I had breakfast this morning with a Realtor who was having a difficult time with one of her listings. She had a contract on the house and the buyer was pre-approved for the mortgage before they wrote the offer. Everything looked like it was set for a nice smooth transaction. When the financing date in the contract came due the buyer still didn’t have loan approval, so they requested an extension. She was assured that the borrower was great and the appraisal came in right where it needed to be. There were just a few small details to take care of and loan approval would be forthcoming. 10 days later when the extension was up, they still didn’t have a loan approval. The loan officer was vague about what the problems were, but promised that it was nothing serious and with a little more time everything would be fine. By this time the Realtor was nervous and the seller was a basket case. But in for a penny, in for a pound, they agreed to a second extension rather than put the property back on the market. You can guess where this story is going. The second financing extension came and went with no loan approval. Now the loan officer isn’t answering his phone and all the calls to his company end up in voice mail and no one is returning phone calls. Many home buyers think of mortgage financing as a commodity, but this Realtor knows that isn’t true.

On the other hand, mortgage rates can be looked at as a commodity. Mortgage options have narrowed and most loans are now either conventional loans insured by Fannie Mae or Freddie Mac, or FHA government insured loans. The rates on these loans are determined by action in the mortgage backed securities markets, and wholesale lenders react to changes in these markets in unison. On the consumer level, mortgages rates are extremely competitive. What this means is that mortgage rates, no matter what the source, are going to be very similar from one lender to another. There will be differences from day to day. On any day one lender might be an 1/8^th of a point better, maybe even a ¼ point (when you account for costs and fees, anything more than this and they are hiding fees somewhere), just as one gas station might at times sell their gas for a few pennies less. But most lenders will offer mortgage rates in a very tight range. So mortgage rates are a commodity, but the mortgage experience is much more than just who has the best rates and fees on any particular day.

Having the best rate doesn’t matter if you don’t close on time or if you don’t close at all. Having the best rate quote isn’t going to help you if the terms of your loan change and you end up closing with a higher interest rate or higher fees. So what exactly should you be looking for when choosing a mortgage besides comparing the programs, rates and fees charged? There are a few things that will have a direct impact on how good, or bad, your mortgage experience turns out to be:

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Communication – Unless you’re a mushroom, you probably don’t want to be kept in the dark. You don’t realize how important communication is until you run up against someone who is not telling you what is going on. Does the loan officer return your phone calls and emails quickly? Does he fully answer your questions? Do you know the status of your loan and is there a system in place to show your loan status?

Knowledge and experience – Does your lender understand what your needs are and help you to meet your goals? Or does he just quote a rate? Does he know how to do the loan that you need? This is a real issue now with FHA loans. FHA used to be a big factor in the housing market, especially for first time home buyers loan But that dropped off and over the last 5 years FHA dwindled down to a trickle. The market has changed though, and this year FHA is the best option for many buyers. How experienced is the lender with FHA? Many loan officers have never done an FHA loan. Letting them practice on you is not going to give you a good mortgage experience.

Follow through – About 50% of good service is about doing what you said you were going to do when you said you were going to do it. If they are promising the moon but not coming through, that’s going to be a big problem.

Reliability – This is where the rubber meets the road. Is the lender going to be able to meet their obligations? More mortgage lenders, both brokers and national banks, have closed their doors over the last year than at any time in memory. Is your lender going to be around for the long run? Will they be able to meet the deadlines in the contract? Are they going to have the money at the closing when you need it? Surprises can be nice, but surprises that come at the closing usually aren’t the kind you want.

Reputation – What do you know about the lender, both the company and the loan officer? Do a little bit of research and see what other people’s experience has been. Do a Google search to see what you find, and see if the Better Business Bureau has any complaints filed. Ask your real estate attorney what they know of the company – they, along with title companies, have more experience with lenders and can tell you who is good and who to watch out for.

Everyone wants to get the best deal and mortgage rates might be a commodity, but the mortgage experience isn’t. When choosing a mortgage make sure you look at the big picture.

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Mortgage loans in Cook County just got a little more complicated. The new anti-predatory lending bill, SB1167, goes into affect today, July 1st. One of the provisions of the bill was to set up a database to keep track of all loans originated in Cook County. Borrowers who fall into certain risk categories will need to get counseling before they can close on their mortgage.

According to SB1167, all loans recorded in Cook County after 7/1/2008 are going to require either a Certificate of Exemption, or a Certificate of Compliance attached to the mortgage. The certificates will be printed from the Anti Predatory Lending Database web site set up by Cook County. Mortgage brokers and mortgage bankers who handle mortgages in Chicago and throughout Cook County are now required to enter the loan in the data base at the start of the transaction. This only applies to owner-occupied 1-4 unit residential properties.

Not every borrower needs the counseling though. The conditions that will trigger the counseling requirement are:

• Any purchase transaction where all borrowers are first time home buyers OR Any primary residence refinance where the loan has one of the features below.

