In the mortgage business, there is always anticipation around this time of year as we wait for the new loan limits to be announced. I know, as far as excitement goes this is up there with waiting for the new phone book to come out. But this year the drama was a little more pronounced. The conventional loan limits (the maximum loan that will be insured by Fannie Mae and Freddie Mac,) have stayed the same for the last several years, and with home prices soft the betting was that they would stay the same again this year. And the betting on that count was right. The maximum loan for a single family home here in the Chicago area and throughout most of the country stayed the same at $417,000. In high cost areas (Hawaii and parts of California, mostly) the max loan limit actually went down. Earlier this year loan limits were raised in these high priced areas in order to help the real estate market and take up the slack as many Jumbo lenders stopped making loans. The Max mortgage in the high priced areas was $729,950, after the first of the year it will be going down to $625,500.

The conventional limits as of January 1st will be:

          General                         High-Cost 

1Unit           $417,000                        $625,500

2 Units        $533,850                        $800,775

3 Units        $645,300                        $967,950

4 Units        $801,950                        $1,202,925

The bigger uncertainty and anticipation was what would happen with FHA mortgages. Earlier in the year FHA raised their limits temporarily to $410,000 for a single family home. FHA used to be just a little slice of the mortgage market, but this year, partly because of the increase in loan limits and partly because of tightening conventional standards, FHA has become the number 1 choice for the majority of home buyers. Everyone expected that the FHA loan limits would go down, the question was how much. We now have the answer. Here in the Chicago area the max FHA loan for a single family home will be $365,700. This is based on 115% of the median home price in the area. Nationally the lowest max mortgages will be capped at $271,050 and in high priced area the loans are capped at $625,500 for a single family home.

Here are the FHA limits for the the greater Chicago area which includes Cook County, Dekalb County, Dupage County, Grundy County, Kane County, Kendall County, Lake County, McHenry County and Will County: 

1 Unit        $365,700

2 Units      $468,150

3 Units      $565,900

4 Units      $703,250

In other areas where 115 percent of the median house price is less than 65 percent of the Freddie Mac limit (which includes most of Down State Illinois), the FHA limits are as follows:

1 Unit       $271,050

2 Units      $347,000

3 Units      $419,400

4 Units      $521,250

Here are the limits in higher priced areas:

1 Unit        $625,500

2 Units      $800,775

3 Units      $967,950

4 Units      $1,202,925

If you are looking for a loan in a higher priced area, or if you are thinking FHA and your loan will be above the new limit, you might want to act fast. The old guidelines are good for mortgages that are entered into the system up until the end of the year. After that you will be subject to the new limits. If you have questions on the max mortgage for a specific location, give me a call.

Illinois Mortgage Rates and News                              First time buyer loans

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Cook County tax bills were sent out last week, and for a lot of homeowners the bills were a big surprise – and not in a good way. My phone has been ringing with home owners wondering how their taxes moved up so sharply. Home values have trended down over the last few years, but accessed values have moved up, in some cases by a lot. The problem is that properties are re-accessed every 3 years (each township rotates so they are not all done at the same time), and this year the re-assessment comes at a time when legislation has phased out some tax caps, so the result is a spike in tax bills while the value of their home is lower.

The real estate tax system is complicated and there are a number of factors that go into calculating the tax bill. The first thing to do is to check your bill and make sure you are getting all the correct exemptions. If you aren’t getting your homeowners exemption this could make a big difference. But one of the major factors is the property’s accessed value. If you can show that the accessed value is higher than the home’s real value, you may be able to get your tax bill lowered. There are attorneys and specialists who do this regularly and charge you a percentage of the taxes you saved. Or you can do this yourself.

If the property was purchased within the last 3 years, the assessor will base the new accessed value on the sale price. This might not help you if you bought when the market was still moving up, and now it is down from what you paid. If you’ve owned the home longer, your accessed value will be based on what comparable homes have sold for recently.

Here is the link to what you need to do to appeal your property taxes in Cook County.

Here is the online Cook county residential property tax appeal form.

Tax appeals are handled the same way in all of Chicago’s collar counties.

Dupage County property tax appeal process.

Dupage County tax appeal forms.

