The Cash/Out refinance has been a long time favorite of home owners who wanted to consolidate debt or take out home equity for other purposes. Being able to take equity out of your home has always been a big benefit of owning real estate, though it grew to an absurd degree during the bubble years. It’s not so easy to take cash out now. For one thing the standards have been raised and lenders now require more equity retained in the home. But the bigger issue is that with home values down, many home owners have lost equity, and many are upside down owing, more on their mortgages than their home is worth. This has led to the newest major trend in lending, the Cash/In Refinance.

A cash/in refinance means you are coming to the closing table with extra money to pay down the mortgage so you can take advantage of the low refinance rates available now. This is obviously not an option for everyone. You can’t add in cash if you don’t have it. But for those home owners who do have cash available, it can make sense for a variety of reasons. Part of this is a change in attitude and a change in expectations. The old idea was that the value of real estate would always go up, and many owners bought for the short term. Now, staying put is a more realistic option for many, and if you plan on being in your home longer term, it makes more sense to get the best mortgage rates available, even if you have to invest more to do so.

Here are some reasons it might make sense to pay down your mortgage in order to qualify for a new loan:

This could be the best investment return available – If you have money in a checking or savings account, you are earning almost no interest. If you have money in stocks, the risk is high and many analysts expect the market to remain flat over the next several years. By adding cash to your home and getting a guaranteed return with a lower mortgage rate, this could be the best and safest investment opportunity available.

Get rid of your PMI – If you put less than 20% as a down payment on your home, you are require to carry private mortgage insurance or PMI. PMI doesn’t help you directly, but without it you wouldn’t be able to buy unless you had the larger down payment. If you are now in a position to pay down your loan and get it to the required 20% equity, you not only lower your interest rate, but drop the mortgage insurance. For example, if you originally put down 5% on a $200,000 loan, you are paying about $130 each month in PMI. If you can save a half a point in interest and get rid of this payment, that would be a great use of your money.

Get below Jumbo pricing – Jumbo mortgages are loans that are over the maximum lending limits for conventional financing, which is $417,000 for a single family home here in the Chicago area. There is a big difference in pricing between conventional and Jumbo pricing, currently about .75% on a 30 year fixed rate. If your loan is close to the conventional limit, or if you just got a big bonus or an inheritance from a rich uncle, this refinance could save you a lot of money. Another option is to combine this with a second mortgage or home equity loan. If the first mortgage is at 80% of the home’s value, you can get the best pricing, even if the combined loan to value (both mortgages compared to the value of your home) is higher. 

Avoid pricing hits – There are loan level price adjustments or price hits added on for all sorts of situations. There are big add-ons to the rate for having lower credit scores as well as the type of property (condos with less than 25% equity get a big price hit). These price hits can go away when you have a larger equity position. This doesn’t make sense for everyone, but it is a consideration and worth looking into.

With the housing market stagnant, it may be a while before we see values increase. If you are in a position to lower your rate and your payment, a cash-in refinance might be a good option.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago FHA Mortgage Company

Since the bottom fell out of the housing market, FHA has become the best financing choice for a big slice of homebuyers and home owners (FHA makes up about 40% of the loans originated now). When all the private lenders dropped out of the market, and Fannie Mae and Freddie Mac tightened their guidelines and added big price hits, FHA stepped in to fill the gap. FHA is the only option for home buyers with low down payments (3.5% down, and this can all come from a gift) and though this is a fully underwritten loan, FHA is more forgiving of past credit mistakes if the underwriter can understand what happened, and why it won’t happen again. In many ways FHA has become the new conventional, and the financing terms work best even for many borrowers who could qualify for conventional financing. But all this success has come at a price. Over the last two years FHA defaults are at record highs, and their reserve fund, which they use to pay claims on defaulted loans, is the lowest it has ever been. Last year FHA  moved to bulk up the reserve fund by increasing the Up-Front mortgage insurance by .75%. With a new bill just passing the House, and now fast tracked in the Senate, it looks like FHA is about to restructure their formula again.

