBay and Craigslist. Have a garage sale. This by itself might not be enough for your down payment, but combined with other strategies it could bridge the gap.
4. Change your withholding rate.  Do you normally get a tax refund at the end of the year? Why wait until next year to tap into it? You can change your W9 form at work so that you are claiming more deductions, which means they will withhold less taxes out of your paycheck each pay period. If you put aside the extra money in your check toward your down payment, your savings will grow much quicker. Changing the withholding means you will be ringing up a big tax liability, but this should be more than covered by the tax credit. Make sure you readjust the withholding rate later so you don’t get burned on your taxes next year.
5. Seller credits. You can’t use a seller credit for the down payment, but you can (and it is common in this market) negotiate for the seller to pay for your closing costs and pre-paids so the only money you need to come up with is the 3.5% for the down payment. Make sure you talk with your loan officer before making the offer, so they can put together a good faith estimate showing all the cash you will need, and the correct phrasing will have to be inserted into the contract. With FHA you can get up to 6% of the purchase price credited back for your costs, but the only reason you will need that much is if you have a very small loan amount or are paying points to bring down the interest rate.
6. Lender credits. Again, this can’t be used for the down payment, but if you can’t get the money for closing costs from the seller, you may be able to get it from the lender. As mortgage brokers and mortgage bankers, our compensation often comes in the form of a yield spread premium. This means that the wholesale mortgage companies pay us for bringing them loans. If you are willing to pay a higher interest rate, your lender can use some of the premium to pay for your closing costs. This is something that is commonly used for refinances, but it could be used for your purchase, too. Ask your loan officer if this is an option.
7. Look deep. You may have money you don’t even know about. A few years back I found out I had money from a closed out bank account I never knew about. Check on the Cash Dash site (in Illinois) to see if you have money there. Check other ways too. Do you have savings bonds you’ve never cashed in? Or maybe you have an insurance policy with a cash value? Coming up with a down payment will take more than looking for coins between the cushions, but you may have money you haven’t even considered.
8. Get serious with your savings. If your life depended on it and you absolutely had to come up with a certain amount of money by a certain date, could you do it? If buying a home is a goal, and getting it done on time pays you an extra $8,000 you have a real incentive to get serious about saving. Think of what things you can do without to increase your savings. Maybe it is kicking a Starbucks habit, or canceling your cable. There are usually ways most of us could cut our spending if we needed to.

Each of these on its own may help, but combine several of these ideas, scrounge around and get creative, and you might be surprised that you are closer to coming up with the down payment than you think, and closer to owning a home of your own.

There are lots of ways to buy without having a lot of cash. Use your imagination and you can come up with some more ways to come up with the down payment.

Illinois Mortgage Rates                   First time home buyer loans  

We Lend in All 50 States

Shaun Donovan, the Secretary of Housing and Urban Development (HUD), dropped a bomb shell in a speech to the National Association of Realtors today. HUD, the administrator of FHA will soon allow the $8,000 first time home buyer credit to be “monetized” and used as a down payment on FHA mortgages. I’ve been saying for a while that this is going to be the year of the first time home buyer. With a combination of the lowest home prices in years, historically low mortgage rates, and the $8,000 first time home buyer tax credit, all the stars were aligned for this to be a huge year, and it has started out strong. But this should kick it into overdrive. The biggest obstacle to buying a first home has always been saving up the down payment. FHA allows a 3.5% down payment, and that has been a great way for many borrowers to make the step into home ownership. But even that has been a big hurdle for many other wise well qualified buyers. This move will mean that borrowers can buy with effectively no do down payment up to around $230,000, and having an extra $8,000 to go toward a down payment will help a lot of people bridge the gap between what they have saved (or can get as a gift) and what they will need to get into the home. With FHA you can use seller credits to pay the closing costs, so the amount of cash coming out of your pocket will be low.

The details of the program will be released next week, but the program will allow FHA approved lenders to monetize the tax credit through a short term bridge loan. This means the home buyer will be able to use the credit as funds at the closing table and won’t have to wait until after closing to get the money. Don’t expect this to be ready to go by next week. Once HUD releases the details each FHA lender will need to determine how they are going to incorporate this into their approval and closing process.  This means a process of how they will verify that the borrowers are eligible for the credit and a way to make sure that they (or more likely who ever is making the loan) will get the money from the credit paid directly to them from the government. It will require some tweaking to see how they will make this work and still fall within the FHA guidelines. My guess is that these are just details that will be worked out. This may take a little longer before everyone comes on board, but the announcement was made, so they will find a way to get this accomplished. This will be a huge incentive for first time home buyers to make their move now.

