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 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.

Illinois Mortgage Rates and News

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 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 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 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.

Illinois Mortgage Rates and News

I read a lot about the economy and what the experts say about it, but I get the best feel for what is happening from talking with my clients. People need mortgage money whether the economy is up, or down, but they need it for different reasons. When the economy was flying high, a typical phone call would be about buying a new, bigger home, starting an addition to their current home or buying a vacation home. I’m still doing a fair amount of new purchases, but a lot of my calls now are about cash out refinances to consolidate debt. It always makes sense to make sure your mortgage is in line with your overall finances, but it is especially important when money is tight. A debt consolidation loan can help you to restructure your debt in a way that puts more money in your pocket and gives you a plan to actually pay down your debts.

Most people look at their home mortgage and other debt separately. For many people their home is their security and paying it off quickly is their biggest financial goal. It’s not unusual to find someone who has a 15 year mortgage because they are trying to pay down their home quickly, but also has a big balance on their credit cards. The problem here is that the mortgage rate is almost always lower, and tax deductible besides. If you are carrying a balance on your credit cards you are paying interest on the interest, and if you pay the minimum payment there is almost no way to get rid of the debt. What is your over-all debt level? Are you feeling pressure making all the payment on your credit cards and other consumer debt? This is where the debt consolidation mortgage comes in.

A debt consolidation mortgage is a type of cash-out refinance where you use the equity in your home to pay off high interest debts. If you have owned your home for a few years, chances are you’ve built up some equity. Here in the Chicago area, even in this soft real estate market, appreciation has driven home prices much higher over the last years. If you are like most people, the equity in your home may be your biggest asset or source of wealth. A debt consolidation refinance doesn’t change the amount of money you owe, what it does is restructure the type of debt. By converting credit card and consumer debt into your mortgage you can lower your monthly payments, increase your tax benefits and use the savings to pay down your debt or start a savings plan. With conventional mortgages you can remortgage up to 90% of your home’s value for a cash-out loan, but the best rates are available at 70% of the appraised value ( We do have one lender who will loan 100% of your value). With an FHA loan you can take out up to 95% of your home’s appraised value at the best rates.

Here is an example of how this works. Say you have a home that is now worth $350,000. You still owe $200,000 on your first mortgage and have a home equity loan for another $75,000 and you have credit card and consumer debt of $50,000. The monthly payments (not counting taxes and insurance) might look like this.

Principal and interest on your first mortgage $1,319

Interest on your home equity loan                      375

Minimum payments on credit cards                  1,200

Total payment                                                 $2,894 per month

If you refinanced this into a new FHA loan at 95% of the home’s value, you could borrow up to $332,500. This is enough to pay off all the debt, plus the closing costs and the amounts to set up the new escrow accounts. If the new rate is at 6.0% on a 30 year fixed rate – the same rate as I used in the example – here is how it turns out.

Principal and interest                                     $2,023

Monthly mortgage insurance                               140

Total payment                                                $2,164

This means that the debt consolidation refinance saves you $730 each month.

This plan has a lot of advantages, but you are increasing and extending your mortgage which can be a scary thing. Also, you need to have a plan on what you will do with the new savings. There can be a danger in this strategy. First, you are extending your mortgage and paying the loan over a longer period of time. You also need to watch how much the refinance costs. If you are paying too much for the refinance, it will be a long time before you see any benefits. But the biggest problem is that it is too easy to get back in the same trouble if you don’t change your credit habits. I’ve seen too many people who used a cash-out refinance to consolidate their debts and get a new start, only to run up their credit cards and get right back in debt. For a long term solution you need to be able to change your outlook and credit habits, too. On the other hand, if you take some of the money you saved and use it to start a monthly savings or retirement fund, or maybe shorten your mortgage so you are debt free years faster. What is best for you depends on your financial situation and your long and short term goals. Refinancing, if done properly, can be a tool to eliminate your debt and build wealth over time. Any time you take out a loan against the equity in your home you are trading some security for the cash you need, but if you have high balances on your credit cards it can be the right way to go.

