The first step in buying a home in today’s market, is to talk with a good loan officer and find out how much of a mortgage you can qualify for and if there are any obstacles you need to overcome before you will be able to buy. This usually starts out as a short pre-qualification phone call, but before you start looking at homes you need a full pre-approval where you supply all your income and down payment documentation, and have the loan officer run your credit and go through your file with a fine tooth comb to make sure there isn’t anything there that will derail the process down the road. Mortgages are readily available and the mortgage rates are great, but the truth is that each mortgage loan is being scrutinized now like never before. When the housing bubble was heating up, underwriting was too easy. Underwriting is tighter now, and full loan approval means not only meeting the normal guidelines, but also the overlays or additional requirements that each lender now requires. This means that your loan officer needs to keep track of all the changes (and there are lots of changes) to the approval guidelines and know how to fit each borrower to the loan that is best suited for their unique situation. The reality is that this doesn’t always work out the way it is supposed to. A big part of my business now is working with borrowers who thought they were pre-approved to buy a home, but when they got their contract together, they found out they really weren’t approved after all. Now they are under the gun with a tight deadline to buy and having to start over.

In most cases, when you get a mortgage pre-approval, you are strictly dealing with the mortgage loan officer. Approving a mortgage is expensive, and without a property under contract it doesn’t make sense to take support staff away from transactions that are already in process to work on a deal that might never come through. So pre-approvals aren’t fully processed and don’t go through the underwriting process. The process in most mortgage companies is for the loan officer to ask a series of questions, request all the documentation, run your credit report and run all the information through an automated underwriting program to get a conditional or first step approval. When we get an approval with the automated underwriting system (this is either Desktop underwriter or Loan Prospector, Fannie Mae’s and Freddie Mac’s respective systems) the approval is subject to verifying all the information put into the system. In other words, the approval is only as good as the information entered into the system. If your loan officer didn’t ask all the right questions, or put in wrong information into the system, the approval is not going to be valid.

If there are any issues and you know what they are up front, you may have time to fix them and put yourself in a better situation. In today’s lending environment, you want to make sure you are working with someone who has the experience and knowledge to look for the hidden pitfalls, and be able to structure your transaction in a way that will put your situation in the best light. If you are just starting to look for a home and want to see how much you can afford, or if you have already been pre-approved for a mortgage but would like a second opinion, give me a call. I would appreciate the opportunity to help.

Free Home Buyers Guide

You can trust in us to get the job done.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

Did you miss out on refinancing last year when mortgage rates dropped to their lowest point in our life times? Last Fall, right before the Fed announced their last round of the Quantitative easing policy, mortgage rates dropped to as low as 4.00% (for the best qualified conventional loans). The consensus at the time was that the economy needed more juice to keep it growing, and that rates were likely to drop even lower still. If you had considered refinancing at the time and missed the boat back then, you know what happened next. The Fed started the Quantitative easing program which pumped more money into the economy. The financial markets switched on a dime and while the big fear before was that the economy was growing too slowly and unemployment was too high, the new fear was that with all this money washing through the system, inflation was about to be unleashed. Rates spiked higher and ran as high as the mid fives. The program that was supposed to drive mortgage rates lower and act as a boost to the housing market had the exact opposite effect. Most analysts were calling for rates to spike even higher, and some thought we would be in six percent range before the end of the year. But while there have been signs of inflation, especially with gas and food related items, the economy is still very fragile. The latest indicator for this was last week’s monthly jobs report, which came in much weaker than expected. Rates are dropping again and have now broken through a technical barrier, which implies that we may have room to go even further down. If you didn’t pull the trigger fast enough last time to get a lower rate, it looks like you will get a second chance.

Refinancing now isn’t as easy as it was in the past. Home values have slipped and not everyone has the equity they need to refinance, but there are programs available where you can still refinance even if you don’t have much equity. There are still programs available if your loan is held by Fannie Mae or Freddie Mac, and the FHA streamline refinance is always a good option. There are a lot of homeowners who can still qualify and would benefit by refinancing their mortgages, who don’t realize it’s possible, or don’t think it is worth the effort.

