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

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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

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UPDATE – It’s official. President Obama signed the bill on Friday November 6th and the bill is now law.

As expected, the Senate has now passed the bill extending the home buyers tax credit and expanding it so that move up buyers will also now qualify. The tax credit was an add-on to a bill that extends aid to the long term unemployed, and it passed by a 98 to 0 margin (you don’t see that very often these days). The current first time home buyers tax credit was due to expire at the end of this month. The new bill will extend the date to properties that are under contract by the end of April, and they will have until the end of June to close. It also expands the credit (at $6,500 instead of $8,000) to move up buyers who have lived in their homes for at least five consecutive years out of the last eight. The bill won’t become a law until it is signed by President Obama, but this is sure to happen soon.

This extension won’t give an immediate boost to the market. Most of the first time home buyers who were ready to buy have already taken advantage of the credit or are in process and set to close by the end of November. The season is also a factor, as December is usually the slowest month of the year for real estate sales. Most home buyers take a break during the holidays, and the cold weather (at least here in the Chicago area) keeps more home buyers indoors. I don’t think this will bring in a flood of move up buyers, either. In order for a home owner to buy a second or move up home, they will need to sell their current home first. A big part of the first time home buyers market is focused on the short sales and foreclosures, which takes inventory off the market, but doesn’t lead to a new sale higher up the chain. Still, this will help the Spring market get off to a faster start, and it could cause some fence sitting home owners to make the plunge and start looking for a new bigger home, which meets their current needs.

Here are the details of the New Home Buyers Tax Credit:

1. The credit is for 10% of the purchase price up to a maximum of $8,000 for first time home buyers and up to $6,500 for qualified move up buyers. This means that if you are a first time home buyer and your purchase is $80,000 or more, the credit will be $8,000.
2. The credit is good for properties that are under contract by April 30^th and you have until the end of June to get the financing together and close.
3. It is now available for first time home buyers (a first time home buyer is anyone who hasn’t owned a home in the last 3 years) and move up buyers who have lived in their home for 5 consecutive years out of the last 8.
4. The home has to be for your primary residence. Second homes and investment properties don’t qualify.
5. This is a true tax credit. As long as you stay in the home at least 3 years, the credit is yours to keep. If you sell before 3 years is up, you may need to pay the credit back.
6. If your tax liability is less than the $8,000 credit ($6,500 for move up buyers), 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 in the current year and get the money back quicker.
7. Income caps apply. They have increased the income caps so more home buyers will now qualify. A single buyer qualifies as long as they earn up to $125,000 per year, and couples are maxed out at $225,000 per year. Higher earning borrowers may get a partial credit, but the amount decreases as their income rises.

To take advantage of the credit you will need to file an IRS 5405 form along with your HUD1 closing statement showing that you have closed on the home. If you have any questions or need to be pre-approved for a mortgage, let me know.

Free Home Buyers Guide

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Bloomberg News service is reporting that the Senate is close to passing a modified extension of the first time home buyers tax credit, which will extend the dead line from November 30^th on to April 30^th for getting a home under contract, and another 60 days to close the loan, making the credit available for closings up to the end of June. The proposed bill will lower the amount of the credit from $8,000 to $7,290 (or 10% of the sales price, whichever is less) and make the credit available to move up buyers who have owned their home for at least 5 years. Under the proposed agreement, the income caps for first time home buyers would remain at $75,000 for individuals and $150,000 for married couples, but move up buyers would still qualify with incomes of $125,000 for individuals and $250,000 for married couples. This bill will be added to an unemployment benefits extension bill, and Bloomberg is reporting that there are enough votes committed to pass the bill.

All the major home industry trade groups (National Association of Realtors, home builders, mortgage groups) have lobbied for an extension of the tax credit, and the move up feature was on all their wish lists. But the news lately was focused more on how much this credit would cost, and on allegations of fraud, so if this happens as projected it will be a big surprise, and a boost to the real estate market. Some economists have said that the tax credit is inefficient and is keeping prices higher than they would be otherwise. But letting home prices fall further isn’t good politics. The market has already softened in the past few weeks as buyers who thought they were too late for the tax credit, headed toward the sidelines. This extension will bring back some of these buyers and should insure that the real estate market stays busy through the first part of next year.

Bloomberg is reporting that this bill could be passed as early as this Friday. I will have more news and details as they come available.

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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

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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.