We need a little background to explain how this will work. FHA’s mission is to make homeownership more available. This isn’t a government give away or a loan for people who can’t qualify. First of all, FHA doesn’t make loans directly. They act more as a mortgage insurance company insuring the lenders who actually hold the FHA loans against loss if the home does get foreclosed on. This system has been around since the 1930s and has always been self funded, that is, the mortgage insurance they collect has been enough to pay for all losses without any additional government funds. But with true unemployment in the double digits, and home prices fallen, the FHA reserve fund has come under pressure. Compare this to Fannie and Freddie which have been bailed out and taken over by the government, or all the big banks which would have collapsed if Uncle Sam hadn’t stepped in to prop them up. So FHA has been a huge success and a key to any recovery in the housing market.

FHA funds their insurance in two ways: with an Up-Front Mortgage Insurance Premium which is rolled into the loan and financed over the course of the loan, and also with an additional monthly mortgage insurance premium. The last change increased the Up-Front MIP from 1.75% to 2.25%. The new bill will raise the maximum monthly insurance premium to a maximum of 1.55% (divided by 12) but the understanding from HUD (the agency which runs FHA) this number is to give flexibility and the real increase won’t be this much, and there will be some trade offs. HUD has previously said that the plan is to decrease the Up-Front MIP down to 1%, a big reduction, and increase the monthly factor to 0.9%(divided by 12). So this will be giving with one hand while taking away with other. I have a feeling that the law of unintended consequences could kick in and make FHA more attractive for many borrowers who have the choice to go with conventional financing, while making it a little harder for those most in need to qualify (it increase the monthly payments while decreasing the cost in the short run).

We will see how this all plays out, but if this insures that FHA will continue to be available in the market, it is a change worth making.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago FHA Mortgage Company

With mortgage rates at all time lows, it makes a lot of sense to fix in your rate and refinance at what may turn out to be the lowest real rates ever. Getting a fixed rate mortgage makes a whole lot of sense for any one who is pretty sure that they will be in their home for a long time. But even now, even with fixed rates as low as they are, fixed rate mortgages aren’t the right choice for everyone. Adjustable Rate Mortgages (ARMs) are priced even lower, and though you are taking on some extra risk, they are the best choice for many. The question is, when does it make sense to go with an adjustable rate mortgage. ARMs are structured in different ways, but the most popular, and safest ARMs are the longer term adjustables which are fixed for a period of time before adjusting. Most ARMs amortize, or pay down, over 30 years, just like the most popular fixed rates. The difference is that the rate is only fixed in for a specific period of time, and then it floats, up or down based on what is happening in the market. The time that the rate is fixed in can be as short as one year, or as long as 10 years. The rates are usually lowest for the shortest periods because you are taking on more risk that the loan will be higher if mortgage rates increase. When you are looking at ARMs, you want to get the lowest total cost for the time you plan on being in the home (or the mortgage). Taking a 1 year or even a 3 year ARM rarely makes sense in a market like this. But a longer term may be a great deal. The 7-1 ARM (fixed for the first 7 years then adjusts once a year after that) is over 1/2 a point less than a comparable 30 year fixed rate mortgage. If you don’t plan to stay with your mortgage forever, this could save you thousands of dollars over the life of the loan.

Questions to ask to see if an Adjustable Rate Mortgage is the right choice for you:

How long do you think you will be in the home?  A lot of this has to do with where you are in life, and what you expect to happen in the future. Are you a single income now, but expect to have a spouse working down the road? Do you expect to out grow this home as your family grows? Do you expect to be transferred or are going to need to move out of the area at some point? Or maybe you are at the other end of the spectrum and have kids who are finishing up with school and are thinking about downsizing in the future. The key is that if you have a good understanding of your future needs, and you really don’t expect to be in the home past a certain point, an ARM may be the right choice.