Illinois Mortgage Rates and News

In my last post, I talked about how it is still possible to buy a home here in the Chicago area with no money down with FHA financing combined with a Down Payment Assistance program like AmeriDream or Nehemiah. But even if you are able to buy with no money for the down payment, there are still other costs you will need to come up with at the closing. You will need money to pay for the bank closing costs which include the appraisal and credit report, a commitment fee for FHA financing and underwriting and processing charges for conventional loans. Then there are title charges, transfer taxes, pre-paid interest, insurance and the money to set up your escrow accounts. The truth is, real estate is a high cost transaction. Even with out the down payment a typical real estate purchase will cost you thousands. So what happens if you are ready to buy now, but your pockets are empty and your wallet is still a little light? There are a couple of ways to buy with no money out of your pocket, but you need to plan ahead.

One way is to ask the seller to pay for your closing costs through a seller concession. You need to ask for this as part of your initial negotiation, once you have a signed contract it is too late. Most conventional loan programs allow the seller to contribute up to 3% of the value toward the buyer’s costs, and with FHA you can get a 6% seller concession. You will need to talk with your lender and have him put together a Good Faith Estimate of what all your costs will be to close. Once you know how much you are going to need, you can ask that the seller to pay that amount at the closing. From the seller’s standpoint, this is part of the price. Any money that he pays out is deducted from the sale price. If the contract for the home is $300,000 and they are paying $3,000 for closing costs and pre-paids, the true sale price is $297,000. It is important to phrase it so that the seller credit will be “toward closing costs”.

You can’t walk away from the closing with any extra money, so make sure you have a use for all the money you get as a concession. One of the great things about this program is that you can use it in different ways. Not only can you pay for the normal closing costs, but you can also use a seller concession to pay for points to lower your interest rate, or for more creative financing options like an interest rate buy-down. Remember though, the seller is looking at this based on how much they will net from the sale, but the appraiser is basing the value on the contract sale price. So it will need to appraise out at the full contract price. This can be more of an issue if you are asking for substantial closing costs along with a seller donation to pay for a grant from Nehemiah or AmeriDream.

Another way to pay for closing costs is through a lender credit. This is more common with refinances than it is with purchases, but it is a great option in some situations. As a mortgage banker, I can offer loans in a variety of price and cost variations. For people who are strapped for cash, it is possible to offer a slightly higher interest rate, but use some of the premium to pay for the loan costs. Whether this will work for you depends on your whole situation. But it is an option, and one more way to reduce the cash you need to close.

Illinois Mortgage Rates and News

Now that it’s April, I think it is finally safe to say winter is over here in the Chicago area. It’s been a long hard winter, and spring couldn’t come a moment to soon. But the baseball season has officially started, the sun is out and my phone is ringing with first time home buyers who are ready to take the plunge into home ownership. Yep, this is springtime in Chicago. First time home buyers generally have two things in common. One, they are nervous about the home buying process and whether they will be able to qualify for a mortgage (especially now with all the economic uncertainty and the tighter underwriting from the mortgage mess), and two, they don’t have a lot of money saved up for a down payment. This wasn’t a problem a year or two back. Over the last few years 100% financing loans were the norm for first time home buyers. Now, with mortgage guidelines tightened (strangled?) and mortgage insurance companies running scared, no money down conventional loans have disappeared. So the question is, can you still buy a home here in the Chicago area with no money down?

The answer is yes. You can still buy a home with out any of your own money, but you will have to plan ahead. The best way left to buy with zero down is with an FHA loan combined with a grant from a down payment assistance program. (There are plenty of reasons to buy FHA in our present mortgage market, even if you could qualify for a conventional loan). Most conventional loans now require a 5% down payment (it could be more in areas marked as declining markets). FHA only requires a 3% down payment. But even a 3% down payment can be a huge obstacle. The down payment can mean the difference between buying now, and waiting a few more years until you have put enough cash aside to buy. This is where the Down Payment Assistance programs (DPAs) come in.

FHA guidelines say that you can buy a home with no down payment if the money comes as a gift from a relative or a grant from a charitable or non-profit organization. The gift from a relative is always an option, but if you don’t have a rich uncle to call on, there are plenty of non-profits that want to help you out. The DPAs take advantage of a loophole in the FHA guidelines. In a way, this is a legal form of money laundering. The home seller is actually paying for your down payment.