Why should you consider refinancing?

• You can lower your interest rate and payments.
• You can shorten your loan term and pay your mortgage off early.
• If you have enough equity you can take cash out for home improvements, college expenses, investments, or whatever your needs may be.
• You can restructure your debts with a refinance to get rid of your high interest credit card balances and save hundreds of dollars per month.
• If you bought with a low down payment, you can often refinance to get rid of mortgage insurance or your higher rate second mortgage.

• You can get rid of an adjustable mortgage and lock in to a fixed rate.

These are just a few reasons you may want to take on a new mortgage. It is important, though, to make sure you know why you are refinancing and that it is really in your best interest. If you would like to compare options, see if it makes sense to refinance your mortgage or get a rate quote for your situation, give me a call.

Free Home Buyers Guide

You can trust in us to get the job done.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Refinance           Chicago FHA Mortgages

A fact of life in the housing market today is that a substantial amount of the inventory for sale is made up of foreclosed homes and pre-foreclosed or short sale homes. One of the biggest issues for buyers of these properties is that the condition of the homes can range from move-in ready to ready to be knocked down, and a good portion of the homes available will need some work. Sometimes this work is required before anyone can even get the loan. Other times the home is in livable condition, but needs modernizing and upgrades before most buyers would consider it a place they would want to call home.

Usually the best and often only financing option for these homes is the FHA 203k renovation loan. This loan allows the buyer to buy a home and add the cost of repairs and improvements into the purchase price. Because this is an FHA loan, it only requires a 3.5% down payment, based on the total cost, and credit and qualification standards are not nearly as stringent as conventional requirements. Knowing how these loans work, and how you can use them, opens up properties that wouldn’t have looked like possibilities before as realistic homes for your buyers. This also gives another tool in the arsenal for listing agents with homes that are outdated or have problems that can be fixed with a little work.

Prospect Mortgage is holding an FHA 203k seminar for Realtors on April 7th, 2011 at the Carlisle Conference center in Lombard, IL from 1:00 to 5:00. This seminar will feature Prospect’s National 203k Manager, John Adams, a nationally renowned expert. I’ve heard John speak a number of times, and he not only knows the ins and outs of how to get more homes sold and closed in the real world, but he is tell it like it is speaker who talks about specific strategies that will help you in today’s market.

Some of what will be covered includes:

• How the FHA 203k works.
• When to use the streamline FHA 203k and when to use the consultant 203k.
• How to help your buyers stay on track so you can close quickly.
• How to increase your sales with the FHA 203k loan.
• What you can do to help position listings for quicker sale with the FHA 203k mortgage.
• Here are the details:

Prospect Mortgage FHA 203k Realtor Seminar

Time: Thursday, April 7th from 1:00 – 5:00 PM

Location: The Carlisle

435 East Butterfield Road

Lombard, IL 60148

As a bonus, a 3G IPad will be raffled off at the event. To register, give me a call (630-479-6424) or send me an email (peter.thompson@prospectmtg.com). If you can make it, this will be time well spent.

Free Home Buyers Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

“How low of a credit score can I have and still be able to get a mortgage?”

This is a question I hear almost every day. One of the frustrating things for many people trying to buy their first home, has been dealing with old credit problems. Some people consistently have problems with credit, and if you just don’t pay your bills on time (or at all) and if you don’t take credit seriously, buying a home and qualifying for a mortgage is probably not an option. But for many people their credit has been damaged due to isolated life events. Too many people have run into problems over the last few years, often as a result of losing a job, medical issues or other traumatic events. For these people, the real frustrating part is that once their lives are back on track and they are back to paying their bills on time, it is still hard to improve their credit scores. To add insult to injury, mortgage guidelines have continued tightening over the last few years. A few years ago credit scores pegged 620 as the lowest level of good credit, that is, credit scores good enough to qualify for the best rate on a conventional mortgage. Now it takes a Fico score of 740 to get the best terms, and those with scores under 700 should expect higher rates or bigger fees.

