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

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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

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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.

Illinois Mortgage Rates                   First time home buyer loans  

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Peter Thompson (630) 479-6424

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How Much Does It cost to Refinance, and How Long is the Pay Back?

With mortgage rates down near their all time lows again, refinancing is getting hotter (purchases, too). Low mortgage rates give you a chance to lock in the low rate for the long term, lower your payment and take some pressure off your budget. The rates now are the lowest I’ve ever seen and I expect when we look back at this a few years from now, they will seem like the bargain of a lifetime. But while rates are low, if you have compared rates you see in the newspaper or on-line, you might think rates are better than they really are. You might also see that some lenders are showing much lower rates than others, when the reality is that we all get our funds from the same sources, and the true rate shouldn’t vary from one lender to the next by more than an 1/8 or 1/4 of a percent.  So what gives? Why are some lenders able to show such low, low rates? Are they really able to do something that other mortgage lenders aren’t able to do?

The truth is, if it looks too good to be true, it probably is. Most consumers focus on the rate when comparing offers for their mortgage refinance, and mortgage marketers take advantage of this fact by advertising the lowest rates they can. But whether the lowest rate is the best deal for you is more complicated. The other thing you need to be aware of is how much the loan will cost you, and the lowest rates have the highest fees. We (mortgage bankers, brokers and banks) have a whole variety of rate and fee combinations we can offer every day. Each wholesale mortgage lender provides a matrix of price options every day. To get the lowest rate you will have to pay points (1% of the loan amount for each point, which is interest paid up front). I’ve seen Good Faith Estimates which show over 4 points (4% of the loan amount) charged to get a  below market rate. On the other hand, you can go in the other direction. The lender pays us (mortgage bankers, brokers and banks) extra money (called yield spread premium) for bringing in loans at higher rates. We can use this extra premium to pay off all your closing costs and give you a no cost refinance. Most borrowers elect to go with loans that have no points, or one point. The lenders don’t care how you do it, because they will get their money either now or in the future, and it works out the same to them based on their pricing models. For you, the consumer, it can make a big difference. So the big question is, what is the best way to refinance, paying extra money up front to get the lowest rate? Or does it make more sense to pay less money in fees upfront, but get a slightly higher rate?

 For a quick check to see if refinancing makes sense for you, and what the best way to refinance is, you need to consider 3 things:

How much will you save by refinancing?
How much will it cost to refinance?
How long do you expect to stay in the mortgage?

To find out the best option for you, you need to figure out your payback or break-even point. Let me work through the math to show you how this works (the rates and numbers here are all for illustration, not based on market rates now).

The first step is to determine, how much you will save?

For an example, let’s assume that you now have a mortgage with a $300,000 balance and a 5.50%% interest rate. This would give you a payment of $1,703 per month on a 30 year fixed rate loan. With improved rates, lest’s say you can now get the same  mortgage for 4.75% with a payment of $1,565 per month. This is a savings of $138 per month. That is a great rate and substantial savings. Does it make sense to refinance? Maybe, but we still need to know more.

The second step is, how much it will cost to refinance?

If you have spent any looking, you’ve found 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. Closing costs include title fees and the amount the bank charges to process the loan, which includes fees for credit reports, appraisals, processing and underwriting charges as well as Points (up-front interest). The cost can make a big difference for you. In the Chicago area it costs about $1,600 to close a refinance if you don’t pay any points or origination fees (another word for a point).  To see how the closing cost can make the difference, divide your monthly savings into the cost of refinancing ($1,600 divided by $138).  So in our example, it will take you less than a years worth of mortgage savings to pay off the up-front costs. Every month after that will be a true savings. If you are paying 2 points on the same loan ($6,000) plus the normal closing costs, ($7,600) the same loan will take almost 5 years before you would have any benefits from refinancing. The rate should be lower if the costs are higher, but you need to run the numbers on each to see which is the better deal. But there is still one more step.So the lowest rate isn’t always the best deal.

The third step is to estimate, how long do you expect to be in the mortgage?