Is your income steady, declining, or likely to go higher? Are you a single income now, but expect to have a spouse working down the road? Are you in a job where you know that your income will be higher as time goes by? If you feel confident that your income will rise, an adjustable could be a good way to go. On the other hand, if your income is likely to be topped out and you don’t expect raises of more than the cost of living in the future, you are better served by going with a fixed rate where you will know the payment is going to stay affordable, even if you are there longer than expected and interest rates jump.

Do you have extra money coming in that you can use to pay down the mortgage? I’ve worked with borrowers who get get bonus as a substantial amount of their compensation. If you are getting a smaller monthly payment, but a big check once or twice a year, it may be easier to keep the monthly payment small and then pay extra toward the mortgage when you get these big checks. ARMs fit in well here (Interest only mortgages are sometimes appropriate, too). Everyone’s circumstances are different. The best approach is to match your needs to the loan that is most appropriate for you.

What is your risk tolerance? Will you be able to sleep at night if rates do move higher? With mortgage rates at all time lows, we know that rates have to go up, the only question is when, and how much. If your circumstances change, and it looks like you will need to stay in the mortgage longer than you planned, is this going to add to your stress? There are safety features built in, but if you are still in the loan when the payment adjusts, it could be a big jump. You will have saved a lot of money up to that point, but unless you used the savings as part of an investment plan, you need to be ready for the higher payment. Consider your risk level and temperament before choosing an ARM. There are a lot of people who would benefit financially from and adjustable rate loan, who still are better off taking on a fixed rate loan.

The other thing to keep in mind when deciding which loan is right for you, is that the future doesn’t always turn out like we expect. There are a lot of homeowners now who are stuck in homes too small for their needs because they can’t afford to sell and buy a new home with the market conditions now. For most home buyers who took on ARMS years ago, their adjusted rates have fallen as the ARMs came due. That probably won’t happen in the future, but if you match up your real needs and an accurate estimate of what your situation will be over the years you plan to be in the home, an Adjustable Rate Mortgage can save you a lot.

Peter Thompson 630-479-6424       

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

Mortgage rates have dropped to all time lows. What used to be looked at as super low interest rates (in the mid or even low 5s), are now considered high. You may be able to lower your payment by a lot, often with no closing costs. For homeowners that are able to take advantage of the lower rates, this can mean big savings over time. With home prices lower and tougher qualifying requirements, refinancing is tougher than it used to be. But there are still a number of mortgage programs which make it easier to refinance now. One of the easiest and most beneficial loans available is the FHA Streamline Refinance.

FHA Streamline Refinance Loans

The FHA Streamline Refinance loan program is only available if you already have an FHA mortgage on on your home (Refinancing into a new FHA loan can make sense for a lot of other reasons, including adding improvements to your home and being able to use cash out to consolidate debts, but for these you need to do a fully documented mortgage). The advantage of this loan is that you can take on the new lower rates with out having to go through the full qualifying process, you usually don’t need an appraisal (which is a major headache with refinances today) and we can often structure this so you aren’t paying any closing costs (we pay the closing costs with a slightly higher rate). You will need to have some cash at closing to set up the new escrow accounts (to pay for your property taxes and home owners insurance) but you will get whatever money is in your escrow account with your current lender back after closing, so it will end up as a wash. If you have enough equity in the home, you may be able to add the escrows into the loan amount and come to closing with no cash at all, but we would need a new appraisal for this to work.

Here are some of the basic requirements of an FHA streamlined refinance:

• The loan must be FHA insured and you have to have made at least 6 payments on the Loan. If the loan is less than a year old, you can’t have any 30 day or more late payments. If the loan is older you need to be up to date on the payments with no more than one late payment in the last 12 months.
• The refinance has to be for your benefit. We need to lower the payment by at least 5%.
• We need to verify that you have enough cash to close the loan (this means enough money in a bank account to pay for the new escrow account and any other cash you may need).
• We need to show that you are employed and have income coming in. We don’t need to do a full underwriting of your income.
• You may be able to change the loan program (if you have an adjustable rate loan you may be able to go to a fixed rate, and visa versa) but we need to make sure that there is a real benefit attached. If you want to shorten your loan term we may need to do a full qualification.
• You can add a spouse or some one else to title without having to go through the full approval process. If you want to delete a borrower we will need more documentation.

