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

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

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

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

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

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

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

Free- Home Buyer’s Guide

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Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

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

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

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

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

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

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

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

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

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

Free- Home Buyer’s Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

This is the second installment of the Chicago Video Home Buyer’s Guide and in this installment we go over one of the major advantages of owning your own home, appreciation and leverage.  Property

appreciation, or how home values increase over time, was something that everyone took for granted up until the bubble popped. Home values now are down sharply from where they were a few years ago, but forces are in place which will stabilize the market, and buying now when home prices are so low means home appreciation is much more likely as we go forward. Leverage is when you use a mortgage to buy your home, and when home prices increase, your return is magnified. This is how people can buy a low priced starter home and build equity to move up to a larger home over time. Of course there is no guarantee that home prices will go up, but this has been a major benefit of owning your own home over time.

The Chicago Video Home Buyers Guide will be released one segment at a time over the next few months. If this segment is helpful, please pass it on to friends or others who are thinking of buying their own home. Let me know your thoughts. Thanks for watching.

Free- Home Buyer’s Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

Whether you are a first time home buyer or looking to move up, buying a home is a big decision, and not one to take lightly. One of my missions with this blog is to help people make the best decisions possible when buying a home or taking on a mortgage. I do this regularly through the information on this blog, and through my free Chicago home buyer’s guide – the Real World Home Buyers Guide (just click to download – it’s 55 pages of information and you don’t need to give up your email to get it). I get a lot of great comments about how helpful this is, and how knowing how the process works, and what to expect when buying a home or getting a mortgage, takes the stress out of buying a home and getting a mortgage at the best terms possible. We are now putting together a Chicago Area Video Home Buyer’s Guide which will break down this guide into short video segments.

The Chicago Video Home Buyers Guide will be released one segment at a time over the next few months. With this first installment we start at the beginning – Why would you want to own your own home? This is the first of three segment discussing the financial benefits of owning, and in this segment we cover equity build up, or how you can increase your equity or ownership interest just by paying down your mortgage. Let me know your thoughts. Thanks for watching, and I hope this is helpful.

Free- Home Buyer’s Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

There are few things that are certain in life, but some things you can count on. Death, taxes and the fact that rents will go up, all make the list. Cook county just sent out their tax bills, and, as expected, even though home values were down, real estate taxes increased. Landlords don’t have the home owners exemption, so their rents have increased more. This puts pressure on landlords to increase their rents or find a way to cut more expenses. At the same time, home prices are down to the lowest level in years, and mortgage interest rates are near historic lows. This means that home affordability is better than it has been in years, and very competitive with the cost of renting. Not everyone who rents will be able to buy, but there are many renters who are qualified to buy and still sitting on the sidelines. For some, renting fits their life style better and they aren’t in a position where they want to settle down and buy a home. But there are others who continue to rent because they don’t realize they can buy, or, with conditions so uncertain, fear is holding them back. For these people, an increase in rent may be the prod to push them toward buying a home of their own.

There are a lot of reasons why renters think they can’t buy. Here are some of the myths that keep renters on the sidelines:

It cost too much to buy – I am continually amazed at how many people think they need a 20% down payment in order to buy. The truth is, you will need some money for a down payment, but not nearly as much as you think. With FHA you only need a 3.5% down payment, and all of this can be a gift. You will also need money for closing costs, but all of these can be paid for by the seller, if you put this into the contract (FHA allows up to 6% of the costs to be paid for with a seller credit, much more than you will usually need).

This is a bad time to buy – This is all about fear. These are uncertain times, and with the economy still fragile, many renters are worried about losing their jobs, or afraid they will buy too early and home prices will fall even further. No one knows what the future will hold. But in many ways this looks to be a great time to buy. With low home prices and the lowest mortgage rates in decades, this is a one-two punch which makes home buying more comparable to renting and the cost of ownership the lowest in years. We won’t know if this is really the best time to buy until we have a chance to look back, but often, the best time to buy is also the time when it seems the scariest. The combination of low home prices and low interest rates at the same time is not likely to last long term, and as the economy picks up, homes will become less affordable.

It costs a lot more to own a home than to rent – We have already talked about affordability and how owning is closer to renting. But to compare the full picture you need to look deeper than just comparing payments. There are several major advantages to owning real estate compared to renting. These include:

• Tax advantages – you can deduct the mortgage interest, taxes and in many cases the mortgage insurance from your tax bill. This is Uncle Sam’s way of making home ownership attractive.
• Equity build up – With most mortgages, you pay down your mortgage over time. This starts out slow, but evey payment you make means a little less interest paid and a little more equity in your home.
• Appreciation – This hasn’t been the case lately, but over time the odds are great that your home will increase in value as time goes by. For now we have to get out of the recession and the housing slump, so don’t count on this in the next few years. But in the long term it is hard to imagine that home values won’t go up.

The financial benefits of home ownership take time, but if you continue renting you know exactly where you will be down the road.