1. The loan has an interest only feature
2. The loan has a prepayment penalty
3. The loan has a negative amortization feature
4. Total points and fees exceed 5%.
5. The loan is an ARM with an interest rate adjustment within the first 3 years. (We’ve been informed by the IAMP that 3/1 ARMs WILL require counseling, even though you may think that the rate adjustments are not “within the first 3 years, but occur after 3 years.)

The following loans are exempt from the counseling requirement: Reverse mortgages, Non-owner occupied (investment), Commercial and multi-family over 4 units.

Predatory lending has been the cause of a lot of foreclosures and a lot of ruined lives. Anything that can put a stop to it is worth doing. But like so many laws this solution isn’t going to have the impact that it is hoping for. For one thing, the real estate market has slowed down and mortgage guidelines have tightened. It’s not as easy to commit fraud when people are paying attention so a lot of the quick-buck sharks and sleazy operators have moved on. The other factor is that the market is ahead of the curve on a lot of these provisions. The loan features that trigger counseling are all features of sub-prime loans, mortgages for borrowers who couldn’t fit into the normal conventional guidelines. Sub-prime loans were the first casualty in the mortgage melt down last year, and no one is making those loans anymore. There will be some sophisticated borrowers who may be forced into counseling because they chose to refinance with an interest only mortgage for the cash-flow benefits, but if first time home buyers are taking on loans with these features they need to know exactly what they are getting into. The law will mean some loans will take a little longer, and it will add an extra step to the process. But who knows, maybe it will even help some people.

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Over the last months conventional mortgage guidelines have tightened, and with risk based pricing mortgage financing has gotten more expensive for most borrowers. Conventional mortgage insurance has pulled back on what they will cover, and the cost of mortgage insurance has gone up (more increases are coming in August). This combination has made it harder to qualify for a conventional loan, and more expensive for those who have lower down payments and good but not great credit scores. The one bright spot in the real estate financing market has been FHA. Earlier this year FHA raised their maximum loan limit (up to $410,000 for a single family home here in the Chicago area, lower in other parts of Illinois) making FHA a great option for many borrowers who would have once been conventional borrowers. But FHA is feeling the pinch of the market, too. Effective July 14^th FHA is changing to risk based mortgage insurance.

FHA is a government backed loan which is designed to help more people buy homes. FHA doesn’t loan the money themselves, they set up the guidelines and insure the lenders against loss through their mortgage insurance premiums. The goal of FHA isn’t to make a profit, like the private mortgage insurance companies, but to encourage more home ownership which makes a more stable society. This means they are willing to take on borrowers who are considered higher risk due to low down payments, lower credit scores, and those who haven’t built up traditional credit. This is still their mission, but now the riskier borrowers will end up paying a little more to make sure the program stays solvent.

FHA breaks their mortgage insurance premium down into 2 parts: an up-front portion that is added to the loan amount and financed over the life of the loan, and a monthly insurance premium which is part of your normal payment. This used to be a one size fits all solution, as long as you qualified for FHA financing you paid the same premium. They are now basing the premium on borrower’s down payment and credit scores. This means the borrower’s with the lowest risk will get the best pricing, and those who are higher risk will have to pay a little more. The current cost of FHA is a 1.5% up-front mortgage insurance premium and .50% yearly premium which is paid monthly. The new schedule will lower the up-front premium for most borrowers who invest at least 5% for their down payment. The monthly premium is going up for all minimum down payment buyers (3% cash investment) and the up-front portion changes based on their credit score.

FHA is still the best choice for many borrowers and the only choice for home buyers with little or no money for a down payment and closing costs. Here is some more information on some of the advantages of FHA financing.

This is what the premiums will be after July 14^th.

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In the first installment of this series we looked at some of the things to look out for when shopping for your mortgage. Here are some more things to be aware of:

Hidden Fees – As I said before, most lenders are borrowing money from the same sources and their cost of business is similar. So if one company’s rates are unnaturally low, it mans they are making up the money in other ways. There is a relationship between the rate that is quoted, and the amount of fees that are charged. The lower the rate is, the more money you will have to pay to get it.

It costs a certain amount of money to process and fund a mortgage. Mortgage companies are in business to make a profit, so they know that they need to bring in enough income to pay all their expenses and earn a reasonable profit. There are two ways to do this. First through the rates – the investors, mostly big banks and financial companies, pay lenders for bringing them loans (this is called a yield service premium. I’ll go into this more in a later post.) The second way is through fees that are charged to you, the borrower. Either way is fine, as long as you know exactly what you are getting. Where it gets tricky is when the lender hides fees in order to make the rate seem better than it is.