Here is the documentation I will usually need for an FHA Streamline Refinance:

• I will need several items from your closing package, including a copy of our HUD1 closing statement, the Note and it makes it easier if I have a copy of your application.
• A current paystub showing you are employed.
• A bank statement showing you have enough cash to close.
• Proof of your Social Security number – this can either be a copy of your social security card or your W2 from last year.
• A copy of your mortgage statement.
• The name and phone number of your insurance agent.

If you have an FHA loan now, this could be a great way to save money. Give me a call and in a short conversation I can let you know how this will work for you, and put together a written estimate.

Peter Thompson                              630-479-6424

Chicago FHA Mortgage Rates          First time home buyer loans

Chicago Mortgage Company

Free Mortgage Pre-approval

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

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

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

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   Fist time home buyer loans

Chicago Mortgage Refinance

Mortgage rates are hitting record lows again. Yesterday after China announced that it was considering decoupling the Yuan from the dollar, it looked like the streak of low rates was about to turn. But this was only a head fake higher before rates resumed their march lower. The market decided that China’s move was more symbolic than anything, and that this might not be the major event it first appeared to be. Today existing home sales fell by 2.2%, worse than expected, and the stock market sold off again. The result is that mortgage rates are the lowest they have been in ages. This means that for those who qualify, refinancing is a hot bet. If you are buying a new home,this is an opportunity to lock in your loan at a rate that will make your parents jealous. The big question now is how long these low rates will last. If past history is a guide, it might not be very long. At the beginning of last year rates dropped, but the lowest rates weren’t around for long. If you can take advantage of a low, low mortgage rate through a refinance or new home purchase, it might not pay to wait.

Here are the current Chicago Illinois Home mortgage rates for an A+ (740 Fico or above), full doc single family home purchase or rate/term refinance on a 45 day rate lock, with 0 points, and no origination fee, best FHA rates assume a 660 Fico score, but loans are available with credit scores as low as 620. Mortgage rates in other states may be slightly different, give me a call and I will give you an accurate quote for your particular situation. The conventional and FHA rates are based on the highest conforming loan amounts, which give the best pricing. Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, or to get pre-approved for a mortgage, give me a call or contact me (Illinois mortgage company) and I will take the time to find the rate and program that is best for you:

Conventional loans up to $417,000

For Jumbo loans over $417,000

*A better option may be to break your Jumbo loan into 2 parts a conventional loan to the limit of $417,000 and a HELOC or fixed second mortgage for the rest. The blended rate is usually much better than a single loan would be, especially for the lower end of the Jumbo range.

** 5-5 ARM is fixed for first 5 years, with 2/6 caps it can’t go more than 2% above the start rate for the next 5 years. 2% cap for next 5 years – so a blended rate over 10 years is no more than 1% over the start rate.

FHA LOANS 3.5% down payment FHA Maximum varies by County

FHA APR reflects 3.5% down payment and the effect of mortgage insurance on the loan. Call for information on no-cost FHA streamlined Refinances

FHA 203K Rehab Loans – Call for a personal Quote for your situation

VA Veterans Administration 0 Down Loans

Call for information on no-cost VA Streamlined Refinances

These are just a few of the mortgage programs and mortgage rates available. Which option is best for you depends on your own specific goals and needs. If you have any questions or want to go over your situation in depth, let me know how I can help.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