With interest rates as low as they are, it may make sense to pay extra to lock in the long term savings. But if there is any chance that you may move, the savings may be wasted. In the above example, even if the rate is much better, if it takes 5 years to pay off the closing costs and you sell your home in 6 years, you wasted a lot of money on a refinance. On the other hand, if you stay in your home a full 30 years, you have made a lot of extra savings by paying more up-front to get the lowest rate. The thing to remember is that one size doesn’t fit all, and you need to go with the program that best fits your needs. Most mortgages last 7 years or less (before the homes are either sold or refinanced) so paying higher costs is not always the best deal. 

The idea that the lowest rate is the best deal can be a big problem. When you are comparing interest rate options, make sure that you compare apples to apples and not comparing a quote with points to one without. Pick the option that works for your needs, and don’t over pay to get a low rate if it costs you more in the long run. And make sure you get it in writing. Every lender should be able to give you a written Good Faith Estimate showing how much it will cost to close your loan, and how long your rate will be locked in for (make sure they are able to process your loan during their lock period). This is shaping up to be a great time to refinance, but you need to understand your options. If you would like a quote for a refinance that works best for your situation, give me a call.

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Welcome to Illinois Mortgage Rates and News week in review for the week ending November 20th, 2009, my take on the week’s financial news and how it affected Chicago Illinois mortgage rates.

Mortgage rates are still holding near the lowest rates of the year. These low rates are compounding the experts. The stock market shows signs of faltering, but it is still up near the highs for the year. Oil and gold have had major run ups, and the dollar keeps getting smacked around on the currency market. The government holds new auctions for debt nearly every week and the money supply continues to grow. The economy is still soft, but we are long past the panic and slowly moving forward. At the same time, the Fed is nearing the end of its commitment to buy mortgage backed securities to keep rates low (the Fed has purchased over $1 trillion out of $1.25 trillion promised). All these are usually signs that inflation is heating up, and that mortgage rates should be rising. But rates stayed flat this week, near the lows of the year. What gives?

I think Fed Chairman Ben Bernanke summed it all up in a speech he gave last Monday on the outlook for the economy. In the speech he said that the improvement in the economy is real, but there are some serious issues that need to be addressed going forward, and the recovery won’t be a strong one. As problems, he singled out the lack of credit and how banks are still not lending like they should, and how high unemployment will continue to hold the recovery back. Inflation is likely to be subdued for some time, he said, because of excess slack (more supply than demand) in the world economy. Inflation isn’t likely to be a threat until these factors stabilize. The way I see this, when the credit bubble popped, the economy imploded and left us in at the bottom of a big hole. We need to fill in the hole before worrying about how high of a hill we are building. If the Fed continues to keep short term rates low (which they said they will) mortgage rates should stay in a low range, too. We all know that rates will rise sometime, and when this happens it will likely be quick and brutal. But for now rates are great, and I expect we will stay in a good range (but probably not as good as where we are now) for a good part of the new year.

With Thanksgiving on Thursday, this is a short week for the markets. Most of the activity will be on Monday and Tuesday before traders leave early on Wednesday for the extra long week. Existing home sales, the GDP, and consumer confidence measures will all be released this week, as well as several new auctions of government debt. With the shortened week expect more volatility in mortgage rates. Let me know if I can help you with refinancing your current mortgage, or helping you with your loan when you buy a new home. The New Home Buyer Tax Credit extension is expected to keep the real estate market hopping throughout this winter. If you are looking for mortgage pre-approval anywhere in the country, give me a call and we can get the process started.

Here are the current 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. 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’ll take the time to find the rate and program that is best for you:

Conventional loans up to $417,000

30 year fixed rate              4.875%         5.078% APR

15 Year fixed Rate             4.25%         4.367% APR

5-1 A.R.M.                         3.75%        3.867% APR

For Jumbo loans over $417,000

***************** SPECIAL JUMBO PRICING ****************

30 Year Fixed Rate*          5.875%        6.093%*

This 30 year fixed Jumbo is special pricing based on a purchase up to 75% LTV or a refinance to 70%, 680 or better Fico scores. Other restrictions may apply.

**************************************************************

7-1 A.R.M.                        4.875%         5.095% APR

(Another option is to break your Jumbo loan into 2 parts – conventional 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.)