There are a number of fees that are normally paid as part of getting a mortgage (I’ll go into more on this in another post). But sometimes the fees can get excessive. In many parts of the country origination fees are standard. Here in the Chicago area it is more common not to charge an origination fee. Rates should be lower if the mortgage company is charging an origination fee. Look for things like discount point, warehouse fees, document preparation, administrative fees and the like. Ask what each of the fees goes for and if the fee is negotiable. I’ve seen lender charges of several thousand dollars plus the origination fees. At my company, Professional Mortgage Partners, the normal bank fees are under $1,000. Again, there’s always a trade off between rates and fees. But if you are paying thousands of dollars in fees up-front, it will take you years before you’ve broken even by getting the lower rate.

Pre Payment penalties: Another thing to watch out for is a pre-payment penalty. This is when the mortgage contains a clause that states that you will have to pay an extra penalty if you get out of the mortgage within a certain period of time, either through selling the home or refinancing. Some mortgages have pre-payment penalties built in, but many more conventional loans offer the penalties as an option - that is, you can get a lower rate if you agree to take a pre-payment penalty. If you know that you won’t be moving, and you’re convinced that rates won’t drop and give you an opportunity to refinance at a lower rate, this can be a fine decision. Where it becomes a problem is when you are quoted with a built-in pre-payment penalty in order to show the lower rate, but the terms are not disclosed to you. This can cut off your options, and cost you thousands of dollars in the long run if you need to get out of the mortgage earlier or can’t refinance because you are locked into a higher rate mortgage.

In the next installment of this series I will show you what you can do to protect yourself when shopping for a loan.

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Chicago, IL. - Are you in the market for a mortgage? If so you are ready to compare rates and prices to make sure you are getting the deal that is right for you. Mortgage ads are everywhere. My spam folder fills up with mortgage offers I never requested, and I cringe when I hear the mortgage ads on the radio. The approach irritates me on these ads because they distort the facts and play on people’s fears. The focus of most of these ads is that they (and only they) can get you the lowest rate for your mortgage. Many people think of loans as a commodity, and that one lender is the same as another, so the decision should be made strictly based on who has the best rate. This can be a big mistake. It is true that most lenders have the same loan programs, but there are other factors you need to compare to make sure you are getting exactly what you think you are. Besides the rate, you need to compare a company’s fees, the terms, the quality of their service, and the company’s reputation. Getting a good rate is important. But if the company you choose is not able to close on time, or doesn’t deliver at the terms you expected, a low rate is no bargain.

In order to know how to compare loan offers, it helps to understand how the mortgage market operates. The truth is, nearly everyone borrows money from the same sources. Whether you are looking at a government loan (FHA and VA), a Jumbo loan for higher priced homes (currently loans of more than $417,000), or a conventional mortgage, most of the loans will be sold off to a small group of end investors. The majority of conventional loans end up in the portfolio of one of two organizations, FNMA or FHLMC, often called Fanny Mae and Freddy Mac. These organizations are government sponsored corporations that are charged with buying up mortgages in the aftermarket, packaging them into investments that are sold on Wall Street, and making sure there is always money available to lend for mortgages.

These companies set the standards for mortgage qualifying, and their purchases set a base for the prices that all of the other lenders charge. Lenders price their loans with the expectation that they will be selling their loan, and eventually delivering it to one of these organizations. What all this means to you is that the true rates on mortgages are usually going to be close to the same from one lender to the next. The range in rates for the same product is typically going to be only 1/8 to ¼ point difference among most lenders. But if you are looking at the newspapers, or searching the internet, you may see advertised rates that are much lower. These low rates look tempting, but you need to know exactly what you are getting. What makes this complicated is the way that lenders show their prices to their customers. Because most consumers are looking for the lowest rate, it’s easy for unscrupulous companies to manipulate the fees and the terms in order to appear to offer a rate lower than it actually is. When comparing illinois Home Mortgage, you need to compare apples to apples and that is not always an easy thing to do.

Borrower Beware! What to watch out for - The number one complaint regulatory agencies receive regarding mortgages, is that the terms they ended up with weren’t what they were promised. There are lenders who will promise whatever it takes to get the customer in the door, but don’t deliver on that promise. Here are some of the areas you need to watch to make sure you are not being quoted an artificially low rate.

Locking In – When you find a property and apply for a mortgage, you have a choice between locking in or floating the rate. Locking in means that you are guaranteed that the rate you choose will be good for a certain period of time. If you choose this option, make sure that the period you lock in for is long enough to approve the loan, and that it extends through the closing date in your contract. Floating means that you are taking a chance. If the rates go down, you will get the lower rate; if rates go up, you will end up with a higher rate than you planned on. Interest rates go up and down based on what’s happening in the mortgage backed securities markets. The markets tend to overreact to both good and bad news, so lenders try to price according to the market, which means they can change every day – lately it’s been common to see rate changes more than once a day. Because the market is so volatile, rates are priced based on how long they are guaranteed for – the shorter the time period, the lower the rate.