Kane County property tax appeal process.

Will County property tax appeal process.

Will County tax appeal forms.

Kendall County Assessors Office

Lake County property tax appeal process.

McHenry County property tax appeal process.

Illinois Mortgage Rates and News

The real estate market has had more than its share of bad news lately. Home prices are down, foreclosures are up and the outlook for the future is more of the same. From a big picture view the real estate market is miserable. But I’m seeing some signs here in the Chicago area that we may not have turned the corner, but we may be a lot closer than most people think. This isn’t a scientific account of what is going on, it is simply an anecdotal look at what I’m seeing in the market right now. I’m not sure what exactly is causing this, maybe it’s a result of the new housing bill, or maybe it’s just the realization from home buyers that there are bargains to be had, but the real estate market here in the Chicago area is active. Here are some “trends” I have noticed:

1. Properties are selling – August is normally one of the slowest months for selling real estate here in the Chicago area. This is the month when people are taking their last minute vacations, getting their kids ready for the new school year, or just enjoying the end of the summer. Most years home buyers take the month of August off. It’s no fun spending the day climbing in and out of a Realtor’s car when the weather is so hot. But that’s not the case this year. Buyers are writing contracts, and a lot of these contracts are coming together. I know because my phone is ringing and I’m busy putting together loan packages at a time when I expected to be able to put my feet up on the desk and take it a little slower.
2. Realtors and home sellers are pricing homes to sell – Any time that the market changes, it takes people a while to recognize it. This is especially true for the real estate market where the changes happen slower and are invisible for all but the most attentive consumers. The market a few years back was white hot. Most home owners didn’t buy a home during that time, but they saw the high prices homes in their neighborhoods fetched, or maybe refinanced their mortgage with a value higher than they expected. It is those prices they have in mind when they go to sell. Or it has been until lately. Realtors are now pushing harder for realistic (lower) listing prices, and home owner’s who want to sell rather than just have a sign in the yard for the next 6 months, are listening to them. So listing prices have come down by a lot.
3. Home buyers are getting realistic, too – There is no question that this is a buyer’s market, but for too many potential home buyers that meant offering a ridiculously low price and then being surprised when no one bit. It is a buyer’s market, and this means home buyers are getting good prices, and often seller concessions (money from the seller to pay for closing costs, for example), but this doesn’t mean that home sellers are giving the house away. I’ve seen quite a few buyer’s who wasted months trying to buy short sales or foreclosures where the lender never even responded, who ended up buying homes that fit their needs and were good deals, maybe even bargains, though not outright steals.
4. Home buyers and consumers are adjusting to the new lending rules – There is no question that it is harder to get a mortgage now than it was a year ago. The tighter financing rules have taken some potential home buyers out of the home buying pool. But financing is available, and there are options for many if not all potential buyers. This was a shock when lending guidelines first started to tighten, now it’s the new normal.
5. Realtors are worried about appraisals – Over the last week I have had 3 conversations with Realtors who were concerned that the offer they were getting on their listing was too high and that they were worried that the property wouldn’t appraise out. This is not the way Realtors normally think. Realtors want to get the highest possible price for their listings, and figure that the details will all work out on their own. To me this says two things: one, that the market is stronger now if offers are coming in high, and two, Realtors are now not only realistic about the market but have a healthy dose of fear, too.

These are again just observations, not hard data, but I think the truth is more complicated than the bleak headlines show. Real estate is different from market to market, and the headlines lump the stronger areas in with the areas with the biggest declines. The market here in the Chicago area is not booming, but it was never as hot as the bubble markets like California, Nevada and Florida, so it makes sense that it would never go down at the same rate.

What we are seeing is a balancing out of pent up buyer demand and sellers who are motivated to sell. The market over all is slow, but some homes are selling quickly. I’m told that about a third of the homes listed are sold quickly, many within the first month. These are the homes that show well and are priced right. Other homes are selling later, usually after price cuts to bring the listing price down closer to the current market. And some homes, because of both condition and price, are going to be on the market for a long time before they sell, if they do at all.

Over the next months we will see if this is a boomlet or a long term trend, but right now the market is active.