FHA LOANS – 3.5% down payment – FHA Maximum varies by County

With 1 point origination fee – 45 day lock

30 year fixed rate              4. 875%       5.369% APR

With no origination fee – 45 day lock

30 year fixed rate              5.125%      5.326% APR

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

Call for quotes on FHA 203K Rehab Loans

VA Veterans Administration 0 Down Loans

With 1 point origination fee – 45 day lock

30 Year Fixed Rate            5.25%       5.437%

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.

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

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Welcome to Illinois Mortgage Rates and News week in review for the week ending November 6th, 2009, my take on the week’s financial news and how it affected Chicago Illinois mortgage rates.

This was a big week for mortgage and real estate related news. This week we had a Fed Open Market Committee meeting, the President signed an extended and expanded Home Buyers Credit, and the unemployment numbers, the biggest market mover, were released. This meant a lot of fear and anticipation, and a greater share of market volatility for the week, but the end result was that mortgage rates trended lower.

There is always anxiety whenever the Fed meets. Once they release their statement at the end of the meeting, the market gurus all go over the wording of the statement looking for secret meanings or clues that point to any change in direction. The statement this time was nearly identical to those over the past year, and the key phrase was that the Fed expected to keep interest rates low for an extended period of time. The worry for the markets, both mortgage bond and stock, is that the massive government borrowing will lead to inflation and higher interest rates. The Fed view is that job loss and the implosion of values in real estate and other assets has made inflation a minimal threat. After the Fed announcement rates improved.

The monthly jobs report was dismal again. There were 190,000 jobs lost in October, and the unemployment rate ticked up to 10.2%, the highest rate since the early 80s. There were hints of good news in the report – the amount of jobs lost is less each month, and the jobs lost over the previous 2 months was revised lower. But even with those few bright spots, the news continues to be grim. The 10.2% rate is bad enough, but when the underemployed and those who have given up looking for a job are included the real number is over 17%. Mortgage bonds surged at the release of this report, and closed the week improved. Mortgage rates are in their best range, even though there is a lot of new government debt coming on the market through new auctions next week.

Over the last few weeks, Congress has been going over the provisions of the New Home Buyer Tax Credit extension. They made it official this week and President Obama signed the new bill into law on Friday. The new bill extends the date that borrowers will qualify for the credit through contracts dated up to April 30^th 2010, and allows up until the end of June to get financing and close. The new bill also expands the credit so that move up buyers who have owned and lived in their home for at least 3 of the last 5 years are now eligible. The credit for first time buyers remains at $8,000 (or 10% of the purchase price up to the $8,000 max) and $6,500 for move up home buyers (or 10% of the sales price maxed at $6,500). They also increased the income limits so that individual home buyers can now make up to $125,000 per year, and married couples can make up to $250,000.

This is good news for home buyers, and though I don’t see this making a big difference this year (home buying always goes down in December), it should make for a strong, and fast start for the market next year. The move up buyer credit will help some, but this is more a case of an added bonus than something that will really get homeowners to sell their homes and buy a new one. Too many homeowners have lost equity in their homes and aren’t able to take advantage of the offer, even though they may have outgrown their current home. Also, the first time home buyers in the market are usually looking for bargains, and they are concentrating on the foreclosures and short sales that are priced the lowest. If these homeowners can’t sell their homes, they won’t be able to move up to a new one. But for those who have equity and can, this is one more reason to take advantage of the low mortgage rates and low home prices available now. If you are looking to buy a new home, the first step is a Chicago mortgage pre-approval, give me a call and we can get the process started.

Here are the current 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. 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’ll take the time to find the rate and program that is best for you:

Conventional loans up to $417,000

30 year fixed rate              5.00%         5.168% APR

15 Year fixed Rate             4.375%        4.568% APR

5-1 A.R.M.                         3.75%        3.867% APR

For Jumbo loans over $417,000

***************** SPECIAL JUMBO PRICING ****************

30 Year Fixed Rate*          5.875%        6.093%*

This 30 year fixed Jumbo is special pricing based on a purchase up to 75% LTV or a refinance to 70%, 680 or better Fico scores. Other restrictions may apply.

**************************************************************

7-1 A.R.M.                        4.875%         5.095% APR

(Another option is to break your Jumbo loan into 2 parts – conventional 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.)