Here is how it works. When you find the home you like, you negotiate the contract so there is a concession on the price upfront which allows the seller to donate the amount to the DPA. The two biggest DPAs are Nehemiah and AmeriDream. With AmeriDream, the donation from the seller needs to be 3% of the sale price plus $500. The 3% will go for the down payment; the rest goes to pay for the organization’s administrative costs. The seller then agrees to give this negotiated concession to the DPA at the closing table out of the proceeds from his home after the loan has closed. The DPA in turn give a grant to the buyer for their down payment at the closing table. So the grant is from the DPAs own funds and the donation from the seller goes into their coffers to pay for the next home buyer.

Why would the seller go along with this? Sellers are concerned with how much they will net, not how the loan is structured. So let’s say you were buying a home listed for $300,000. One way you could do this is offer a purchase price 3% ($9,000) below the list price. This means the seller is selling the home for $291,000. Another way you could do it is by offering the seller the full asking price of $300,000, but conditional on the seller donating the 3% to the DPA. Either way he nets the same amount, $291,000. (This is simplified because the administrative fee needs to be in there too). The important thing is to do this when you are first negotiating the offer. If you are negotiating on the same $300,000 home and the seller agrees to sell it for $290,000, you are going to have a hard time coming back later and asking him for more of a concession to pay for your down payment.

There are a few things to watch out for with this home buying strategy. First, the property has to be able to appraise out. You need to negotiate a price which will stand up to what comparable homes are selling for. Also, you need to make sure you follow the guidelines and get all the proper documentation. You will need to put the right phrasing in the contract, and get a few extra forms signed. Here is the wording for AmeriDream:

Seller agrees to contribute 3% of the purchase price ($ ), plus $500 (total $_______) to the AmeriDream Downpayment Gift Program.

There were some questions about whether these DPAs were legal and if the program could continue. But a court ruling last year kept the down payment assistance option open, so for now it is the best option for first time home buyers or anyone who wants to buy a home with no money down.

Keep in mind, the down payment assistance program takes care of the down payment, but you will still need money for closing costs, pre-paid interest and to set up the escrow accounts. There is a way to buy with not just no down payment, but with no money out of your own pocket at all. I’ll cover that in my next post.

Illinois Mortgage Rates and News

Not so long ago, FHA loans were the red-headed step child in the housing market. They didn’t get any respect. That wasn’t always the case. Back in the old days FHA loans were the only option for most first time home buyers or others who had little money to put down. FHA was the way for many borrowers to take their first steps into home ownership here in the Chicago area. Not only could you buy a home with a small down payment, but the entire down payment could be a gift, and your credit didn’t have to be perfect. There were problems with FHA loans, though. It took longer to get a loan approved and closed than with a conventional loan, and if there were issues with the homes condition (like peeling paint) the issues had to be fixed before closing. Many people felt that FHA underwriters were professional nitpickers, so if they had a choice, many Realtors and home sellers would take a conventional buyer over an FHA buyer. As time went on FHA became less and less of a factor in the market. Conventional loans came out with low, and later no down payment options, and other loans catered to borrowers with bruised credit. Another part of the problem was that FHA didn’t keep up with the market values. As home prices moved up in Dupage County and throughout the Chicago area, FHA kept their loan limits low, and became a non-issue for all but the lowest priced homes. Now, as the conventional market is in turmoil, it looks like FHA has another shot at its glory days, and there is no doubt that FHA financing is the best loan option for many Chicago area home buyers.

Over the last few years FHA has updated the way they make loans. They’ve eased off on their property conditions, and with direct endorsement underwriters we can approve and close an FHA loan as fast as we can a conventional loan. But the biggest change is that FHA has increased their loan limits here in the Chicago area and throughout the nation. In the Chicago area (this includes all of the collar counties including Dupage, Kane, Lake and Will) you can now get an FHA loan on a single family home up to $410,000. This is already making an impact. FHA’s market share in 2006 was about 3% of total mortgage originations. Today FHA is closer to 10%, and moving up.