Some lenders take advantage of this system in several ways. One way is to quote a very short-term lock period, which means a lower interest rate. But it doesn’t help you to lock into a 15-day rate guarantee if you aren’t closing for 45 days. Another twist on this is to quote you based on the short-term rate but then to encourage you to float. Or they claim that you can’t lock in until after you have been fully approved, or right before closing. These techniques are unfair because all the risk is put on you. If rates go up, you are stuck with the higher rate. Floating is always an option, but it should be your decision, not something that is forced on you.

A darker version of this is when the lender tells you that you are locked into a rate, but doesn’t lock you in with an investor. If rates stay the same or go down, you will close at the rate that was quoted and never know that you hadn’t been locked in. If rates go up, however, you may find that you are rejected for a Home mortgage at the last minute, or are forced to take a higher rate in order to close your loan. This is not only unethical, it’s illegal. But it happens. Every time that interest rates move up sharply, there are businesses that close their doors for good because they couldn’t honor their lock commitments, leaving their customers without the financing they had relied on.

Mortgage rate shopping is a big topic. I’ll have more on this in my next post.

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Last year, when the Sub Prime market was imploding, there was a lot of talk about how FHA, a Government backed loan, was going to be the new Sub Prime. It hasn’t worked out quite that way. In fact, the real truth is that FHA is the new conventional mortgage.

Sub Prime mortgages were loans for borrowers who couldn’t qualify for the more stringent conventional guidelines. This often meant borrowers who had credit

problems, or it could mean borrowers who couldn’t prove their income. The thing about Sub Prime loans is they were profitable for the lenders (if they got rid of them quickly). These loans were often structured as 2 or 3 year adjustable rate mortgages, and they were priced several points higher than a conventional fixed rate would be. When the market was hot, defaults were low, so these loans were money machines for the lenders who offered them. With money to be made it was almost inevitable that conventional lenders started making more of these types of loans, that is, loans to low credit score borrowers and loans to borrowers who couldn’t prove their income. This went on for a while, but as it had to eventually, the party stopped, loan default rates rose and the whole mortgage market changed. Sub Prime mortgages were the first to disappear, but over the last 9 months conventional guidelines have continued to tighten going from a way too loose approach to where we are now when even good credit risks may have trouble qualifying for a mortgage.

After the market changed, I heard a lot of people say that FHA would take over the slack. But FHA isn’t now and never has been a loan of last resort - which sub prime was. For one thing Chicago FHA Loans are full doc. That means we need to be able to verify the borrowers income and know where the money to close is coming from. FHA will take on borrowers with lower credit scores or borrowers who have had major credit problems in the past, but this isn’t an automatic thing. FHA has no set minimum credit score (though many of the wholesale lenders now do – some will only go as low as 580, others will go below 550) but the idea behind FHA underwriting is to understand the risk involved in a loan. FHA isn’t as concerned with a borrower’s past credit problems as they are about how the borrower will treat credit in the future. This means understanding what happened that caused the problems in the past, and showing that the situation has changed so that these credit problems won’t be a problem going forward. If the bad credit is over 2 years old it probably isn’t even an issue.

Conventional loans have always been the foundation of the illinois home mortgage market. But as conventional guidelines have tightened, borrowers who used to be considered great risks are now frozen out or forced to pay more for their mortgage. FHA helps to fill this gap. Earlier this year FHA upped their lending limits (Temporarily at least, if not extended it will expire by the end of this year) so that you can now buy a home in the Chicago area with a loan as high as $410,000.

What can you now do with an FHA loan that you can’t do with conventional financing? Here are a few advantages of FHA and ways that FHA has become the new conventional alternative here in the Chicago FHA loans : Mortgage Chicago il area:

1. No Risk Based Pricing adjustments- Risk Based Financing is the idea that those borrowers with the best credit scores will be able to get the best mortgages rates, and those with lower credit scores will have to pay more. With conventional loans buyers with credit scores under 720 and with down payments under 20% are getting hit on their pricing. With FHA if you qualify for the loan you get the best pricing. You can qualify for an FHA mortgage with credit scores in the upper 500s – without any price hits.
2. FHA uses common sense credit guidelines –FHA looks at the buyers over-all history, not just their credit scores.
3. You can buy with a low down payment – or no down payment – This is another area where FHA has a big advantage over conventional loans. It is now much harder to get a conventional mortgage with a minimal down payment. But FHA only requires 3% down which can come as a gift from a relative or as a grant from a down payment assistance program. That means that you can still buy a home with no money out of your own pocket.
4. FHA allows a seller concession of up to 6% - By using seller concessions, you can structure your purchase in more creative ways including paying all your closing costs.
5. FHA is more lenient with past bankruptcies – FHA is MUCH more lenient with past bankruptcies. Conventional loans just changed their guidelines to make financing harder. FHA takes a more common sense approach.
6. FHA financing is available for Permanent Resident Aliens – With FHA you don’t need to be a U.S. citizen and you don’t need to have your green card. You will need to have a social security number, established credit and proof that you are able to work in the United Sates.
7. No cash reserves are required – All you need with FHA is enough to pay the down payment and closing costs. No reserves necessary.
8. No income limits – Many of the low and no down payment conventional loans are set up to help low and moderate income home buyers. This isn’t the case with FHA.
9. Non traditional credit is accepted – Most conventional loans require that you have a credit score and an established credit history. But not every one uses credit. With FHA we can build up a credit history from other payments you have mad. This would include your rent and utility payments, and any other non-traditional credit you have used.
10. Mortgage insurance is lower than conventional – FHA splits their mortgage insurance into 2 parts – an up-front insurance which is added to the loan amount, and a premium which is paid monthly. If you are buying with a minimum down payment, the combined premium on FHA is better than it is with conventional loan programs – especially if your credit scores aren’t the highest.
11. You can buy a 2-4 unit building with only 3% down – Conventional financing isn’t even close here, and rental income is looked at in a way that makes it much easier to qualify. With a 2-4 unit you will need 3 months of reserves, though.
12. FHA refinancing - FHA has a streamlined refinance that makes refinancing easier and less expensive, and a cash out refinance program that goes up to 95% of your home’s value, giving you more flexibility in your debt management.