FHA LOANS – 3.5% down payment – FHA Maximum varies by County

With 1 point origination fee – 45 day lock

30 year fixed rate              4.875%       5.369% APR

With no origination fee – 45 day lock

30 year fixed rate              5.00%      5.347% APR

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

Call for quotes on FHA 203K Rehab Loans

VA Veterans Administration 0 Down Loans

With 1 point origination fee – 45 day lock

30 Year Fixed Rate            5.25%       5.437%

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.

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

We Lend in All 50 States

Illinois Home Loans Provider/ Broker. Most respected mortgage bankers in the area.

Find the Maximum FHA Loan Amount in Your Area Here illinois FHA loans

Contact Your illinois mortgage company Today

We Offer illinois home mortgage Loans with best mortgage rates

Get Best Advice from illinois mortgage broker

UPDATE – It’s official. President Obama signed the bill on Friday November 6th and the bill is now law.

As expected, the Senate has now passed the bill extending the home buyers tax credit and expanding it so that move up buyers will also now qualify. The tax credit was an add-on to a bill that extends aid to the long term unemployed, and it passed by a 98 to 0 margin (you don’t see that very often these days). The current first time home buyers tax credit was due to expire at the end of this month. The new bill will extend the date to properties that are under contract by the end of April, and they will have until the end of June to close. It also expands the credit (at $6,500 instead of $8,000) to move up buyers who have lived in their homes for at least five consecutive years out of the last eight. The bill won’t become a law until it is signed by President Obama, but this is sure to happen soon.

This extension won’t give an immediate boost to the market. Most of the first time home buyers who were ready to buy have already taken advantage of the credit or are in process and set to close by the end of November. The season is also a factor, as December is usually the slowest month of the year for real estate sales. Most home buyers take a break during the holidays, and the cold weather (at least here in the Chicago area) keeps more home buyers indoors. I don’t think this will bring in a flood of move up buyers, either. In order for a home owner to buy a second or move up home, they will need to sell their current home first. A big part of the first time home buyers market is focused on the short sales and foreclosures, which takes inventory off the market, but doesn’t lead to a new sale higher up the chain. Still, this will help the Spring market get off to a faster start, and it could cause some fence sitting home owners to make the plunge and start looking for a new bigger home, which meets their current needs.

Here are the details of the New Home Buyers Tax Credit:

1. The credit is for 10% of the purchase price up to a maximum of $8,000 for first time home buyers and up to $6,500 for qualified move up buyers. This means that if you are a first time home buyer and your purchase is $80,000 or more, the credit will be $8,000.
2. The credit is good for properties that are under contract by April 30^th and you have until the end of June to get the financing together and close.
3. It is now available for first time home buyers (a first time home buyer is anyone who hasn’t owned a home in the last 3 years) and move up buyers who have lived in their home for 5 consecutive years out of the last 8.
4. The home has to be for your primary residence. Second homes and investment properties don’t qualify.
5. This is a true tax credit. As long as you stay in the home at least 3 years, the credit is yours to keep. If you sell before 3 years is up, you may need to pay the credit back.
6. If your tax liability is less than the $8,000 credit ($6,500 for move up buyers), you will get the difference as a check back to you. If you have already filed your taxes, you can file an amended tax return in order to take the tax credit in the current year and get the money back quicker.
7. Income caps apply. They have increased the income caps so more home buyers will now qualify. A single buyer qualifies as long as they earn up to $125,000 per year, and couples are maxed out at $225,000 per year. Higher earning borrowers may get a partial credit, but the amount decreases as their income rises.

To take advantage of the credit you will need to file an IRS 5405 form along with your HUD1 closing statement showing that you have closed on the home. If you have any questions or need to be pre-approved for a mortgage, let me know.

Free Home Buyers Guide

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Bloomberg News service is reporting that the Senate is close to passing a modified extension of the first time home buyers tax credit, which will extend the dead line from November 30^th on to April 30^th for getting a home under contract, and another 60 days to close the loan, making the credit available for closings up to the end of June. The proposed bill will lower the amount of the credit from $8,000 to $7,290 (or 10% of the sales price, whichever is less) and make the credit available to move up buyers who have owned their home for at least 5 years. Under the proposed agreement, the income caps for first time home buyers would remain at $75,000 for individuals and $150,000 for married couples, but move up buyers would still qualify with incomes of $125,000 for individuals and $250,000 for married couples. This bill will be added to an unemployment benefits extension bill, and Bloomberg is reporting that there are enough votes committed to pass the bill.