FHA is much more common sense in regards to credit. With FHA your whole credit profile is considered and the scores themselves aren’t nearly as much of a focus. FHA underwriters also base their decisions on letters of explanation telling what happened to your credit, why it happened and why it isn’t likely to happen again. FHA is much more common sense, and FHA doesn’t have a minimum credit score that they require. But over the last year almost all of the lenders who fund FHA loans have added overlays (additional requirements) that have raised the required FICO score to a minimum of 640. There might not be much difference in the credit profile between someone with a 640 score and someone with a 629 score. But statistically, credit scores under 640 are much more likely to default on their loans. The sad thing about concentrating on credit scores is that it doesn’t take the human element into effect, and there are people who have scores where the credit is improving, and others with the same scores where the credit is going down. Up until now they have all been looked at the same way if their score was below the 640 minimum. But this is now changing.

Prospect mortgage, the company I work for, has just come out with a new loan program that allows people to buy homes with Fico scores between 580 and 639. In my opinion, this is a huge step in the right direction. This isn’t a new version of sub-prime and it doesn’t mean anyone with a credit score over 580 is now able to get a loan. What it does mean is that those people who have been doing the right things and who can show they are able to afford a home payment  won’t be frozen out simply because their Fico scores came in too low. This program is going back to old school FHA underwriting. In order to qualify for this program, we need to see that even though your credit scores are lower than what is normally called for, you are handling your credit responsibly and whatever caused the problems is all past history. The real key to this loan is affordability. Having a payment that fits in your budget means you aren’t stretching too far, means less stress on your finances, so one of the biggest factors for approval will be showing that both your total mortgage payment and your mortgage payment plus all your other debt, are at comfortable levels. If your payment is going to jump with the new mortgage compared to what you have been paying for rent, we will need to see that you have been saving regularly and that the higher payment won’t be a burden.

This new program is an FHA fixed rate mortgage. Here are some of the features of this new loan:

• Borrowers credit scores between 580-639.

• Available for purchase loans only.

• 3.5% down payment.

• All the funds for closing can come from a gift.

• Available for single family homes, townhomes, condos and 2 unit buildings (rental income can’t be used to qualify).

• Ratios (this is to show affordability) are 31% of income cam be used for the housing payment and 43% of income can go toward the housing payment plus all other debt. These ratios can be increased if there are at leas 2 compensating factors.

• Can apply 2 years after a chapter 7 bankruptcy discharge – 12 months after chapter 13.

• 2 months reserves required (based on 2 times the full mortgage payment).

• Home buyer counseling is required.

The rates on this program are higher than for conventional FHA mortgages because of the higher risk. This program won’t help everyone, but it will help a lot of people buy a home now. If you are looking to buy a home but worried that your credit will hold you back (or a Realtor working with clients who have had problems in the past), give me a call.

Free Home Buyers Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

In this installment of the Chicago Video Home Buyers Guide, we talk about what is involved with starting a mortgage pre-approval. Getting approved for a mortgage is the first step in buying a home. Knowing

how much of a payment you can afford, and how much cash you will need to close allows you to set your sites on a home that is within your price range and your budget. Mortgage guidelines have tightened over the last few years, and knowing what is involved, and what you can do to put yourself in the best position, can make the difference between being able to buy a new home, and continuing to rent. As part of a free mortgage pre-approval, a good loan officer will not only tell you what you can afford and what the best way to buy will be, but can also offer advice that will help you meet your long term financial goals.