In short, more people will qualify at a lower price with FHA financing. Put it all together and there is no doubt, FHA is the new conventional.

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If you are in the market to buy a home or condo here in the Chicago area, you are probably a little bit nervous. On one hand, the property values are down and you are able to buy a home at a bargain price compared to where homes were selling just a year or two ago. On the other hand, you wonder if we are near the bottom, or if the bargain you buy now will seem over priced a year from now. The truth is that markets (whether stock markets, bond markets or real estate markets) are unpredictable, and we won’t know where the bottom was until we have gone past it. That being said, I’m not sure we are at the bottom yet, but it is still a good time to buy a home here in the Chicago area, as long as you plan to keep it more than a few years.

Markets go up or down based on supply and demand, and these two factors can be broken down into fear and greed. The fear and greed isn’t just with the buyers and sellers of real estate, it extends on to all the players in the real estate market, Realtors, lenders and the financial markets. A few years back when the real estate market was on fire, greed was in the air and all people could see were dollar signs. Sellers saw prices for their homes that they wouldn’t have dreamed of a few years before. Buyers saw an opportunity to buy a home that would do nothing but appreciate, and they were convinced that if they didn’t buy now the price would be higher if they waited. Realtors and lenders saw more opportunities for sales and commissions and the financial markets looked at this as a way to convert cheap, easy money into an endless stream of high return investments. The belief at the time was that real estate in the United States never went down in value. Anyone with a long term memory would know that didn’t make sense. There had been real estate bubbles in California and Florida before, and the Texas market took a long time to recover from the bust after the Oil boom in the 80s. But here in the Chicago area, in the heart of the stable Midwest, it was easier to believe. We didn’t see the extreme highs that other areas saw, so we felt that we would escape a real down turn, too.

Since the real estate and mortgage market started to dive, people have been pointing fingers at who was to blame. Some said it was the buyers who bought homes they couldn’t afford. Others blamed the lenders for making loans to people who never should have gotten credit in the first place. Some of this blame is well deserved - I know that I shook my head at some of the loans that were offered – but I think the real cause was the big financial players on Wall Street who had too much money to invest, and not enough places to invest it. Money at the time was cheap, and there was no place on a global scale that was able to give the returns that big investors were demanding. The old secure A-Paper mortgages weren’t enough to meet this demand. This was when the creative minds on Wall Street started churning out new mortgage backed securities that would fill the void for their investor clients. Mortgages are underwritten based on risk. When greed is in the air risk doesn’t seem as important, so underwriting guidelines were thrown out the window and mortgages were available for people who never would have considered buying a home before. With so many more buyers able to qualify for financing, this means there was more demand than the supply of homes for sale was able to meet. This meant that property values had to go up, here in the Chicago area and throughout the country.

Now the pendulum has swung and we are on the fear side of the equation. At some point, probably when property values started to move down in the hottest markets, Wall Street saw the risk they were taking. They cut off the money spigot and since then mortgage underwriting has gone through a series of tightening measures so that it is harder to qualify for a loan now than it was before the whole loose money party started. With less people qualified for financing that means less people are able to buy. Lower demand means lower prices. So now fear has taken hold and everyone is looking at all the negatives. Foreclosures are up, the economy is soft and the inventory of homes for sale is the highest in years. Right now we are going through a cycle where the bad news in the market causes the lenders to pull back even more, reinforcing the bad news and making it that much harder for the market to recover. But markets are unpredictable and hard to time right. At some point the bad news will be less important than the opportunities for profit. In the stock market the recovery usually starts when people are the most pessimistic and it could work the same way in our market. By the time good news is out, we will have bounced off the bottom and prices will be heading up again. So the question is, is the time now? Are we close?