Why would you consider an FHA loan over a conventional loan? Here are some of the advantages:

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. Fannie Mae and Freddie Mac, the two big buyers of mortgage loans in the mortgage aftermarket, recently changed their guidelines in a way that meant all but the very best borrowers will pay more for a loan. Now buyers with credit scores under 720 and with down payments under 20% are getting hit on their pricing. This isn’t the case with FHA. 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. FHA uses a common sense underwriting approach that understands credit problems can happen to anyone. Their concern is that the problem has been addressed and isn’t likely to occur again. If you have had credit problems in the past, you may need to document why they happened and what you have done to correct the problems, but you aren’t automatically frozen out of a loan, as you would be now with most conventional loans. If you have some issues with your credit, give me a call before you are ready to buy. Working to fix your credit earlier will help you save money later.
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. And this down payment can come from 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. One way many buyers use this is by converting a seller concession into a grant from a non-profit down payment assistance program like Nehemiah or AmeriDream. Here is how it works. When you negotiate the contract with the seller, you would ask for a concession on the price upfront — the amount will usually be between three and a half to four percent of the price (more if you want to build in closing costs, too). Three percent will go for the down payment; the rest goes to pay for the organization’s administrative costs. The seller agrees to give this negotiated concession to the grant provider at the closing table, and they in turn give a "grant" to you for your down payment. This is all done on paper and no money really changes hands, but it allows you to buy your home with no money down. There are other ways to use the seller concession, including buying down your interest rate to lower your monthly payment. The important thing is to make sure you ask for the concession right up front when you first start to negotiate your purchase.
5. FHA is more lenient with past bankruptcies – With FHA you can buy a home 2 years after a Chapter 7, and 1 year after a Chapter 13 bankruptcy – sooner if the bankruptcy is medically related or due to actions beyond your control. You will still need to show that you have reestablished your credit and can afford your new payment.
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 – This is another way that FHA differs from conventional financing. Saving up for a down payment is the biggest obstacle to buying for most first time home buyers. With conventional loans you need to have saved not only the amount for the down payment, but also have some money left over in reserve. With FHA they only require enough cash to close and you don’t need money in reserves.
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. It’s goal is to help more people buy homes and there are no limits on how much you can make.
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 upfront 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.

These are other just a few of the advantages of FHA financing. There are other advantages of FHA financing which help some individual needs. One of the biggest things to keep in mind is the pricing. FHA pricing is as competitive as conventional financing –and much lower if you are buying with a low down payment or if your credit scores aren’t the absolute best. If you would like to see how FHA could work with your situation, give me a call or contact me. I would love to work with you.

Illinois Mortgage Rates and News

FHA just released their new loan limits for Northern Illinois and the Chicago area. This determines the maximum loan for FHA financing in Cook County, Dupage County, Kane County, Lake County, Will County and McHenry County. The limits are:

1 unit    $410,000

2 unit    $524,850

3 unit    $634,450

4 unit    $788,450

This is great news. As underwriting for conventional loans has become progressively tighter, FHA is shaping up to be a great alternative. Some of the advantages of FHA financing include:

3% down payment required – the down payment can come from a gift from a relative or as a grant from a down payment assistance program, so the buyer can come in with no money out of their own pockets.

FHA allows a seller concession of up to 6% - this allows more creative ways to structure your purchase, including ways to buy with no down payment or closing costs, or using this concession to lower your interest rate.

FHA is not credit score based – this means you can qualify for an FHA mortgage with credit scores in the upper 500s – without any price hits. With low down payment conventional mortgages the rates go up if your FICO score is below 680. FHA uses a common sense underwriting approach. It understands that credit problems can happen to anyone. Their concern is that the problem has been addressed and isn’t likely to occur again.

FHA is more lenient with past bankruptcies – you can buy a home 2 years after a Chapter 7, and 1 year after a Chapter 13 bankruptcy. If the bankruptcy is medically related or due to actions beyond your control, you can buy sooner.

FHA pricing is as competitive as conventional financing – the pricing on FHA is on par with any conventional program, and much lower if you are buying with a low down payment or if your credit scores aren’t the best.