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

Other videos in this series -

Equity build up – How you build value by paying down your mortgage

How leverage and home appreciation will build value over time

The tax benefits of owning your own home

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

Free- Home Buyer’s Guide

Free Mortgage Pre-approval

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

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

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

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

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

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

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

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

Free- Home Buyer’s Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

As part of the new FHA condo approval process adopted earlier this year, all condominiums on the FHA approved list had to go through a recertification process to make sure they still met the FHA condo approval guidelines. The deadline for the recertification was this past week, December 7th. As it turns out, many associations didn’t even start the process until the deadline was almost on them. Part of this is the normal human tendency to procrastinate, and I’m sure another big factor was lack of communication and not knowing what to do or how to do it. But in today’s market, having an FHA condo approval is more important than ever. Mortgage underwriting is much tougher now than it has been in recent years, and if you are buying a condo it is even tougher. Not only do you have to qualify, but the building has to hit all the guidelines. Many mortgage insurance companies won’t insure a condo purchase without at least a 10% down payment, and conventional loans have a price hit when the equity is less than 25%. This has made FHA a bigger factor in the condo market than ever before. With FHA condo mortgages, you only need a 3.5% down payment, and the underwriting guidelines are considerably less stringent than with conventional financing. But in order to get FHA condo financing, the condominium project has to be on the FHA approved list. The re-certification process has now been extended, but the dates of the extension are staggered depending on when the condo project was first approved. The extension for the oldest approvals, those condos which were approved between 1972 and 1985, the extension is a short one, just through the end of the year. More recently approved projects have a little more time. 

If you are buying a condo in the Chicago area and it is not currently on the FHA condo approval list, this doesn’t mean the project can’t go FHA. The new FHA condo approval process allows all condominiums to be approved in one of two ways, directly through HUD (HUDRAP), or by a qualified direct endorsement FHA lender (DELRAP). Going through HD is likely to take some time. They have a lot on their plate, and re-certifying all the old units means a bigger backlog. But a lot of the new FHA condo approvals in the Chicago area are by passing HUD and being done directly through the lender as part of the mortgage approval process. In these cases, when a buyer submits the offer it is contingent on the property getting the FHA condo approval. The key to this is that the association has to submit all the paper work required, and this is done side by side while the borrower’s loan is going through the normal approval process. Once the project is approved for the borrower, it is added on to the FHA condo approved list, which means other borrowers can then buy in that project with FHA. In the Chicago area the FHA maximum mortgage is $410,000, so FHA isn’t only for low end properties. Having an FHA condo approval is now a big factor in making condo units more salable.

Here is the extension list based upon the original approval date:

1972 – 1980                                          December 7, 2010                 December 31, 2010

1981 – 1985                                          December 7, 2010                 December 31, 2010

1986 – 1990                                          December 7, 2010                 May 31, 2011

1991 – 1995                                          December 7, 2010                 July 31, 2011

1996 – 2000                                          December 7, 2010                 August 31, 2011

2001 – 2005                                          December 7, 2010                 September 30, 2011

2006 – 2008 (Sept)                               December 7, 2010                  March 31, 2011

If you have any questions about buying an FHA approved condo in the Chicago area, or what it takes to get your Chicago area condo project approved by FHA, give me a call.

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

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

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

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

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

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

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

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

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

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

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

Free Home Buyers Guide

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

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

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

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

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

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

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

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

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

Let’s take this a step further.

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

Let’s take this one step further still.

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

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

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

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

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

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

You can trust us to get the job done.

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Company            Chicago FHA Mortgages

One question I hear all the time, is – When will rates drop to 4.00% (or 3.75% or whatever mortgage rate is conceivable but just out of reach)? Mortgage rates are at all time lows, but it is human nature to always want a little better than what is available at the time. No one wants to take on a loan now and then have mortgage rates drop even lower. I usually hear this question after the market has gone in the wrong direction for a few days, but I was hearing variations of this last year (when will rates drop to 4.5%). Sometimes the question comes up after someone is referred to me by a friend or co-worker who just got a great rate, or by someone who heard someone talk about the unbelievably low rate they just locked into. In cases like this we don’t always get the whole story. If their friend locked into a 15 year fixed or an adjustable rate loan, the rate will be lower than the available 30 year fixed rates. Sometimes the friend doesn’t mention that they paid points (higher closing costs) in order to take on a lower rate. The truth is that there is not one mortgage rate available, but many. Your mortgage rate depends on what type of mortgage you are getting, your personal financial situation, the type of property, how much you are willing to pay to close and a number of other factors, as well as what is happening in the mortgage rates market at the time. We can break these down to three categories which determine what rate you can get on any particular day. Some people can get the best rates now, while others may not even be close.

