I had breakfast this morning with a Realtor who was having a difficult time with one of her listings. She had a contract on the house and the buyer was pre-approved for the mortgage before they wrote the offer. Everything looked like it was set for a nice smooth transaction. When the financing date in the contract came due the buyer still didn’t have loan approval, so they requested an extension. She was assured that the borrower was great and the appraisal came in right where it needed to be. There were just a few small details to take care of and loan approval would be forthcoming. 10 days later when the extension was up, they still didn’t have a loan approval. The loan officer was vague about what the problems were, but promised that it was nothing serious and with a little more time everything would be fine. By this time the Realtor was nervous and the seller was a basket case. But in for a penny, in for a pound, they agreed to a second extension rather than put the property back on the market. You can guess where this story is going. The second financing extension came and went with no loan approval. Now the loan officer isn’t answering his phone and all the calls to his company end up in voice mail and no one is returning phone calls. Many home buyers think of mortgage financing as a commodity, but this Realtor knows that isn’t true.

On the other hand, mortgage rates can be looked at as a commodity. Mortgage options have narrowed and most loans are now either conventional loans insured by Fannie Mae or Freddie Mac, or FHA government insured loans. The rates on these loans are determined by action in the mortgage backed securities markets, and wholesale lenders react to changes in these markets in unison. On the consumer level, mortgages rates are extremely competitive. What this means is that mortgage rates, no matter what the source, are going to be very similar from one lender to another. There will be differences from day to day. On any day one lender might be an 1/8^th of a point better, maybe even a ¼ point (when you account for costs and fees, anything more than this and they are hiding fees somewhere), just as one gas station might at times sell their gas for a few pennies less. But most lenders will offer mortgage rates in a very tight range. So mortgage rates are a commodity, but the mortgage experience is much more than just who has the best rates and fees on any particular day.

Having the best rate doesn’t matter if you don’t close on time or if you don’t close at all. Having the best rate quote isn’t going to help you if the terms of your loan change and you end up closing with a higher interest rate or higher fees. So what exactly should you be looking for when choosing a mortgage besides comparing the programs, rates and fees charged? There are a few things that will have a direct impact on how good, or bad, your mortgage experience turns out to be:

Communication – Unless you’re a mushroom, you probably don’t want to be kept in the dark. You don’t realize how important communication is until you run up against someone who is not telling you what is going on. Does the loan officer return your phone calls and emails quickly? Does he fully answer your questions? Do you know the status of your loan and is there a system in place to show your loan status?

Knowledge and experience – Does your lender understand what your needs are and help you to meet your goals? Or does he just quote a rate? Does he know how to do the loan that you need? This is a real issue now with FHA loans. FHA used to be a big factor in the housing market, especially for first time home buyers. But that dropped off and over the last 5 years FHA dwindled down to a trickle. The market has changed though, and this year FHA is the best option for many buyers. How experienced is the lender with FHA? Many loan officers have never done an FHA loan. Letting them practice on you is not going to give you a good mortgage experience.

Follow through – About 50% of good service is about doing what you said you were going to do when you said you were going to do it. If they are promising the moon but not coming through, that’s going to be a big problem.

Reliability – This is where the rubber meets the road. Is the lender going to be able to meet their obligations? More mortgage lenders, both brokers and national banks, have closed their doors over the last year than at any time in memory. Is your lender going to be around for the long run? Will they be able to meet the deadlines in the contract? Are they going to have the money at the closing when you need it? Surprises can be nice, but surprises that come at the closing usually aren’t the kind you want.

Reputation – What do you know about the lender, both the company and the loan officer? Do a little bit of research and see what other people’s experience has been. Do a Google search to see what you find, and see if the Better Business Bureau has any complaints filed. Ask your real estate attorney what they know of the company – they, along with title companies, have more experience with lenders and can tell you who is good and who to watch out for.

Everyone wants to get the best deal and mortgage rates might be a commodity, but the mortgage experience isn’t. When choosing a mortgage make sure you look at the big picture.

Illinois Mortgage Rates and News

In the first installment of this series we looked at some of the things to look out for when shopping for your mortgage . In the second part we talked about hidden fees and pre-payment penalties.  The third installment covered APRs and how important it is to know how to read a Good Faith Estimate of closing costs.. In this, our last installment, I’ll go over what may be the most important factor in choosing where you will get your mortgage, reputation and integrity.