Here is how the first time home buyer tax credit works:

1. The credit is for 10% of the purchase price up to a maximum of $8,000. This means that if your purchase is $80,000 or more, the credit will be $8,000.
2. It is available only for first time home buyers. By their definition, a first time home buyer is anyone who hasn’t owned a home in the last 3 years.
3. The home has to be for your primary residence. Second homes and investment properties don’t qualify.
4. This is a true tax credit. The original bill released last year gave buyers a credit the first year, but they had to pay it back over the next 15 years ($500 per year). If they sold their home in that period they would have been liable for the amount of the credit they hadn’t paid back. This new version makes it a true credit as long as you stay in the home at least 3 years. If you sell before 3 years is up, you may need to pay the credit back.
5. If your tax liability is less than the $8,000 credit, you will get the difference as a check back to you. If you have already filed your taxes, you can file an amended tax return in order to take the tax credit this year and get the money back quickly.
6. Income caps apply. A single buyer qualifies as long as they earn up to $75,000 per year, and couples are maxed out at $150,000 per year.
7. This credit applies retroactively from January 1, 2009 to December 1, 2009.

Keep in mind that there is an expiration date to this tax credit. You have to buy the home and close by December 1^st of this year, which gives you about 6 ½ months to get it done. With record low mortgage rates and affordable home prices there is already a strong incentive to buy. If you want to see how much of a loan you qualify for, or what the best way would be for you to afford a home, give me a call.

Update 05/27/2009 – So far, no new details. FHA posted a mortgagee letter about the program, but took it down the same day. It appears that this was announced prematurely, and they are still scrambling to put the details of how it will work together. But the word is that it is still going to happen. Stay tuned, and check back in later. As soon as I have news on this program I will post it here.

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What is Needed for Conventional and FHA condo approval

If you are in the market to buy a condo here in the Chicago area, you’ve probably figured out that financing it may be a problem. It used to be that condos were treated like every other property. If you qualified for financing, there were loans available. That’s not necessarily the case now. As a result of the housing downturn and the mortgage mess, financing has become harder to get for all properties, but condos have been hit the hardest. A lot of this is due to condos being too successful. Condos fit the life style that works best for many homeowners, especially singles and couples who want prime living space but don’t want to spend their time mowing the lawn and shoveling snow. Demand for condos was so high, both here in Chicago and throughout the nation, that it led to a boom in new condo construction and conversions. Over the last 2 years thousands of new condo units have come onto the market, even as the market has softened. Financing was too easy during the boom years, but now the cycle is reversing and guidelines are being tightened to the point where many condo complexes will not be able to get financing, even for the most qualified buyers.

Here are some of the changes we’ve seen in the last year that make financing for condos harder to come by:

• All the mortgage insurance companies instituted declining market policies which meant that in most cases 10% is the minimum down payment you can buy with on a conventional loan.
• Loan level price adjustments (price hits) were added so that in order to get the best pricing you would need to have a 25% down payment. With less than a 25% down payment there will be an extra .75% charge which means either higher costs or a higher rate.
• Fannie Mae and Freddie Mac have made several changes on how they look at condos, but the latest change may have the biggest impact. The pre-sale requirements have been raised from 51% to 70%. This means that new condo developments now must have 70% of their units sold and closed before they are able to take advantage of conventional financing. In the past there were plenty of banks and private lenders who would take on these loans for their own portfolios. But with the banking crisis this money has all but dried up.

Combined, these changes are likely to make a lot of newer projects unsalable. You can have the best amenities and the best location in the market, but if financing isn’t available there are only so many cash buyers. Over time the lending rules will ease up and financing for newer projects will be available again. But by then some of these new projects will be long gone or converted into rental units. The condo market is being divided into two classes, properties that can be financed and those that can’t. For those properties that can be financed, there are two options, Conventional and FHA.