The Housing Bill – The Housing and Economic Recovery Act of 2008 was passed by the Senate on Saturday and is expected to be signed into law sometime this week. The bill will actually take effect on October 1st. There have been a lot of rumors as to how this will shake out, but these are some highlights of what has been agreed to and will be in the new bill:

• A bailout of Fannie Mae and Freddie Mac, raising their debt ceiling and authorizing the government to purchase their stock as needed in order to keep them afloat. They are also now subject to more regulation than in the past.
• Foreclosure relief for some homeowners who bought in the last few years. The lenders have to approve it, so in a way this provides an option for a short-refinance. It will only work if the lender goes along with it and the borrower will have to split their equity with FHA if they sell their home for a profit at some point down the road.
• FHA will raise their minimum down payment from 3% total investment to 3.5%.
• FHA will eliminate the down payment assistance programs or DPAs (Nehemiah and AmeriDream) which allowed seller concessions to be used as a way for home buyers to buy with no money down.
• A 12 month moratorium on the FHA risk based pricing, which just went into effect 2 weeks ago.
• A tax refund of up to $7,500 for first time home buyers – but this will have to be paid back over the next 15 years, so it more of an interest free loan than a refund.
• A streamlined approval process for FHA condos.
• The maximum loan limits for both Conventional and FHA financing will change based on the median home price for the area, it’s still not certain what it will be here in the Chicago area.
• A nation wide licensing system for loan originators – we already have this in Illinois.

Some of this is going to be good for the market, but things like increasing the minimum FHA down payment and doing away with the down payment assistance programs will make it harder for otherwise qualified people to buy. There is talk that a separate bill will try and resurrect the DPAs, but once they are gone it will be harder to bring them back. If you are looking to buy a home here in the mortgage chicago il area and you lack the down payment, this may be your best chance to buy. A Down Payment Assistance program combined with an FHA loan is still a way to buy with no money down, but you will need to close by September 30th.

There is a lot more in the bill – it is over 700 pages long. A lot of what this means will be open to interpretation and clarification down the line. I’ll keep you informed as I hear more details.

Illinois Mortgage Rates and News

If you’ve been paying attention to the news, you know that the real estate market is tough. Homes are taking longer to sell and selling for much less that they would have just a year or two ago. Many of the Realtors I speak with are still making their adjustments to the new market and trying to find new ways to generate a paycheck. I met with one Realtor last week who offered me the chance to get in on the ground floor of a multi-level marketing program he was considering. But the market isn’t bad for everyone. As two news stories from last week show, with a little bit of luck and ingenuity real estate is still a winner.

Flipping houses for a profit is harder to do than it was in the past, but Donald Trump managed to eke out some coin when he sold a Palm Beach property, Maison de l’Amitié, for a reported $95,000,000. Trump had been bragging that the sale was for $100 million, but according to the Palm Beach Post last minute negotiations brought the price down when Trump agreed to pay the closing costs (seller concessions work, even at the top price range). The buyer was a Russian billionaire and the price he paid was the highest sale price for a single family home in the United States (though I’m sure a few families could comfortably live there). Trump bought the home for a little over $41 million in 2004. Not a bad profit. As Trump himself told reporters, "I love breaking records, and this is a record. In an age of so many people getting hurt in real estate, it shows that you can still do well in real estate.” I’m not sure what the moral is here, that the rich get richer, or that if you are selling your home you might want to let some Russian billionaires know about it.

The other story was much closer to home, in Lake Bluff, Illinois. This story concerns another real estate developer, George Michael, who was intent on finding ways to lower the costs on his property. One of the biggest costs associated with real estate is real estate taxes. According to the Chicago Tribune, Mr. Michael creatively decided to reduce his expenses by cutting his tax bill to zero. He did this by converting his $3 million dollar lakefront mansion into a church for a tax savings of $80,000 per year. The church, the Armenian Church of Lake Bluff, isn’t open to just anyone. There are no trespassing signs posted throughout the property and it is mostly family members in the congregation. His plan might not work long term, though. The village of Lake Bluff is saying the church failed to get proper permits and had no authority to change his home into a church. This one may end up in court.