We may be closer than we think, or it may take quite a while before the market turns around. But if you have a good reason to buy it really shouldn’t matter. The Chicago area is still a dynamic economy and people still need housing. Home builders are at a standstill and not cranking out new homes, so over time the supply and demand will start to balance out. Prices are low, mortgage rates are low and if you have a long term perspective, chances are that when real estate values recover you will be rewarded, and we won’t know we are there until the train has already left the station.

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In a recent post, I talked about how an underwriter looks at a borrower’s credit history, income and job history to determine how much of a mortgage they can qualify for. The other big part of qualifying for a mortgage is showing how much skin you have in the game, that is how much are you investing in the home, and where the money is coming from. We need to make sure you have enough money for your down payment and closing costs, and in some cases, money in reserve. Again, this all goes back to the idea of risk. Not so long ago it was common to buy a home with no money down. But that was before the real estate market turned down. Conventional lenders have now eliminated 0 down financing and you will, in most cases, need to have at least 5% of the purchase price for a down payment. You still can buy a home with little or no money down, but you have to plan ahead and it won’t work in all situations.

Why does the lender want you to have your own money invested in the property you’re buying? There are a few reasons. First, if you have your own money at stake, you’re more likely to take care of the property and make sure you make your payments on time. An investment in your home strengthens your commitment. Mortgage insurance and 2^nd mortgages allow you to buy with lower down payments while taking some of the risk off the lender. How ever much you are putting down, we need to verify it, know where it’s coming from and be able to prove that you have enough to close.

In order to check for assets, we need to know where the money you need to close (down payment and closing costs) is coming from. Here are some acceptable sources for a down payment:

• Money on deposit in the your checking, savings, money market, certificate of deposit or any other liquid account.
• Money from liquidation of stocks or bonds.
• The proceeds from the sale of a house or other assets (an extra car, a boat or having a garage sale).
• A loan against your current home or other secured asset.
• A liquidation or loan against your 401K or IRA.
• A gift from a relative or a grant from an agency (like AmeriDream or Nehemiah) that doesn’t have to be repaid.
• Cash value from a life insurance policy.

If you are using money from a bank or other cash account, we will need to verify that the money in the account is really yours. We will look at the statements for the last 2 months. If there are any large deposits (not counting your normal payroll checks) we need to show proof with a paper trail of where the money came from. As you can see, there are lots of ways to raise the money for your down payment - here is a bigger list. Where it can’t come form is an unsecured loan (no credit cards). Again, the lender wants to make sure you have skin in the game, and borrowing more money doesn’t cut it.

To make the loan approval process as smooth as possible, it’s important to know where your down payment money is coming from. It’s best not to transfer money from account to account, if possible, but if you have to, make sure you keep records so we can trace the flow of funds. If you have any questions about your down payment, and whether it will be acceptable, discuss it with your loan officer before you are ready to make an offer, to make sure you can structure it correctly and this won’t be a problem later.

Gifts for your down payment - Gifts are a special case, and if you are expecting that some of your money will be from a gift, a little planning ahead of time will make your experience much easier. First of all, gifts aren’t allowed on every program. With some conventional programs, unless you are putting at least 20% down, 5% of the down payment needs to be from your own funds - all the rest can come from a gift. With FHA loans all your cash can come from gift, or a grant from a non-profit agency.

Gifts also have to be documented in a particular way. We have to be able to show that this truly is a gift, not a loan. To show this, we use what is called a gift letter. This is a form that is filled out by you and the person giving the gift. It states how much the gift will be, what your relationship is to the person (it has to be a family member of some kind), and that this is a gift and won’t need to be repaid.

The next step is we need to prove that the donor (the person giving the gift) has enough money to give the gift. For this we will need an account statement or a letter from the donor’s institution stating that they have the funds available. The last step is that we need to show the transfer of funds from their account to yours. The easiest way to prove this is for them to give you a certified check showing them as the donor and you as the payee. Make a copy of the check and show the deposit into your account, and we’re done. If they give you the gift as a personal check, you will need to allow extra time because then we’ll have to see the canceled check. This whole process is clumsy and redundant, but following each step will make things much smoother in the long run.

One other note, this letter and the documentation are only used for approving the loan. None of the information will be shared with the IRS, or any other government agency.

Your credit, income and assets are what we look at when approving you for a mortgage. The other part of the approval is approving the property. I’ll have more on appraisals in a future post.

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Are you just starting to look for a home in the Chicago area, and wondering how much of a home you can afford? There are all types of rules of thumb for how much of a home you can qualify for, but rules of thumb are simply estimates, not guidelines. It used to be that there was a hard set formula for how much of a loan you would qualify for, now the underwriting process is more technology driven and in many cases you can qualify for more of a mortgage than you can comfortably afford. But how much you can qualify for is just a first step. The mortgage you choose has to fit your life style and future goals, as well as your current financial situation. To find out how much of a home you can afford, and how much of a mortgage payment is right for you, you need to understand what we look for in the mortgage process, and how mortgage loans are approved.