All the major home industry trade groups (National Association of Realtors, home builders, mortgage groups) have lobbied for an extension of the tax credit, and the move up feature was on all their wish lists. But the news lately was focused more on how much this credit would cost, and on allegations of fraud, so if this happens as projected it will be a big surprise, and a boost to the real estate market. Some economists have said that the tax credit is inefficient and is keeping prices higher than they would be otherwise. But letting home prices fall further isn’t good politics. The market has already softened in the past few weeks as buyers who thought they were too late for the tax credit, headed toward the sidelines. This extension will bring back some of these buyers and should insure that the real estate market stays busy through the first part of next year.

Bloomberg is reporting that this bill could be passed as early as this Friday. I will have more news and details as they come available.

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The new FHA condo approval process is being pushed back another month, until December 7th. The new process will make FHA financing available for a lot more units, but get ready for a long wait for closings until the kinks are worked out.

New FHA Condo Process

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Mortgage rates have dropped again, and we are now back in the all time low range we were at earlier this year. If you didn’t refinance your mortgage earlier this year, it might be time to look at it again and see if lowering your mortgage rate and payment would help you now. A few years back refinancing your mortgage was an automatic any time that mortgage rates dropped. It is more complicated now because mortgage guidelines have gotten tighter, making it harder for some to qualify, and with home prices down it isn’t a slam dunk that your home will appraise out to the value needed. But there are programs which make it easier to refinance even if you don’t have a lot of equity (or none) in your home.

The FHA Sreamline Refinance – This is available only if you already have an FHA mortgage. This (up until it changes in November 2009) is the easiest and most inexpensive mortgage around. If you can lower your rate an payment you can refinance without a new appraisal or credit qualifying, and roll most of your costs into the new loan.

FHA refinance – With this program you will still need to show that you qualify and we will need to order a new appraisal, but for a refinance where you aren’t taking any cash out, you can refinance up to 96.5% of the home’s value.

Fannie Mae and Freddie Mac Home Affordable (Obama Refinance) – These programs are ways to lower your rate even if your home value has gone down. Most lenders will now accept up to 100% of your current value, and mortgage insurance will be based on what it was when you originally took on the loan.

Refinancing can make a lot of sense if you are lowering your rate and payment without incurring a lot of up-front costs. The more you pay up-front to close the loan, the longer it will take for the lower mortgage payments to pay off the higher cost of getting the loan. This can still make sense if you are sure that you will be in the home for a long time, and you want to lock in the lowest rates. But too often the lowest rate isn’t the best value. 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?

To find out how long it will take for you to break even, figure out how much your loan will cost you (the bank fees and title charges on your Good Faith Estimate) and divide this by the amount you will save on a monthly basis (the difference between your new mortgage payment and your current payment). This will give you the amount of months that it will take to pay off the closing costs and break even on your new loan. For example, if it costs you $1,600 (this is what I am currently quoting for bank fees and title charges for a no point loan in the Chicago area) and you are saving $50 per month, it will take you 32 months to break even, and every month after that you will be saving money.

On the other hand, if the loan cost more to close, you should be saving a lot more each month. For another example, let’s say you are paying a point (1% of the loan amount) and the cost of the new loan is now $4,600. If your new payment is now $100 better than what you are currently paying, it will take 46 months ($4,600 divided by 100) before you break even. So even though the rate on the second option is lower, and the monthly savings are higher, the first option is going to be better for the near term. You then need to decide how long you think you will be in the loan, and if it makes sense to pay the extra to get the long term benefit. In many cases it will, but in most cases it takes about five years to pay off any up front points. You need to see which option makes the most sense for your own situation. You can also go the other way. Instead of paying points or closing costs, for many borrowers the best option is a no cost refinance. With this program the lender increases the rate slightly and uses the yield spread premium (what we are paid to make the loan) to pay all the closing costs.

I’ve heard all sorts of rules of thumb of when it makes sense to refinance, but each situation is different. It would take a big rate reduction to make sense to refinance a small loan, but with a larger loan a small reduction in rate could pay off quickly. Run the numbers yourself (or give me a call and I can walk you through the options) and you will make the decision that works best for you.

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