Illinois Mortgage Rates and News

I’ve received 4 calls this week from home buyers looking to buy condos in Chicago and the Chicago suburbs. With more condos on the market than at any time over the last several years this is a great time to buy. This means there is more of a selection to choose from, and the competition is bringing condo prices down. This is a great time to buy a new condo, but changes in the mortgage market have made financing condominiums harder than it used to be. Mortgage guidelines have gotten much tougher and mortgage insurance companies are even tougher. Fannie Mae and Freddie Mac have junked their declining market policy, but the mortgage insurance companies have kept the policies intact. What this means is that in declining markets the mortgage insurance companies require an extra 5% down payment in order to take on the loan, so if you were going to put down 5%, you would now need to have 10% for a down payment. Chicago and the entire Chicago area are now listed as declining real estate markets. The net result is that if you are going to buy condo anywhere in the Chicago area, and you are going for conventional financing, you may need a 10% down payment.

These new requirements are going to make it harder to finance Chicago area condos, but there is one way you can still buy with a minimal and in some cases no down payment. FHA financing allows a 3% down payment and this money can come from not only your own funds, but a gift from a relative or a grant from a down payment assistance program (at least for now). There’s only one catch. When you buy a condo with FHA financing, the condo needs to be approved by FHA. There are a lot of condominium complexes and buildings that are FHA approved, but most of these are older properties. Many of the condo units have been built or converted to condo in the last 5 years, and during this time FHA was looked at as a dusty old program with loan limits too low to even worry about. So the developers never applied for the FHA approval. But things have changed since then. The FHA loan limit in the Chicago metropolitan area has been raised to $410,000, and FHA now is able to approve more buyers than any other program. If you are looking for a condo the first thing you should do is to see if the property you are looking for is already FHA approved. There is a HUD web site where you can search for properties by address and zip code, to see what is already approved. If you have a question or want to see what FHA condos are available in your town, contact me illinois Mortgage Company first time home buyers loan and I’ll be glad to run the search. IF you are interested in a property that isn’t on the list, there is another option. FHA offers a way to approve condos units one at a time with a spot loan.

FHA spot loans are designed to make FHA financing available to home buyers in successfully run condo buildings which have not gone through the approval process. From the FHA guidelines, the following requirements must be met to approve a spot loan:

• The condominium project must be complete, including all common areas and facilities.
• Control of the common areas must have been turned over to the homeowners
• association for at least one year.
• The owners association must provide evidence that the project has the appropriate
• hazard, liability and flood insurance.
• Individual units in the project must be owned fee simple. The project’s legal documents must provide for undivided ownership of common areas by unit owners.
• The project’s documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is unacceptable. Such restrictions include rights of first refusal and restrictive covenants.
• At least 90% of the units in the project must have been sold.
• At least 51% of the units in the project must be owner occupied.

• No single entity may own more than 10% of the units in a project. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time.

First Time Home Buyers Loan | Chicago FHA loans

Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.

It’s up to the mortgage lender (that would be me) to gather the correct documentation to show that the condo project meets all the eligibility criteria. Once we have all the documentation this would be submitted to the underwriter along with the rest of the file. Putting together an FHA spot approval takes a little more time and effort, but it allows home buyers to buy a condo they couldn’t buy with a conventional loan. In this market it may be one of the best tools available, for condo buyers and sellers alike.

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Illinois Mortgage Rates and News

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.

Illinois Mortgage Rates and News

Over the last year mortgage qualification has become increasingly harder. Two new changes go into affect next week which will ratchet loan approvals a little tighter still.

One is a change that only affects mortgages here in Illinois. Senate Bill 1167 will become law as of June 1^st. This law is aimed at predatory lending and the problems caused by sub-prime loans. It restricts the types of loans available, requires home buyers counseling for home buyers in Cook County who are taking out specific types of loans, and it requires more transparency so the consumer knows exactly what they are getting when they enter into any mortgage financing. There are some good features in this bill, but most of what they are legislating against has already gone away due to market forces in the mortgage market. Sub-prime loans have been a big problem and there is no question that they were abused. But there is no such thing as a sub-prime mortgage now, so this bill is coming too late to make any real impact.