What lenders are looking for: When qualifying for a mortgage, I look at it as a game of twenty questions. I need to get as much information about you and your finances as possible to make sure we find the best loan program for you. The whole idea behind the qualifying process is to measure the risk, that is, to figure out how likely it is that a borrower will pay back the money they’re borrowing. I ask a lot of questions, but the personal qualifying issues all revolve around 3 areas:

Credit

Income

Assets

Your history in these 3 areas determines what type of loan you can get, how much you can afford, and what your payments will be. All conventional loans (those loans eligible for purchase by Fanny Mae and Freddy Mac, the 800 pound gorillas in the mortgage market) are now put through an automated underwriting process. This is a computerized artificial intelligence program which weighs all of your risk factors and spits out a decision on whether or not the loan is acceptable. In most cases the loan decision is made by computer, but loan officer and underwriter have to make sure that all the information that is put in is true and verifiable. FHA also uses the same programs, but there is more leeway and more chance of an approval if the loan is underwritten manually (that is, by a real live person). Let’s break these factors down a little.

Credit Qualifying – Credit scores are key. With a high credit score you can get approved for a much higher mortgage than someone with the same income and debts, but a lower score. Your credit score is crucial not only for approval, but for how much you pay for your loan. One big change in the mortgage market is the new Risk Based Pricing model. This is the idea that those borrowers with the best credit scores and higher down payment will be able to get mortgages at the best rates, and those with lower credit scores and lower down payments will have to pay more. The people affected by this change are borrowers with credit scores good enough to qualify for Fannie Mae and Freddie Mac based conventional financing. This concept has been talked about for years, but it is only now with the soft real estate market that it is going into effect. Or more to the point, it’s only going into effect now when the big mortgage players are taking it on the chin for all the bad loans they wrote when credit was easy. Those with lower scores and not much equity (first time home buyers?) will be hit hardest. FHA does not have risk based pricing, which makes it a good option for many home buyers. Here is some information on what you can do to make the most of your credit.

Income Qualifying - The second area we look at is your income. Again, we’re measuring risk here. In this case we want to make sure that your income is high enough to comfortably make the payments on your new mortgage and that your income is . To do this, we look at two things: How stable is your income? and, How does your income relate to the housing payment and your other debt? I’ll go over both.

Income stability - When people are trying to figure out how much they can afford, this is one area where it’s easy to get bad information. First we need to determine how much you make each month. We use gross income, not your take home pay. If you’re in a job where you get the same amount of pay each month, it’s pretty simple. But if you have a job where your income fluctuates from month to month, like commissioned sales or construction, or if part of your pay comes from bonuses, it gets more complicated. In these cases we need to go back and look at the history of your income over the last two years and make sure that this income is likely to continue.

The truth is, lenders look more favorably on someone who has been in the same (or similar) line of work for at least 2 years. If you haven’t been working steadily for the last two years, we need to know why. There are many acceptable reasons, including:

· You recently finished school, vocational training, or left the military.

· Your work is typically seasonal and gaps in employment are normal in your industry.

· You have been laid off from your job.

· Frequent employment changes are normal in your line of work (if you are in car sales, for example), but you have been consistently employed and maintained a consistent level of income over the past 2 years.

Besides income from your job, other sources of income can also be used. These can include alimony or child support (we need to see that you have a history of receiving it), pension or disability payments, investment income, trust income, income from a part time job and so on. Again, in order to use this income to qualify, we need to be able to show that the income is likely to continue.

Housing and Debt Ratios -This is a big factor in how much you qualify for, but one that has changed a lot recently. There are actually 2 ratios we look at. The first, the housing ratio, is a measure of your total housing cost compared to your monthly income. The housing figure includes all the normal monthly costs of owning a home: the principal and interest payment, the monthly taxes and insurance, mortgage insurance, and the association fee if it’s a condo or townhouse. The second ratio is the total expense ratio. This measure includes not only your housing expenses, but all your other monthly debts, too. So this takes into account all your minimum credit card payments, car payments, student loans, any alimony or child support, and the like. (There are some obligations that you are required to pay, things like car insurance and day care for children, that don’t count in the ratio. You do, however, need to keep these items in mind when budgeting.)

For years, the maximum ratios were 28/36; that is, no more than 28% of your income could go toward your housing payment, and all your debts combined couldn’t be above 36% of your income. This isn’t the case anymore. As I mentioned before, credit scoring changed everything. With good credit, it’s now common to qualify for a much larger payment than you would have before. You still need to budget and make sure that the payment you qualify for is one you are comfortable with.

What if you can’t prove all the income you receive? This is another area where the underwriting guidelines have changed a lot. Not so long ago, there were lots of loans that didn’t even ask about how much you made, or if they did, they didn’t try to verify it in any way. These programs went under a variety of names such as, no income verification (NIV), no ratio loans, stated income and ‘No Doc’ loans. These opened the system to a lot of abuse. Some people bought houses they had no hope of making the payments for, and foreclosures in these loans skyrocketed.