FHA may be about to change again. In a vote of 406-4, the House of Representatives passed a bill that, if passed by the Senate, will increase the monthly mortgage insurance for FHA loans. Over the last 2 years FHA has gone from being a bit player in the housing market, to the main choice for most first time home buyers, and now makes up about 40% of the overall loan volume. Because FHA has increased market share so quickly, and as a result of all the stress in the housing market, loan defaults have become a real problem. Some critics of the program have said that the higher default rate is a result of FHA making bad loans. The truth is more complicated. FHA, though it is a government program, has been self sufficient since it started, and uses the mortgage insurance premium that it charges to cover any losses from bad loans. This mortgage insurance (MIP) is broken into 2 parts. One part of is Up-front mortgage insurance which is a lump sum that is financed into the loan. The other part is an annual premium that is paid monthly, just like conventional mortgage insurance. This mortgage insurance has always been enough to keep the program solvent, so unlike Fannie Mae, Freddie Mac and all the big banks that make mortgages, FHA has stood on their own 2 feet and haven’t required a bail out to stay in business. But with the housing market still rocky, FHA management is moving to make sure they keep their reserve levels high, and this means raising their MIP.

Last year FHA raised their Up-front MIP requirement from 1.5% of the loan amount to 2.25% (again, financed into the loan). The new bill focuses on the monthly premium. This bill would allow FHA to increase the annual premium from the current .55% of the loan amount (divided by 12 and paid monthly) to a maximum of 1.5%. This nearly triples the amount they could collect, and if they put this in all at once, would be a major hardship for most borrowers. But it is more likely that they will tinker with the formula, lowering the Up-front premium and raising the annual, but not all the way to the limit. One combination that has been discussed, is lowering the Up-front MIP to 1% of the loan amount, and raising the annual to .90% (again, divided by 12). This approach gives a little on one side, while taking away on the other. An increase from the current .55% to .9% would result in about $30/mo on a $100,000 loan, while reducing the Up-front premium by $1,250. This may not be the intended result, but what this really does is make FHA more attractive for those who don’t plan on being in the property long term, and may make FHA a better alternative for some who would otherwise be able to finance with a conventional mortgage. I will have more analysis on this once we know how this will really shake out.

Nothing will happen until this bill passes through the Senate. No Senator has sponsored the bill yet, but based on the lopsided passage in the house, I have no doubt it will be coming soon. The higher payments will make it more expensive for some buyers, but this is a small price to pay to keep the FHA program on track. In order for the housing market to recover, FHA needs to stay healthy.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

FHA is making changes to insure their long term survival and increase their reserve fund, and these changes mean it will be more expensive for home buyers. FHA has  been talking about these changes over the last several months, but now it is official. The biggest change is an increase in the Up-Front mortgage insurance FHA charges on every loan. FHA doesn’t make loans, they act as a mortgage insurance fund insuring lenders against loan losses through the mortgage insurance charged on each loan. FHA handles this in two ways, a small (compared to conventional mortgages) monthly charge, and a large chuck up front, which is usually financed into the loan. The up-front MIP (mortgage insurance premium) is currently 1.75%, but with this announcement it will soon increase to 2.25%.

The way this works, if a first time home buyer or other buyer buys a home at $100,000 with a minimum 3.5% down payment, they will have a mortgage of $96,500 plus the new Up -Front MIP (2.25%) of $2,171, so the actual mortgage will be based on the adjusted price of $98,671. If the interest rate on the mortgage is 5.25%, the mortgage payment would be about $545 per month, $21 more than the payment with the current premium . This change is due to go into effect this Spring.

The other major change is a reduction in the FHA allowed seller concession from 6% of the purchase price down to 3%. This brings FHA in line with conventional guidelines,. The seller concession is usually used to pay for the buyer’s closing costs, and allows buyers to buy a home with out having a lot of extra costs beyond their minimum down payment. This change won’t have much of an impact on most home buyers. Even in higher cost areas like Chicago (which has a high buyer paid transfer tax) 3% is enough to pay for most costs the buyer will take on. The people who this will affect the most, are those who are buying lower priced homes. If a first time home buyer is buying a $250,000 home with a 3% seller concession this is $7,500. If they are buying a $50,000 condo it is only $1,500, which when you figure in bank costs, title charges, attorneys fees transfer tax and the like, this won’t be nearly enough to cover the costs. So buyers of lower priced units will need to save more before they can buy. This change is not likely to happen until Summer.