The three factors that determine what rate you are able to get are:

1. Your personal situation and the characteristics of your loan.
2. What is happening in the mortgage backed securities markets and the back offices of the big lenders.
3. How much you are willing to pay to get the loan.

Lets look at each of these in detail.

Your personal situation and your loan characteristics

When people are shopping for a mortgage, most assume that it is a one size fits all situation. But each loan is priced on its own. There are loan level price adjustments (price hits) for a variety of situations, and other things that influence your loan pricing. Some of the factors that could influence your pricing include:

• Fico scores –Fico scores above 740 get the best conventional pricing. When scores are below 700 the price hits get big (with conventional loans), which means higher interest rates or more money at closing. So the better your credit score, the better your chances of getting the lowest rate.
• Loan to value – Loan to value is a way of looking at how much equity you have in the property. The more equity you have, the less risk, so this can affect your pricing on the loan. This actually works two ways. If you don’t have much equity there can be price hits, but if you have lots of equity in your home the pricing could get better.
• Loan Amount – There are price hits for smaller (under $100,000) mortgages, but the bigger issue here is that bigger loans bring in more revenue for the company. It costs the same to process a $40,000 loan as it does a $400,000 loan. But at the same rate, the larger loan is much more profitable. This means that you will get better pricing for the larger loan amount. Also, if your loan is above the lending limits ($417,000 for a single family home in the Chicago area) this will be a Jumbo mortgage and the rates will be higher.
• Property type – There are price hits for financing condos (unless you have 25% equity) and multi unit buildings.
• Secondary financing – If you have a second mortgage or a home equity loan this could be another price hit, depending on how much equity you have in your home.
• Type of mortgage – If you take on an adjustable rate mortgage, or pay the loan off in a shorter time frame (15 years instead of 30 years) the rate will be lower. FHA loans are priced differently than conventional loans. Adjustable rate loans are always lower than fixed rates because you are taking on more risk. Make sure you are comparing apples to apples when you compare rates. If you have a friend who just refinanced into a loan in the 3s, it probably isn’t a 30 year fixed.
• Property use – If you don’t live in the property (and it isn’t a second or vacation home), it will be considered non-owner occupied, and there will be big price hits meaning higher rates. 

Bottom line, each loan is priced individually. But even when you are comparing your own situation, mortgage rates can change from day to day.   

What is happening in the mortgage backed securities markets and the back offices of the big lenders

This is going to get a little complicated, but here it goes -Mortgage rates go up and down based on what is happening in the economy, and this is reflected every day in the mortgage backed securities (MBS) markets. Lenders use these mortgage bonds to hedge their rates, buying up contracts and locking in their profits. They buy enough bonds  to cover their expected production, and by buying bonds that match up to the rates they are charging, they know what rates they will deliver 30 or 60 days later when the loan actually closes. Locking in your rate means that you are guaranteeing the rate you will close at. This gives you security, and you know there won’t be any last minute surprises where the rate jumps higher at closing. But rates change every day. Good news in the economy (more jobs created, increased production) is looked at as bad news for mortgage rates, and bad news (loss of jobs, any sign that the economy is dipping) is looked at as wildly good news for mortgage rates. The reason for this is that the MBS market is a type of crystal ball. Investors in mortgage bonds include insurance companies and hedge funds, investment companies and other countries (especially China and Japan), buy mortgages bonds because they are considered low risk (even now, because the US government is behind them). The other group of buyers to add in to this mix are the traders who add liquidity to the market by making bets on the direction of interest rates by buying and selling these bonds.