It doesn’t make sense to buy now since they don’t have the tax credit anymore – The tax credit was a great incentive, but most of the people who took advantage of this were planning on buying a home anyway. The mood of congress has changed, and worries about the deficit and spending are much more of a concern. It is doubtful that they will come back with any type of credit. But the lower prices and rates make up for the loss of the credit. Also, if you qualify, there are other programs that are worth much more. The MCC mortgage credit certificate program is a way for moderate income earners to get up to $2,000 extra as a deduction on their taxes, every year that they own the home (income and property values apply, but they are high enough to help many home buyers). This is a great long term program, and one that most home buyers have never heard of.

It is too hard to qualify for a mortgage – Mortgage guidelines have gotten tighter, but there are still plenty of ways to qualify. One big misconception is that your credit has to be perfect. We do have to show that you have a responsible credit history, but if you’ve had some problems in your past they won’t hurt you forever. If you would like to own your home but aren’t sure if you qualify, do your self a favor and talk with a good loan officer. You might be surprised to find you are in better shape than you thought. If not, a good loan officer can help you to find a plan to fix the problems so you can own a home.

We will see if more renters do take the plunge into home ownership over the coming months, but I expect it will be a lot. There are a lot of renters who are thinking of buying, but just waiting for the right time. The American dream is still to own a home of your own. Let me know what we can do to help get you there.

Free Home Buyers Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

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

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

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

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

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

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

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

Let’s take this a step further.

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

Let’s take this one step further still.

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

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

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

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

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

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

You can trust us to get the job done.

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

The real estate market is a mess. Almost every day I talk with people fighting to save their homes. I have daily conversations with homeowners who want to refinance their mortgages, but can’t because their home values are too low. I know too many good Realtors who are looking for full time jobs, because they can’t support themselves and their families doing what they are so well suited for. I get it. The economy is in a recession, but the real estate market is in a depression.

Time magazine gets it too. Their recent cover story, Rethinking Homeownership, talks about all the problems in the real estate market. It notes the problems of foreclosures and short sales and how trillions of dollars of home equity have evaporated over the last few years. But Time takes this a step further. The point of the article is that with things so tough in the real estate market, it no longer makes sense to own your own home. This is a real head shaker, and a common flaw in logic. They are taking a current trend and projecting it on into the foreseeable future. If things are bad now, they will always bad and will probably get worse (or the flipside, things are good and they will only get better). Time is famous for these types of stories. They have called for new highs in the stock market right before the markets dived, and I am sure that president Gullianni and President Hillary Clinton had to feel a bit queasy when they got their cover stories early in the last presidential primary season.

Time had another cover story on real estate back in 2005, but the point of that one was that with real estate prices heading higher, you could use your home as an ATM and everyone would have a McMansion soon. In this article they took the current trend and used that to say that the real estate market would continue to boom on into the future. At the time, the market was building up to its peak and they turned out to be spectacularly wrong. I expect that in another five years we will look back and their new article will look just as ridiculous.  I’m not saying that the market is about to boom. There are real structural problems to the economy. With unemployment high and a huge inventory of distressed properties to deal with, home prices are likely to remain low for a long time. But those who are buying now at prices a fraction of where they were a few years back and at interest rates in the 4s are miles ahead of those who bought when Time last called for a boom.

Having a home of your own has always been part of the American dream. Homeownership gives you control and there are a lot of personal and emotional reasons to own. But let’s look at the meat of the article, is it true that it no longer make financial sense to buy a home?

There are 4 major financial benefits to home ownership. Let’s see if these still apply:

Equity build up – Assuming you are buying a home with a traditional mortgage, part of your payment each month goes to pay down the loan. The mortgage payment is split between principal and interest, and in the early years you are paying mostly interest. But with every payment you pay a little less interest an a little more principal. Most people don’t stay in a house to pay off the mortgage, but if you did, at the end of the term you would own your home free and clear. If you continued to rent, you would still be renting at the end. This is still a strong advantage of home ownership.

Price appreciation – Back when Time wrote the article in 2005, this was the big attraction to real estate. The thinking then was that if you bought today, the home was sure to be worth more tomorrow. Historically home prices do rise over time, at least keeping up with inflation. But the early years of this decade the real estate market was part of a bubble, and with cheap money flooding the system underwriting standards went out the window. So nearly anyone could qualify for a mortgage. This in turn brought on a building boom, and we are now dealing with an over supply of housing at the same time that demand is low. So does this mean appreciation is a relic of the past? Maybe, but I doubt it. New home building has ground to a halt. Eventually the economy will improve and all of a sudden all the potential buyers sitting on the sidelines will be in the market again. This is all about supply and demand, and right now with supply high and demand low, the buyers who are out there are getting screaming good deals. That is what happens in a buyer’s market. So my guess is that if you buy low, when others are afraid to, there will be appreciation down the line.

Leverage – This goes along with appreciation. Mortgages are available with low down payments (FHA offers loans with just 3.5% down) so you don’t need a lot of money up front in order to own your own home. This not only makes homeownership affordable, but it means that if prices do rise, your return is magnified. If you buy a home for $100,000 without a mortgage and it goes up $10,000 in value over time, you have gotten a 10% return($100,000 invested divided by the $10,000 increase). If you took on a mortgage for 90% of that and used a down payment of $10,000, that same $10,000 increase in value is now a 100% return on your cash invested ($10,000 invested divided by the $10,000 increase). Again, appreciation isn’t automatic, but when it happens leverage means you build equity faster.