Conventional condo financing

Conventional financing is for those loans that conform to Fannie Mae and Freddie Mac guidelines. This means loans of up to $417,000 (for higher loan amounts Jumbo loans are available, but they will still follow conventional guidelines) and is for well qualified borrowers with good credit scores. A year or two back, there was financing available for any new condo, even if you were the first buyer in the project. That has changed, but for most newer projects conventional financing is still the only option (though some newer projects have portfolio financing available). In order to qualify for conventional financing, we will need to approve both the borrower and the condo project itself. Borrower guidelines are tougher with condos because they look at this as a layering of risk. If you plan on putting down less than a 20% down payment you will need to have mortgage insurance, and mortgage insurance is tighter on condos than on single family homes. The mortgage insurance guidelines have changed along with everything else, and most buyers will need at least a 10% down payment to qualify (we do have an option for 5% down for the most qualified buyers).

In order for the loan to be approved, the condo building also has to go through an approval process. One of the first things I do when I get a new condo contract, is send out a condo questionnaire to the management company or home owners association. The completed questionnaire gives a quick picture of the financial condition of the project. Some of the things they look for are:

• How many units are in the project?
• How many are completed?
• How many are sold and closed?
• How many units are owned by investors?
• Is the project complete?
• When was the home owners association formed?
• What percentage of the owners are behind on their association dues?
• Is the project adequately insured?
• Is the association party to any law suits?

If any of these answers raise more questions, then further research will be done to make sure the project conforms to the guidelines. The appraisal and a review of the condo declarations and by-laws is also part of the condo approval process.

Conventional financing is the best option if you are putting down a large down payment, have excellent credit and are buying a building which meets all the new guidelines. Conventional guidelines are now set up so that the best borrowers will still be in fine shape, but for most borrowers, and especially first time home buyers, if they are able to buy with a conventional loan it will cost them a lot more than it would have before.

This is part of the reason that FHA has become such a big factor in condo financing.

FHA condo financing

FHA is a government program designed to help more people buy homes and more borrowers will qualify with FHA financing than with conventional. It is a low down payment (3.5% down) program and the credit standards are much looser. Because it doesn’t have the price hits that conventional now does, the mortgage rates are better, too. Anyone who is putting less than 20% down should compare both options and see which loan is better for them. Like conventional, we will need to approve both the borrower and the condominium project.

There are two ways that a condo can be FHA approved. The first way is if the developer or home owner’s association applied for and was granted a project approval. This means that FHA has already done all the checking and the project is ready to go. Here is a link to the site which tells whether a project is approved, or not:

FHA Condo Search Tool

This tool is just a starting point. You can search a number of different ways, but the results aren’t always up to date, and if you don’t have the search exactly right you might not find it, even if the property is approved. But it is a good starting point.

One problem with FHA approvals is that most of what you will find are older properties. When the market was booming, FHA was looked at as too old school, and there were conventional options with no down payment where the borrowers (and the developer) didn’t have to go through the extra paperwork that FHA required. So most of the approvals will be older, more established (and usually without the amenities most buyers are looking for) buildings which went through the process some time back, or newer properties that have just gone through it. The good thing is that there is another option, the FHA spot approval.

FHA condo spot approvals

FHA spot loans are a way to make FHA loans available to home buyers in well run condo projects even if they haven’t gone through the full approval process. The difference here is that these loans are for the individual unit, not the whole building. This is a huge advantage because a good portion of the condos that are eligible for conventional financing also meet the FHA spot approval guidelines. If you have a minimum down payment, or if your credit scores are below 700, this is the only way you will be able to buy a condo. If you are putting 10% to 15% down, this is still likely to be the least expensive way to go.

FHA spot loans won’t work for all situations. They are only an option for properties which have already sold out or are nearly there, and have shown that they have the financial resources to continue to perform well in the future. From the FHA guidelines, here is what is need to approve a spot loan:

• The condominium project must be complete, including all common areas and facilities.
• Control of the common areas must have been turned over to the homeowners
• association for at least one year.
• The owners association must provide evidence that the project has the appropriate
• hazard, liability and flood insurance.
• Individual units in the project must be owned fee simple. The project’s legal documents must provide for undivided ownership of common areas by unit owners.
• The project’s documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is unacceptable. Such restrictions include rights of first refusal and restrictive covenants.
• At least 90% of the units in the project must have been sold.
• At least 51% of the units in the project must be owner occupied.
• No single entity may own more than 10% of the units in a project. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time.
• Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.