These are just a few of the advantages of FHA financing. When I first got into this business, a long, long time ago, FHA was the preferred program for first time home buyers or others who didn’t have a lot of money available for a down payment. FHA lost favor over the years as more low down payment conventional options came on the market. It was hard to do an FHA here in Dupage county and other parts of the Chicago area when the max loan limit didn’t keep up with the increase in housing prices. FHA has worked toward modernizing their underwriting over the years, and it is now much more streamlined and user friendly. For many home buyers FHA is now the best loan alternative, by far.

Illinois Mortgage Rates and News

If you are a home buyer here in the Chicago area or around Illinois, and are looking for a Jumbo mortgage, your options aren’t what they used to be. A Jumbo loan is a mortgage higher than the conforming loan limit set by Fannie Mae and Freddie Mac, the two big purchasers of loans on the mortgage after-market. The current Fannie Mae limit here in the Chicago area is $417,000 for a single family home, so anything above that is considered a Jumbo mortgage. Because these loans aren’t covered by Fannie and Freddie, Jumbo loans are considered slightly riskier than conventional loans and have always been a little more expensive. Last summer, before the credit crunch (also known as the sub-prime melt down) hit the mortgage industry, the premium on a Jumbo 30 year fixed rate was just a ¼ point higher than a conforming fixed rate. This made sense at the time. Jumbo mortgages are typically made to people with higher incomes, good credit and good assets. These are usually people who have owned homes before, and are considered good credit risks. But then the credit crunch hit, and suddenly the market for Jumbo loans disappeared. The market for Jumbo loans has returned, but now the difference between a 30 year fixed rate Jumbo and the 30 year fixed rate conventional has grown to as much as 1% difference in rate, so if a conventional is at 6.0%, a Jumbo would be at 7.0%.

This means that Jumbo loans have gotten much more expensive than they were before. If you are a Jumbo buyer, the difference in rates and the larger loan size means you are paying thousands of dollars more now than what you would have before. So what are your options if you are in the market for a Jumbo loan? Do you need to just grit your teeth and pay the extra money? Not necessarily. There are a few options for Jumbo buyers that can keep the rates and payments down, and save money.

1. Adjustable rate Jumbos are still competitive. The market for fixed rate loans has been hit the hardest, but there are still adjustable rate loans which are priced more aggressively. The most popular adjustable mortgages are actually a combination of a fixed rate and an adjustable. That is they are fixed for a set period of time, typically 5 or 7 years, before they become ARMs. This gives you the security of knowing that your payment and interest rate are fixed for the first 5 or 7 years while saving you thousands of dollars in payments. If you are planning on staying in the home longer than that you are taking a risk that payments may go up, but you can refinance your mortgage at any time, and odds are good that you will have some opportunities to refinance into a lower rate sometime down the road.
2. Break the loan into 2 parts a first and a second mortgage. This works best if you are in the lower range of jumbo mortgages. Here is how this works. Let’s say that you are buying a home for $700,000 with a 20% down payment and financing $560,000. If the interest rate for a 30 year fixed rate on the full loan amount is 6.75%, the payment would be $3,632 per month. If you break the mortgage in to two pieces, the first mortgage would be at the conforming limit of $417,000 and the second mortgage would be for the difference, $143,000. Let’s say the rate on the first is 5.75%. That gives you a payment of $2,433 per month. The rate on the second is higher, say 6.50% for a fixed rate. This means a payment of $904 per month. Add the two payments together and you get a total payment of $$3,369 – a savings of $263 each month compared to taking out a single jumbo loan.
3. 3. Portfolio Investors. All the problems with Jumbo mortgage pricing stem from the breakdown in the mortgage backed securities markets. With the uncertainty in the market, buyers for these loans have dried up and prices have risen. But there are some lenders who don’t sell their loans in the mortgage after-market. These lenders price their loans based on what makes sense for their own investment needs. We have one lender who is currently offering Jumbo loans at 6.125% with no points, much lower than anyone else in the market. The guidelines are tighter and the money is available only for a limited time, but it is a great deal.