The one part of this that is going to hurt some is that stated income loans will no longer be available in Illinois. Stated income loans were loans which didn’t verify the borrower’s income, but took whatever was stated as the Gospel truth. As you can imagine, this was a license for abuse, and there were way too many borrowers who bought homes with no idea how they would pay for them. That said, stated income loans do make sense for well qualified borrowers with complicated tax returns – self employed borrowers. These loans, like so many others, have been disappearing over the last year. The guidelines in the law are somewhat vague as to what is considered stated income, but the lenders who were offering this program are taking the cautious path, and are withdrawing from the market. It looks like this will be the final nail in the coffin for any loans that don’t verify income, which means it will be harder for self employed borrowers to qualify for a mortgage.

The other big change is that Fannie Mae brings out their new version of their automated underwriting system, DU 7.0. Most conventional loans are approved through the automated underwriting system, so this will have a huge impact on how loans are approved. On the good side, this version does away with the declining market policy. Last December, in a reaction to the down turn in the housing market, Fannie Mae came up with a plan to identify markets where the prices were falling, and require a higher down payment in those areas. The plan basically made it harder to get financing in the areas that needed it most, and was not a popular move. So getting rid of this plan is a step in the right direction. It will be looked at as a bigger step if the mortgage insurance companies follow the lead and stop their declining market policies, too. The rest of the changes in version 7.0 are not going to be positives for mortgage borrowers. Some of the changes include:

• Borrowers must wait a longer time after a bankruptcy or foreclosure before they can get a mortgage again, and when they are ready they will need a higher down payment and a better credit score.
• Debt to income ratios, that is how much debt you are carrying, will be much lower.
• Condos will now be considered riskier, and harder to approve.
• Having mortgage insurance on your loan will not reduce the risk of having less than a 20% down payment.
• ARMs will be considered riskier than fixed rate loans.

There’s more, but the bottom line is that this is a way of tightening more, and some borrowers who will qualify for a loan today, may not next week.

Illinois Mortgage Rates and News

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First Time Home Buyers Loan : Tax Benefits Make Real Estate a Smart Investment for Chicago Area First Time Home Buyers

Oil prices are up to record highs. Last week the price went as high as $135 per barrel, and I’ve seen predictions that it will be $150 or even $200 per barrel by the end of the year. We’ve all seen how this spike in prices has affected gas prices at the pump. Yesterday I filled up at $4.20 per gallon, about $15 a tank higher than what I’ve gotten used to paying (which already seemed too high). Depending on how much you drive, this extra cost is taking a nice sized bite out of your disposable income. Add that to the effect of higher gas prices on the economy as a whole, everything that needs transportation (both goods and people) now costs more, as does anything which is made with oil (fertilizer, plastics and so on). This means that prices in general are going up. So the question of the day is how does this affect our housing market here in Chicago and throughout the Chicago area?

The people who are feeling this the most are the people who have the longest drives to work. Over the last years the Chicago suburbs have spread out further and further. New roads have opened up and areas that used to be farm land, like Plainfield, Oswego and Huntley, are now booming suburbs. On the good side you can buy a lot more house for your money in these areas. The bad side is long commutes and now, with higher gas prices, much higher transportation costs. The growth in these areas has already slowed down because of the soft housing market. Will the high gas prices slow development in the far suburbs long term? Maybe. But only if gas prices stay high.

Part of the increase in oil prices is speculative. When ever a market starts moving in one direction, speculators jump on for the ride, magnifying the move. High speculation can lead to a bubble, and when the bubble pops prices fall. With the economy slowing down the natural effect of higher prices will lower demand. Also, the high prices will lead to more oil production, maybe in areas which were cost prohibitive before, but will now make sense with the higher price per barrel. So over time the supply will increase. After the Iranian revolution in 79 and through the early 80s the price of oil surged to record highs, and then dropped back down to the same level it was at before. It could be different this time though. India and China are growing and using more oil and some think we are nearing peak oil, which means the oil that is left will be harder to get to and harder to get out of the ground. These trends point to higher prices long term.