The day to day change in mortgage rates is largely determined by economic news, and again, bad news in the economy usually means good news for mortgage rates. But there are a couple of other factors that shape mortgage rates each day. One major factor is the traders that buy and sell MBS. They react to each day’s news by buying and selling contracts, trying to get in front of whatever the trend appears to be. The market can be volatile and swings in the market on a day to day basis can be significant. But the truth is that rates normally trade in ranges (until something happens to push rates into a new range). So even with market swings, someone closely following the market can do a pretty good job of predicting when the rates are about to hit the best part of the range and it is time to lock in, or are near their worst levels when it is a better bet to float. But there is one other factor that makes this a little more complicated. The MBS market is the basis for mortgage rates, but the actual rates charged are determined by the lenders (usually the wholesale lenders who buy the majority of the loans in the mortgage aftermarket) making the loans. Lenders again hedge their pipelines to be able to guarantee their rate locks, and they are sophisticated enough that they play the ranges along with the traders in the market. But even if they have locked in their own pipelines, they don’t always offer the best pricing in their daily rates. Lenders offer rates based on whether they need more loans, or not. It takes time, effort and manpower to process and close a loan. When a lender has excess capacity, they are likely to offer better rates. When their pipelines are filled and they have more loans than they can handle in a reasonable amount of time, they turn off the spigot by raising rates. Sometimes you will have one wholesale lender who is more aggressive with their pricing than others, because they need more loan volume. Once their pipelines are filled, they come back in line with the other lenders in the market.

Right now the big question is what the Fed will do at their next meeting (November 3rd) and whether they will start a new policy of Quantitative easing, or pumping more money into the economy by buying treasuries and MBS. The goal of this policy will be to lower rates, and the smart money says that this policy is almost a sure bet. But the question then comes down to whether this will mean mortgage rates will actually fall lower, or if the pricing is already built in because everyone expects the Fed to pull the trigger soon. Mortgage rates dropped when the idea was first floated, so I am in the camp that a good portion of the improvement is already baked into the rates now. Rates could drop lower, but barring new evidence the economy is dropping lower, I don’t think we will drop a whole lot lower.

The bottom line here is that mortgage rates change on a daily basis, and sometimes the reasons are clear, other times they aren’t. Many borrowers are best served by just locking in the rate when they apply, and being able to relax knowing that they got a rate that works for their needs and they don’t have to worry that rates will spike higher. But if you want to try and time the rates, you either need to follow the market closely and be able to move fast when the time is right, or you need to work with someone who will do this for you. Find a good, knowledgeable loan officer who watches the market and they can help advise you on what the best strategy is for locking in your mortgage rate.

How much are you willing to pay to get the loan?

The last major factor in what rate you get is how much you are willing to pay to get the best mortgage rate. If you look at the rates in the newspaper or some of the rates quoted in the internet, rates are likely to look very low. But the flip side of the lowest rate quotes is that the cost of getting these rates (points and fees) is going to be higher. Because almost all lenders are getting their money from the same sources, mortgage rates should be very close from lender to lender. When comparing different rate options you need to make sure you are comparing apples to apples. Sometimes it makes sense to pay extra to get a lower rate, other times it is smarter to pay less (or no closing costs at all) and take on a slightly higher rate.

If you are thinking of refinancing your mortgage, you should always do a break even or pay back calculation. For this you need to know 3 things:

1. How much will you save by refinancing?
2. How much will it cost to refinance?
3. How long do you think you will stay in the home, and with this mortgage?

The first step is to determine how much you will save. For an example, if you now have a mortgage with a $200,000 balance and a 5.00% interest rate., your mortgage payment is about $1,073 per month. Now, if current rates are at 4.00% (this is an example.  Call me if you want a personal quote) the new mortgage payment would be $955per month. The lower rate means a savings of almost $118 each month. This is a great savings, especially when you look at it over the life of the loan, But does it make sense to refinance? Maybe. We still need to know more, though.