Other changes include an increase in the minimum credit score required for FHA to 580, but almost all the lenders have already increased their FICO requirements to 620, so this should have little or no effect. FHA also announced that they will enhance monitoring to increase enforcement on FHA lenders to make sure they are adhering to all the rules and guidelines.

FHA still offers a 3.5% down payment and it still offers terms which are better for most first time home buyers, or anyone else who is buying with a lower down payment. These are all common sense guidelines, and though it will make financing a little more expensive, the health of the program for the long term makes this a good trade-off. But if you are a first time home buyer in the market to buy, this gives you one more reason (along with the $8,000 first time home buyer tax credit and record low mortgage rates) to buy now, instead of putting it off until later.

,Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company

Foreclosures rule the mortgage world. With home prices way down from where they were a few years ago, and  unemployment so much higher, foreclosures are still surging. The sad fact is that a record number of homeowners are in default and can’t pay their mortgages. A home foreclosure is a tragedy for the home owner and a problem for the community. The wave of foreclosures has also wreaked havoc in the mortgage industry. I don’t have much sympathy for the banks that made the loans because they knew what they were doing, or should have, and they made too many risky loans when the housing market was riding high. But the foreclosure wave has also had a big impact on the buyers who want to buy a home now, and it is effecting what they can afford and how they can qualify.

Everything moves in cycles, and if the pendulum swings too far in one direction, you can be sure it will swing too far back in the other direction. The fog the mirror underwriting of a few years ago has been replaced by underwriting where you need everything but a blood sample in order to qualify. Conventional financing just got another round of tightening with the release next week of DU 8.0, and it looks like FHA’s time is coming up soon. There has been a lot of press lately about how FHA has gone below its 2% reserve level and that the program is in trouble. I think we need a little perspective here. It wasn’t FHA loans which caused the economy to blow up, and all the big banks, as well as the big GSEs (Fannie and Freddie), have already either been taken over by the government or are only around because they took government TARP money. FHA still has billions in reserve, and is still supporting the housing industry.  

HUD Chief Sean Donovan talked about the future of FHA the other week, and came up with some possible ways to grow the FHA reserve fund.

Some of the ideas mentioned included:

• Increasing the down payment from 3.5% to 5%.
• Minimum credit score standards.
• Increasing the up-front mortgage insurance premium from 1.75% to 2.25%.
• Lowering the amount that sellers can contribute toward closing costs from 6% of the sales price down to 3%.

I doubt if raising the down payment a bit would have much of an impact, and even though FHA doesn’t have minimum credit scores, all the lenders that administer the program already do. The other ideas may make more sense (especially if the up-front mortgage insurance increase is based on risk). There is a lot of political pressure to do something, but they could raise the down payment to 20% and require perfect credit and foreclosures will still be a problem if the unemployment rate stays high (this is the problem with conventional loans). Without FHA financing available the housing market would be in a lot worse shape. There has to be a balance between keeping the reserve fund high and still keeping mortgage funds available for the average home buyer. If they tweak the program too hard, home sales and home values will go down, which will cause greater problems to our fragile recovery

I expect that FHA will tighten in some ways (hopefully not too much), but even if they do, FHA mortgages will still be the go-to program for a good portion of the home buying public.