The conventional wisdom is that the credit markets will eventually loosen up and Jumbo mortgages will be in demand again. When this happens I expect that the rate difference will narrow and Jumbo loans will be priced much more attractively. In the meantime, there are still options.

Illinois Mortgage Rates and News

With the rates on fixed rate mortgages moving higher over the last few weeks, adjustable rate mortgages (ARMs) are suddenly popular again. Right now there is a huge spread between the rate on a 30 year fixed rate mortgage, and a 5-1 ARM, which is fixed for the first five years before it can adjust. The difference in rate now is 7/8s of a point, which is mind boggling huge. On a $300,000 loan this comes out to a savings of $166 per month. This spread means a home buyer here in the Chicago area can save thousands of dollars in payments by going with the adjustable instead of the fixed rate. But the savings come at a cost. By taking on an ARM, you are taking a risk that rates may be higher down the road, and if you are still in your home, and still in your mortgage, your payments would then move up.

Does it make sense to take the risk? If you’ve been following the news, there is lots of talk about the housing slump, and one of the mainstays of these stories is about the dangers of adjustable rate mortgages. There is no doubt that people have gotten in over their heads, and in some cases ARMs have been part of the problem. (A bigger part of the problem might be that they didn’t understand what they were getting into.) ARMs aren’t as dangerous as some think. They aren’t for every person or every situation, but used correctly they can be a great option.

So when does it make sense to choose an ARM?

1. When you don’t expect to be in the house for the long term - Most home buyers go with fixed rate mortgages because they feel safer taking on a mortgage where the rate and payment will always stay the same. But most people don’t stay in their homes for 30 years, especially first time home buyers. With job transfers, changes in life style and upward mobility, it is now common for homeowners to move after five to seven years. ARMs come with fixed periods for the first 5, 7 or even 10 years. Why pay extra for time you don’t expect to be in the home?
2. When you don’t expect to be in the mortgage long term – This one is harder to anticipate, but most home owners don’t keep the same mortgage, even if they stay in the house long term. Interest rates go in cycles, up and down. Refinancing used to be prohibitively expensive. Now no-cost refinancing (we pay all the closing costs by increasing the interest rate slightly) is common. Now if the mortgage rate drops by a half a point it makes sense to lower your payment by refinancing. Mortgages are now looked at as more of a financial planning tool. If you build up equity in your home, you may want to tap into that equity with a new loan. Again, if you think it is likely that you will refinance your mortgage in the next 5 – 7 years, an ARM may be a good option.
3. When you expect that your income will be increasing - This is the case with a lot of first time home buyers. If you are early in your career and expect that your income will be moving up, you are in a position to accept a little more risk that your payment will be higher down the road. By taking on an ARM you are able to take advantage of the savings now, when you need it most.
4. When you want to build up equity quicker – You can use adjustable rate mortgages to build up your home equity or as a way to increase your investment. One way is to pay the same mortgage payment you would make if your loan was fixed. If you did this with the example I used earlier and paid the $166 saving as an extra principal payment each month, you would pay down an extra $14,000, building more equity than you would with the 30 year fixed rate. Another way to approach this is by taking the savings and investing it in an outside investment where you can earn more than the mortgage interest rate. If you plan on doing this, you need to make sure you consistently add to your investment each month.

Those are a few reasons why you might consider an ARM, but for some people adjustable rate mortgages are the wrong way to go. Don’t take an ARM if you meet any of these criteria:

• You plan on staying in the home for at least 10 years.
• Your income is not going up, and you would have trouble making the payment if the mortgage payment goes up when the loan adjusts.
• You can’t afford the home if you don’t use the ARM.
• Taking on the extra risk will make it hard for you to sleep at night.

Whether an ARM is right for you depends on your own personal and financial situation as well as your goals and expectations. But ARMs aren’t something to be afraid of, and for many people they are a great way to save money. If you have any questions, or if you want to go over your own situation and see if an ARM would work for you, let me know.

Are you a first time home buyer in the Chicago area? Or are you someone looking for more information on how to save money when buying a home and getting a mortgage? I’ve put together a free 49 page Home Buyer’s Guide which goes into detail on the entire mortgage and home buying process. Just click on the link to download your free copy.

Illinois Mortgage Rates and News