The biggest hang up for many buildings is the first right of refusal. This was standard language in many associations, and it is still the norm in many areas. Some condo associations are taking the steps to remove this language so that their units are more marketable, which adds value to the entire project, but it takes time and their are legal costs to get this done.

The process for approving an FHA spot loan is similar to conventional condo approval. The mortgage lender (that’s me) needs to gather the documentation and prove that the unit meets the FHA guidelines. We do this through the condo questionnaire, the property appraisal and by reviewing the condo decs and by-laws. Once we have everything together we submit the package to the underwriter, along with all the borrowers documentation, and this becomes part of the loan approval. The FHA spot approval takes a little more time and some extra documentation, but for many people it is the best, and some times the only, way to buy a condo.

The fact is, there are too many properties that are too new or have issues which make them ineligible for any financing. It is going to take some time for the market to sort itself out. But there are options for home buyers, and with a little persistence condo financing is readily available.

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The real estate market here in the Chicago area is heating up. Traditionally the Spring market is the most active time of the year for home sales, and as the weather starts warming up here, the market is getting warmer, too. Most of the activity is still in the lower priced category, and first time home buyers are the biggest part of the market now. There are some big reasons why first time home buyers are the focus now. Most importantly, they don’t have a home to sell. I’ve talked to a lot of home owners who would love to move and find a home with more room for their growing family, or a place which meets their needs better than their current home does. But in order to do that, they would have to sell their current home first, and right now that is a hard pill to swallow. Home prices are down, and even if move up home buyers can afford it and can get a great bargain on the larger move up home, psychologically it is tough to admit that the home they have now is worth much less than it was just a few years ago. There is pent up demand, but my guess is that the real estate market won’t really take off again until after the economy is humming again, when interest rates are higher and inflation is in the air. So for all intents and purposes, this is a first time home buyer’s market.

There are some big reasons why first time home buyers are in the market now:

• Home values are down and affordability is up. Much of the activity is focused on short sale and foreclosed properties, and these are coming in at prices we haven’t seen in years. This is a buyer’s market, and buyers have the leverage to get real bargains now.

• Interest rates are low. Mortgage interest rates are bouncing around record lows. This ties into affordability, and if you are able to buy a home at a low price with a low fixed rate mortgage, your cost of home ownership is way down.

• The government is paying first time home buyers to buy homes now. The $8,000 tax credit means that first time home buyers will be able to write off 10% of the value of their new home, up to a maximum of $8,000 if they buy a home before November 31^st of this year. This means that the government is offering a discount for first time home buyers.

• Low down payment mortgage financing is available. FHA is the go to financing for first time home buyers here in the Chicago area. The down payment is 3.5% and if that money is hard to come up with, it can all come from a gift. FHA also allows for a seller credit of up to 6% (you don’t need that much) so the contract can be structured so that the seller is paying for your closing costs. FHA has also increased the maximum loan size it will take on up to $410,000 in Chicago and the surrounding suburbs, so it works for more situations now than it ever has before.

No one knows what will happen with the economy or how quickly the real estate market will recover. Unemployment is still growing, and there is a lot of fear in the air. Some experts that have been right since early on are saying that home prices could fall further. But if you are planning on being in the home for at least five years (and you shouldn’t be buying if you aren’t planning on being there for a while) it is hard to see how this isn’t a great time to buy. As the economy gets back on track, and it will eventually, more home buyers will gain confidence and the real estate market will return to a new type of normal. Over time home prices will increase, and mortgage rates will pop higher. My guess is that a whole lot of people will be kicking themselves for not buying when they had a chance. If you are a first time home buyer, or thinking about becoming one, you have control of the market now.

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There has been a lot of press recently about FHA loans and how the program has been under stress. At the end of February 7.46% of FHA insured loans were  in default or seriously delinquent. There has also been a sharp increase in FHA loans which go into default without the new owner making a single payment, a clear sign of fraud. These are ugly and eye popping numbers. Because of these statistics, I’ve heard commentators state that FHA is a broken program and that FHA is only picking up the worst loans, and setting itself up for failure. I’ve heard others say that FHA is like the sub prime loans of the past and we are making the same bad decisions now that got the mortgage market into a mess before. There is no question that FHA is under stress, but in my opinion it’s not because the standards are too low, the stress is a fact of life in the present economy.