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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.

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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.

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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.

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About a month ago, I wrote that it was too early to panic if you were a first time home buyer and counting on the $8,000 first time home buyer tax credit. Home sales have been inching up each month, and a big part of the increase is due to first time home buyers. The $8,000 tax credit is a big incentive, and predictions call for a surge in first time home purchases as the November deadline approaches. But it takes more time than most people realize to find and finance a home, and too much of the process is outside of the buyers control. Too many things can happen to delay a closing, or worse, kill the deal. If you are one of those people who wait until the last minute to get things done (I know I’m guilty of that), this isn’t like pulling an all-nighter to get your term paper done the day before it’s due. There are a host of parties involved in any real estate transaction, and you are at their mercy when it comes to timing. So is it time to panic yet? The answer is still no, but the clock is ticking and that time is approaching faster than you might think.

Here are some things which may add extra time to your purchase:

Are you looking at short sales or foreclosures? Some of the best bargains on the market now are short sales and foreclosures. These distressed transactions now make up about 40% of the sales here in the Chicago area. These can be great bargains, but don’t expect the deal to come together quickly. With a short sale you need to not only get the seller to agree, but also the bank that holds the mortgage. Some of the banks are now responding quickly, but it’s not uncommon to put in an offer and wait for a month or longer (sometimes much longer) before the bank makes a decision. If short sales and foreclosures are on your list to look at, you don’t have a lot of time to waste.

Are you looking for the right home, or just any old home? When you have more time to look, you can afford to be picky. When a deadline fast approaching, too many buyers are going to settle on the first home that is acceptable and not the home that is right for them. Avoiding the last minute rush gives you more control.

Do you have problems you don’t know about? – One of the major factors in your loan approval is your FICO score. All loans, both conventional and FHA, now have established minimum scores for approval, and pricing is based on how high your scores are. One of the things I see on almost a daily basis is people who are surprised about what comes up on their credit report. This could be a matter of incorrect or outdated information, or it could be a real issue which you need to address. Either way, if we have time we have a better chance of fixing the problem then if you don’t find out about it until the last minute. This is one of the main reasons it makes sense to get pre-approved for a mortgage before you even start looking for a home.

Everything will take longer as we get closer to the deadline – Once you have your contract together, getting the mortgage done on time is the major hurdle. Right now we are processing loans and closing quickly, but a few months back when the system was overloaded with refinances, everything took a lot longer. As purchases pick up over the next few months, we expect a back log as we get closer to the date. And if rates drop again, and refinances pick up again, this will cause more of a back log. We, like many companies, have ramped up our staff and are ready for the higher volume, but I still hear about many mortgage companies who are taking 60 days or longer to get a loan to closing. When you are ready to close, make sure you ask your loan officer if they can get the loan done on time, and if they can guarantee that you will hit the dates in the contract.

What is the properties condition? It’s becoming more and more common to see homes that need repairs before they can close, especially with the foreclosures. Sometimes these are small things, and a lot of buyers are getting access before the close and making the repairs themselves (the banks usually won’t). But often the repairs are too extensive and cost too much. For these situations an FHA 203K loan is a great solution, but this will take more time to put together and close. I’ll write more about the 203K loan soon, but if you are looking at this as a possibility, you should get moving soon.

Are there any issues with the title? Another issue that you may not even know about until close to the closing is if there are any title issues. The title is usually pulled by the sellers attorney, and it gives a history of the property’s ownership, and shows if any liens are outstanding. If something shows up on the title, this will need to be cleared up before you are able to close. If you are near the deadline, this could be enough to push you over, losing out on the $8,000 tax credit.

There are some other new wrinkles to the mortgage process which will also add to the time required for the mortgage and the closing. The new HVCC appraisal requirements means that the appraisers aren’t as service oriented as they were before, and as volume picks up it will take longer to get an appraisal back. There are also new Truth in Lending rules which just went into effect, and if the APR on a loan changes by 1/8 of a point, either up or down, the Truth in Lending will need to be re-disclosed and there is a mandatory delay of the closing. There is a whole list of items which affect the APR including not only bank fees, but title charges and tax stamps, so until the industry gets this one down there is a potential for delay.

The bottom line is that it’s not time to panic yet, but you may have less time than you think. If you want to make sure you do everything in your control to close on time (and allow for those items out of your control) you should start soon.

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Downers Grove Mortgage Company

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