The next step is to find out how much it will cost to refinance. This is where it can get confusing. If you have spent any time on the Internet, you’ve seen lots of ads for mortgage companies claiming they offer the lowest rates. But low rates don’t mean a thing if you don’t look at the closing costs too. I’ve seen closing costs differ by as much as $6,000, so this is something that can make a huge difference. Closing costs include title fees, the cost of the appraisal and bank charges as well as points – which are upfront financing charges.

The difference in closing costs can make a big difference in whether the loan makes sense, or not. If you are paying $1,800 in total closing costs, it will take you a little over a year to payback the closing costs with the $92 savings from your new rate.  After that, every payment you make will be a true savings. But if that same loan cost $6,000 to close, then it would take close to 5 years before you would get any benefit at all from refinancing. So the lowest rate isn’t always the best deal.

The last question, is how long you do you expect to be in your home and in the mortgage. If you plan to stay in the home for at least 10 years, then paying more to get a better rate might be the best strategy, especially if you think (like I do) that rates are about as low as they will ever go. But most people don’t stay in their home forever. If you aren’t sure how long you will stay in your home, you might be better served by getting a loan with lower closing costs. Even though the rate and payment may be a little higher, your savings will come much quicker.

We can take this idea one step further. When rates are down, the biggest obstacle to homeowners lowering their payments and taking advantage of the low rates is the cost of refinancing. The more that the loan costs, the longer you will need to be in the new loan before refinancing makes sense. So if a loan costs a lot up-front, it takes a big improvement in the rates before it is worth doing. On the other hand, if there are no costs at all, a small reduction in the rates can save you a lot of money over time.

With a no-cost refinance we use the yield spread premium (the money that the wholesale or end lenders pay us to bring them the loan) to pay for the closing costs. When I price loans I have several different options. Every day the lenders we deal with send us new price sheets. These sheets have matrices which allow us (the mortgage banker or broker) to price the loan in different ways. It is common in the Chicago area to price a loan to show no points or origination fees, but with the customer paying the normal costs at closing. If someone wants a lower rate, I can price it so that they pay more money up-front (points) and get a lower interest rate. We can also do it the other way, offering you a slightly higher interest rate (where the lender pays us a higher premium) and we can use part of this premium to cover all your closing costs.

Here is how it works. If you have a mortgage with a balance of $250,000 and an interest rate of 5.00%, your loan would have a monthly payment of $1,342 for principal and interest. If rates drop. and you are able to refinance at 4.00%, your new payment will be $1,193, for a savings of $148 per month.

In order to do the loan with no closing costs, we raise the rate a little to cover the costs. How much the rate increases depends on the size of the loan, but in most cases the loan will be just an 1/8 or 1/4 point higher. So with our example, if you could refinance at 4.00% with closing costs, let’s say the rate would be 4.125% with no closing costs. So the payment now goes up to  $1,211 per month, or $18 per month higher. The monthly savings are lower, but with no closing costs , you have no investment in the mortgage at all. This works especially well for people who don’t plan on being in their home or their mortgage forever.

No-cost refinances work best when the loan amount is higher. In many cases we can do a no-cost refinance for the same rate as other companies are doing full cost loans. Smaller loans, those under $150,000 are harder to do without any cost. The smaller the loan the higher the interest rate would need to be in order to cover all the closing costs. This won’t be the best route for everyone, but, depending on your situation, it could be a great option.

So, when will rates drop to 4.00%, or 3.75% or …?

This post has gone the long way around, but the best rate available to you depends on your own unique situation, what is happening in the overall economy and how that is reflected in the mortgage backed securities markets and how much you are willing and able to pay in order to get a low mortgage rate. If you want to see where you stand, and what we can do to give you the rate and program that best fits your needs. If I can help in any way, give me a call.

Peter Thompson                              630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Chicago Mortgage Refinance