Here are some reasons FHA financing will continue to be the best financing option for many home buyers:

• With FHA the down payment and all the funds needed to close can be a gift.
• FHA still has a common sense approach to credit, and past credit problems are not an obstacle if you can show you have put the problems behind you.
• Under the new rules, FHA offers more flexibility with condominium financing allowing buyers to purchase with minimum down financing units that can’t even be financed conventionally.
• FHA qualification ratios are more flexible than conventional, allowing more buyers to qualify.
• FHA allows non-occupant co-borrowers, so income can be blended in order to qualify.
• FHA offers better pricing for most borrowers with less than a 700 credit score.
• FHA offers better pricing for condos (with less than 25% down payment) and 2-4 unit buildings.

The mission of FHA is to make it possible for more people to afford homes. They may tighten the requirements some, but if they make it too hard, they are defeating their stated purpose. FHA will still be the best loan choice for many home buyers.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

We Lend in All 50 States

Mortgage qualification guidelines are getting tighter again as Fannie Mae (along with FHA and Freddie Mac, one of the 3 big buyers of loans in the mortgage  market) is about to roll out the newest version of their Automatic Underwriting System (AUS), DU 8.0. Most loans are now approved through an AUS which is a type of artificial intelligence program. The systems grade each loan for risk and produce a decision which says whether the loan meets their standards, or not. Getting an AUS approval is just the first step. We still have to make sure that all the information entered into the system is correct (garbage in – garbage out) and even if the loan meets Fannie Mae’s guidelines, we need to make sure it fits the extra lender requirements and do all the other things needed to approve a loan. But the odds of getting a conventional loan closed without an AUS approval are beyond slim. It’s not going to happen. So when a new AUS system comes out, this is a big deal. Home buyers who are qualified to buy under the present guidelines, may not be able to qualify under the new rules. And with the release of DU 8.0, a lot of buyers are going to be outside looking in.

A lot of the changes will be tweaking the formula, and some of the changes are taking away programs which all the lenders stopped doing ages ago. The new release does away with expanded approval loans (those with riskier profiles) and raises the minimum credit score from 580to 620. But in the real world, lenders haven’t accepted expanded approval loans in the last 2 years, and with all the price hits included, anyone with a score below 680 is likely to get better pricing with an FHA loan. There are other changes, like a reduction in mortgage insurance requirements, which will lower the cost of financing for some home owners.

The biggest change in the new release is a maximum debt ratio of 45% – or possibly 50% with strong compensating factors. The debt ratio is the total of the new mortgage payment and all your other debt payments divided by your income. The idea behind the debt ratio is to make sure you are able to afford the mortgage and not taking on too much debt. A borrower with a lot of money in the bank and high credit scores is a much safer risk than someone with lower scores and no reserves, so they should be allowed to manage a higher debt load. Back in the old days when I first started doing mortgages (and dinosaurs roamed the earth) the back end ratio was set at 36% for conventional loan, so the 45% (or 50%) isn’t awful. When they adopted the AUS system, much higher ratios were allowed because they were looking at the entire risk profile, not just one number. With strong borrowers it wasn’t unusual to get approvals when the total debt was well over 55% of the income we were showing (many borrowers have income coming in which we can’t use to qualify).  This change will  mean that a lot of well qualified buyers who are able to make their payments, won’t qualify for a Fannie Mae loan. Freddie Mac hasn’t announced that they are following through with similar changes, yet, so for now there are still conventional alternatives for borrowers affected by these changes.

With these changes, FHA is likely to increase their market share, again. FHA is in the same boat as its cousins Fannie and Freddie in that they are under pressure to increase their loan quality and up their reserves. FHA has already announced that they will be tightening their guidelines too, but because FHA financing was just a sliver of the market when the housing bubble was expanding, it doesn’t have the same level of problems that its conventional cousins do. Also, FHA is set up as a way to make financing affordable for more home buyers, so even as they tighten, they will still offer more opportunities to qualify. FHA has a stated back end ratio of 43%, but when run through the AUS much higher ratios are common. You are only hurting yourself if you buy more than you can afford, but there are so many situations where a one size fits all approach doesn’t apply. It’s good that is still an option. At least for now.

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Peter Thompson (630) 479-6424