FHA has always filled a need in the market. FHA is a federal program with a mission to increase home ownership for low and middle class families. FHA loans are fully underwritten and the emphasis is on whether the borrowers will be able to afford the home and make the payments in the future. The biggest obstacle to home ownership has always been saving up the down payment required to buy a home, and FHA offered the low down payment loans that made it possible for many first time home buyers to get in on the first rung of the home ownership ladder. FHA wasn’t a big part of the problems that got us into this mess. FHA had lost market share to low down payment conventional options every year up until last year, and was down to about 2% of the loans originated. But that was then, this is now. Conventional guidelines have tightened and price hits added to the point where many otherwise qualified buyers would pay so much more for a conventional loan that FHA is the only option. FHA loans now make up almost 40% of purchase loans. With more buyers who would have otherwise gone conventional forced into FHA, I am seeing more buyers with larger down payments and reserves than the typical cash strapped FHA buyer, and more buyers who have been home owners before, not just the typical first time home buyer. Rather than going down, the quality of FHA loans is actually going up.

With an explosion of new loans in a declining economy, it was a foregone conclusion that FHA would run into problems. But the truth is, this isn’t an FHA problem, it is a mortgage problem. Conventional loan delinquencies are at a record rate and Jumbo loans, which are above the conventional lending limit and made to buyers who are usually well to do, are now showing an increased rate of default. This is all linked to unemployment. As unemployment moves higher, more borrowers who were in good shape before will have trouble paying their loans, and that is exactly what has happened. The cities with the worst FHA default rates, Detroit, Elkhart Indiana and several cities in Florida, are all areas with high unemployment. As the economy recovers and unemployment goes down, this will take off the loan stress and bring the situation back to normal. The first payment defaults are more a result of the explosion in loan volume that FHA has seen. There have always been loan scammers and fraud involved in mortgages. Before it was concentrated in sub prime, now with so many more loans on the books, FHA is the target.

There have been a number of changes over the last year that take away some of the risk on the loans FHA insures:

• The minimum down payment has increased from 3.0% to 3.5%.
• Down Payment Assistance Programs, which were a way for the seller to fund the buyer’s down payment, are now gone.
• FHA cash out refinances have been decreased from 95% loan to value to a maximum cash out of 85%.
• The wholesale lenders have adopted minimum credit standards so that buyers will need at least a 600 credit score to qualify.

There is no doubt that more changes are on the way, and underwriting is likely to get tighter. But there are a lot of advantages to FHA and it is not a loan of last resort, but a loan that is the best option for many borrowers and many situations. These are some reasons you may want to consider FHA financing:

• Competitive rates and fees – FHA is comparably priced to conventional loans, and when you consider price hits, it is often priced better.
• It is the only option left for a low down payment purchase with a minimum investment of 3.5% of the purchase price.
• The entire down payment can come as a gift from a relative.
• With FHA approved condos and FHA spot loans, you can buy a condo at a good rate with a minimum down payment. With conventional guidelines you will need at least 10% down and there will be price hits if your down payment is less than 25%.
• To get the best pricing with a conventional loan you need a 740 credit score, and if your score is below 680 the price hits will make the conventional loan much more expensive.

FHA financing has gotten a bad rap lately, but without FHA as an option a whole lot less homes would be sold and less home buyers would be able to obtain financing.  FHA, along with all loan programs, will be under pressure and defaults are going to be a big problem until unemployment starts to fall. The home market is stressed now, but without FHA to pick up the slack left from tighter conventional guidelines, the housing market would be in even worse condition.

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Last year, as a way to increase financing options and help stabilize the housing market, FHA temporarily increased their lending limits. This, combined with conventional guidelines tightening, meant that FHA quickly became one of the best loan options for most borrowers. The temporary limits expired at the end of the year, and new limits were put in place which lowered the FHA limit to $365,700 for a single family home. This was lower than the temporary limits, but well above what FHA had been before. Now, as part of the recently passed stimulus package, FHA is returning loan amounts to the higher temporary limits for the rest of this year. So effective for loans which are credit approved in calendar year 2009, 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:

1 unit $410,000

2 unit $524,850

3 Unit $634,450

4 Unit $788,450

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.

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

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