Because of these problems, lenders have pulled most of these loans off the table. Still, if you are self employed, or if you know that you’ll be able to make the payments, but there’s income that we can’t use for qualifying, and you have good credit, there are some options available. It all depends on the amount of your down payment and your credit score. If you have questions about whether we can use all of your income to qualify, give me a call and I can find the program that works best for your circumstances.

I’ll go over the third area, asset qualifying, in my next post.

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In the mortgage industry, the present is looking more and more like the past. Back in 1992 when I first got into the mortgage market, George Bush was finishing his last year in office (though he didn’t know it at the time), a Clinton was running to take his spot and Brett Favre had just been picked up by the Green Bay Packers. A lot has happened in between, but another George Bush is finishing his time in the White House, another Clinton is running for president and now that Favre has finally retired he is threatening to un-retire and continue his reign of terror against our beloved Chicago Bears. In the mortgage industry the future is looking a whole lot like the past, too. Back when I first started there were two types of loans which covered the majority of lending options – conventional and FHA. Conventional mortgages were for those home buyers who had strong credit and a good down payment. FHA was for everyone else.

Back in the day, we put together loan packages which highlighted the strengths of the borrower, and showed that they met all the guidelines in regards to credit, income, job stability and having enough money to close, as well as a full detailed appraisal. With changes in technology and a strong national real estate market, mortgage underwriting loosened up a lot. The credit score became the biggest factor in the approval process. With a high FICO score lenders would overlook weaknesses in other areas. It got to the point where some of the biggest wholesale lenders were doing most of their business taking on loans where the borrower stated their income and assets without proving the figures were true. (Even the appraisal guidelines loosened and many loans were approved with just a drive by appraisal, or a computerized estimate of value.) These loans were sold as a way for well qualified borrowers to cut down on their paper work and to streamline the loan process. Unfortunately, this opened the way for abuses and led to “Liar’s Loans”, and some people who bought way over their heads, and couldn’t afford to make their payments.

It wasn’t until property values declined (not so much here in the Chicago area, but very sharply in some areas of the country) that the abuses in the system really showed. When home prices were moving up borrowers found a way to make the payment, even if it was by borrowing more against their home. Now loan defaults are up and mortgage lenders have found that old time religion again. This means we are back to the old ways of doing things, tighter underwriting for everyone, and FHA is again the best option for many borrowers and first time home buyers.

So what can you do if you are planning on buying a home or refinancing your mortgage and you want to make sure you present your self in the best light? Here are a few things you can do ahead of time to improve your chances of getting a loan at the best rate and terms:

1. Focus on your credit – One thing that hasn’t changed is that your credit score and your credit profile are still a crucial part of the loan approval. Make sure you review your credit before you need a loan. If you have problems, work on them when you still have time to get them fixed. Here is a series on credit that will help you understand your options, and show you how to increase your credit score.

How to understand and improve your credit score-part1

How to understand and improve your credit score-part2

How to understand and improve your credit score-part3

How to understand and improve your credit score-part4

2. Address problems up-front – If you have had problems of some type in the past, don’t try and hide them. In the mortgage process we look into all the information you present and verify everything. But some things that you may think are huge problems we may be able to work around. For example, if you have credit problems from the past that are hurting your credit score, FHA can still be an option. The key here is to show that you have moved beyond these problems and they are no longer an issue. To show this you will need to write a letter addressing any credit problems that show up on your credit report. In the letter you need to explain what happened, what you have done to correct the situation and why this isn’t a problem anymore. If you have any documentation to help your case, provide it. The same applies for other problems like job gaps and

3. Put together your documentation – The days of the no-doc loan are gone, so you will need to have documentation proving you make enough income to afford the mortgage payments and you have enough money or other assets to pay for the down payment and closing costs. This usually means putting together some simple documentation. In some cases we can get by with less, and in others we will require more, but this is a good list to start with -

W2s for the last 2 years (in some situations we will need full tax returns),

Your pay stubs for the last 30 days

Bank and investment statements for the last 60 days with all pages attached.

4. Have a plan – Do you know how much of a payment you can afford? Do you know how much cash you can come up with for a down payment and closing costs? There are still ways to buy with little or no down payment required, and there are ways to buy with no closing costs. If you have money to put down, where is it coming from? Will you still have money left over afterwards for other purchases or emergencies? You need to think about these things before you look for a home and applying for a mortgage. The answers to these questions will help you to decide what to look for and how you will finance it.

5. Get pre-approved for a mortgage – With all the changes in the mortgage market this step is crucial. A mortgage pre-approval will tell you how much of a loan you can qualify for and how much of a home you can afford. A good loan officer will take it a step further and help you to figure out the best way to structure your financing so it meets your long and short term needs. And if there are any problems, a good loan officer can also give you advice on how to put yourself in the best position to buy a home, if not now in the future.

The mortgage industry might have gone back to the past, but if you make a plan and follow through, there could be a new home in your future.

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