Tax advantages – Uncle Sam loves real estate. Home owners are given tax exemptions for the interest part of the mortgage, the real estate taxes and in many cases mortgage insurance. This makes sense because home owners have deeper roots to the community and this helps build a stronger society, but the bottom line is that the government helps you pay for the cost of owning your home. Every now and then you hear cries for eliminating these exemptions, but the chances of this happening are about as close to zero as you can get. This is still a strong financial benefit of owning real estate.

The financial benefits of owning a home are as strong now as they have ever been. If history is a guide, Time’s bold stand against home ownership is a good sign that we have hit the bottom of the cycle and the turn around is starting. I don’t think this will be a quick change in the market. Home prices could still drop a little further and we are likely to bump along at the bottom for a while before the market improves. But for those who are willing to look to the long term this could be a great time to buy.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company           Chicago FHA mortgages

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

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

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

To compare, we will base this on -

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

Under the current program it will look like this:

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

This is how it will work with the new plan:

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

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

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

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

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company           Chicago FHA mortgages

This week the National Association of Realtors announced some grim news – existing home sales were off 27.2% in July, the worst reading in 15 years. Though this news is grim, it isn’t surprising. The real estate market has been hit hard and with employment high, it isn’t likely to turn around soon. But the numbers don’t tell the whole story.

There are a couple of things to keep in mind that put this number into fuller context:

• First time home buyers bought in force earlier in the year to take advantage of the tax credit. So many buyers who would have otherwise been in the market now, have already bought. July’s numbers were worse than expected, but sales came in stronger earlier in the year.

• Real estate is seasonal. Home sales usually peak in the Spring time, dip in the Summer and then there is usually a smaller increase in the fall. Traditionally, Summer is one of the slowest times for real estate sales. First time home buyers often buy in the Spring after getting their tax refunds, and families want to buy earlier to make sure they allow time to close and be in the house before school starts in late August.

But no matter how you spin it, these numbers are low. This is bad news if you are a homeowner and you are planning on selling your home soon. There are so many people who own a home now and need more space, but are stuck in their current home and have to sell before they can buy. The number of homes for sale has risen, even as home sales have dropped, so the inventory of homes for sale is high. This puts more pressure on home prices to drop even lower. But there is also a good side to this, but only for those who are still on the sidelines and haven’t bought a home yet.

I am seeing contracts on homes in areas I know well, where the prices are going back in time to where they were 10 years ago. With so many homes and so few buyers ready to move now, it is a true buyer’s market, and the home that are selling are selling at great prices. Add to this that mortgage rates are at all time lows, and this means that mortgage payments are going even further back in the time machine. Affordability is the key to any recovery now, and I do expect to see some increase in sales over the next months. And for those who do buy, homes are now more affordable than they have been in years. And in the long run, this is a good thing.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago FHA Mortgage Company

Good news for many short sale and foreclosure buyers, Congress passed and President Obama has now signed a bill to give homebuyers another three months to close on their home loans and receive tax credits up to $8,000 ($6,500 for move up buyers). The bill applies ONLY to homebuyers who had a signed contract to purchase a home by the April 30, 2010 deadline. The bill extends the deadline to September 30, 2010, for homebuyers to close on their real estate transaction.

The original deadline was June 30th, 60 days after the contract date. This was plenty of time to close for those in a normal transaction, but for those buyers dealing with short sales or foreclosed properties, the timing of the close was out of their control. The banks who hold the mortgage on the distressed properties look at closing dates as suggestions, not firm time lines they are required to meet. So even when the bank has agreed to the price and terms, getting the home closed in a reasonable amount of time is often a struggle. That is the case for those transactions where the bank has already entered into the contract. A lot of short sales are ones where the buyer has a contract with the home owner subject to the bank’s approval, but the bank hasn’t come back with a response yet. For these buyers, even the extra 3 month’s may not be enough. Short sales can mean big bargains, but there is no way to get the bank who holds the mortgage to move faster than they have to.

The big question now is what will happen to the housing market now that the tax credits have gone away? Last month, the first month after the credit expired, home sales dropped by 30%. This isn’t surprising, as many buyers picked up their pace to take advantage of the free money from the government. Now that this over, I am still seeing a lot of new buyers coming into the market, but they aren’t in a hurry to buy something right now. They are willing to taker their time and find the right home at the right price. Talking with many of the Realtors I work with, home sellers are starting to get more realistic about the market and I am hearing about a lot of price reductions. So the answer may be that prices fall a little further to make up for the loss of the credit. Mortgage rates are at all time lows, so for home shoppers who are still sitting on the fence, there are some incredible bargains (looking at not only price, but monthly payments). The extension of the tax credit is good news for many buyers, but for those who didn’t buy in time to take advantage of the credit, this could still work out to their advantage. But it won’t be because of the government incentives..

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   Fist time home buyer loans

Chicago Mortgage Refinance