So if oil prices do stay high, how will this affect the real estate market? The conventional wisdom says -

• Demand will be higher for houses in the city and close to public transportation.
• Energy efficient housing will go main stream and there will probably be more tax breaks.
• Interest rate may move higher long term, as higher fuel prices feed inflation.
• Suburban sprawl will slow down over the long term.

I think these are all accurate predictions – if oil keeps going higher – but if history is a guide, I think it will be a while before we see any of these predictions come off in a major way. Oil prices were around $90 per barrel at the beginning of the year, so we have had almost a 50% increase since then. The question is whether the prices will continue to climb and, how far will they go. My guess is that we will have higher gas prices long-term, but there are reasons to think that prices will come down some first, and that we will get used to higher prices.

• The economy is slowing down and with consumers having less money in their pockets, or feeling like they have less money in their pockets, demand for energy will naturally slow down.
• People are driving less because of the high cost of gas. Travel was down considerably over the Memorial Day weekend.
• People will not only change their driving habits, they will also change what they drive. SUV sales have been circling the drain all year, and Hybrid sales have gone through the roof.
• Over time people get used to higher prices, and it will take a big increase before people change their habits for good.
• A lot of the increase in oil prices is due to speculation, and what goes up fast will often come down just as fast.

So my opinion is that oil prices will make people feel poorer for a while, but I don’t think they will make a huge difference in their home buying decisions. At least not for a while. I do think the far suburbs are going to take longer to recover, and high gas prices are part of that, but over building and high commuting times are bigger factors.

Illinois Mortgage Rates and News

A recent article in the Chicago Tribune talked about the amount of new condo units coming on the market this year here in Chicago. According to the article 5,984 units are due to come on the market this year. Last year there were 4,794 new units, and next year they are projecting 4,160 units. Condo construction has been a big part of the city’s resurgence over the last years, and the new condo units help to revitalize neighborhoods. But with so many units coming onto an already glutted market, at the same time that condo financing is getting increasingly more stringent, we are sure to see some problems.

Over the last few years we have seen a boom in new condos, both in Chicago and throughout the Chicago suburban area. Part of these were new construction condos, and a lot were conversions from apartment buildings to condo units. The condo conversions made sense when the market was flying. If you could buy an apartment building based on the rental income it produced, make some improvements to the property and change the ownership to condominium, the developers could sell the new units at a much higher per unit basis, ensuring a huge profit. The same economics apply to new construction condos, but the lead time between starting the project and finishing can take much longer. Because of the longer lead time, we are now seeing a surge in new units coming on the market, even though the market has shifted and demand is much lower than it was a year or two back.

Even as more condos are coming on the market, condo financing is getting tougher. Mortgage qualification has gone through a series of tightening over the last 9 months, and it is harder for most buyers to qualify than it was before, but this is especially true of condos. Condos carry a higher risk because the lender has to measure the risk of not only the borrower, but also the condo project. When processing a loan for a condo we need to send out a condo questionnaire which asks information about how many units have been sold and closed, how many units are owned by investors and what financial shape the condo association is in. In order to qualify for the best financing, the condo needs to meet Fannie Mae guidelines. Condo projects that have a history have an easier time, but they are still looked at as riskier than a single family home and some lenders require more documentation and charge premium pricing to finance any condo unit. But it gets tougher for new and rehab condos which have to go over a higher hurdle than existing condo units. Fannie Mae (and Freddie Mac) require a higher down payment and pre-sale requirements for early buyers. Not long ago there were lots of lenders willing to offer mortgages for condos that didn’t meet these guidelines, no matter how much they had available for their down payment. We still have lots of condo financing sources, but now lenders are pulling back. With less buyers able to qualify for financing, this means that there are fewer buyers, period.

The article picked up on this trend in the city, but the same thing is happening throughout the suburbs, too. I know of one large apartment complex in Naperville that converted to condo last year, but now has a sign offering condos for rent. The real estate market is slow right now, and the added units keep prices down until the supply of units is absorbed by new buyers, or possibly renters. New construction for single family homes has already ground to near a halt. With less new properties coming on the market this will help reduce the supply and this will act as a kick start when the real estate market starts to pick up again. It won’t be the same with the condo market. When the market for single family homes is on the upswing, condos will still be behind the curve.