So many people focus on getting the lowest mortgage rate, but the lowest quoted mortgage rate isn’t always the best deal. I’ve heard too many horror stories over the years of buyers who were promised one rate, but when they got to closing they found the rate was higher, the costs were considerably more, or the program was different than what they were promised. If you got the bait and switch at closing (it’s illegal, but it does happen) you have two choices. One, you can walk away from the closing, possibly losing your earnest money, or two, you swallow your anger and go through with the deal. The problem is that the loan officer knows much more about how the system works than the consumer does. The mortgage application process can be intimidating, and you are signing a stack of disclosures, most of which no one reads. What your lender told you may be different from the documentation you signed. Mortgage lenders who are behaving in this manner are obviously not looking for repeat business. The companies that play these games are looking for the fast buck and don’t care about your long term value as a satisfied customer.

The reputation of the company, and loan officer you are dealing with, will go a long way toward predicting what kind of experience you will have. How did you get the lender’s name in the first place? Where they recommended to you by someone you trust? Word of mouth referrals can be a great way to choose your lender, especially if they were recommended by a Realtor or real estate attorney who has lots of contact with different mortgage brokers and mortgage bankers. Ask your attorney what he knows about the company or loan officer you are dealing with. If the company is active in his market area, he will know the reputation of the company and how reputable they are.

You can also check with the better business bureau and the appropriate regulatory agency (As an Illinois based mortgage banker I am regulated by the Illinois Department of Financial and Professional Regulation. Mortgage brokers and federally chartered banks are regulated by different regulatory bodies) to see if they have had complaints lodged against them. Here is a link to sites and phone numbers where you can check for complaints. Also, run the company’s name and the loan officer’s name through a Google search. In some cases you will come back with a lot of information, in other cases it will show nothing but the company web site. Some other things to watch for when choosing your mortgage banker or broker are:

Does the company have a reputation for meeting its commitments and closing on time?

Is the loan officer experienced and able to answer your questions?

Does the company have the financial stability to stand behind its commitment?

Do they have the resources to meet the deadlines in the contract?

Do you feel comfortable with your loan officer?

Does he get back to you quickly, and does he (or she) follow through when he says he will do something?

These are all questions that should be part of your decision. Until you close, you will rely heavily on your loan officer. If you have a loan officer who doesn’t return phone calls, or one who doesn’t provide information, or doesn’t communicate well with you, getting your loan will be a frustrating experience. If someone is not responding during the process, can you be confident that you will close on time and with the right terms? Keep this in mind when choosing who you want to work with. The rate quoted is only as good as the integrity of the person quoting it.

Illinois Mortgage Rates and News

In the first installment of this series we looked at some of the things to look out for when shopping for your mortgage . In the second part we talked about hidden fees and pre-payment penalties.  In this installment I’ll talk about some of the ways to compare mortgage offers and what you can do to protect yourself when shopping for a loan. Knowing what to look for, and what questions to ask, puts you in a position where you can make an informed decision.

APR - The APR, or Annual Percentage Rate, is a measure used to compare different loan options. The rate on the APR is always higher than the note rate, the actual rate you will pay for your loan. As part of the Truth in lending Act, the government requires that any time a rate is advertised, the APR also has to be shown. This is an attempt at transparency and the goal is to express the total cost of credit over the life of the loan, taking into account how much it costs you to take out the loan so you could tell which offer was better, a loan with a higher rate and lower fees, or mortgage with a lower rate but higher fees.

This concept is a step in the right direction, but it really doesn’t work as well as it could, and the result for most people it to leave them Dazed and Confused. There are a couple of problems with it. First, there is no one precise formula for determining the APR. Some costs are included in the calculation, and others aren’t, and there are some costs, such as application fees and mortgage insurance, that can be considered a cost under some circumstances, but not under others. And other costs, like pre-paid interest which can be manipulated to change your APR for the better. This means that the same loan, with the same closing costs, can show different APRs with different lenders.

Another problem with the APR is that it balances the cost over the entire loan period. For example, the closing costs on a 30 year loan would be averaged over the entire 30 year period, even though all the costs are paid up front. In the real world, very few people stay in a loan for the entire time. Let’s say you were comparing loans between two lenders and the closing cost on one was two thousand dollars higher than the other. Because you are averaging the costs over a 30 year period, the APRs would be very similar. But if you only stayed with that loan for seven years (with moving and refinancing so common the average time in a mortgage is closer to 5 years), it would turn out to be much more expensive than the lower cost loan.

Also, if you are going to compare APRs you need to compare with the same loan product. Comparing a 30 year fixed rate to a 15 year fixed won’t give you a true comparison, and comparing a fixed rate to an ARM will be of no use at all. Loan size matters too. The cost of fees on a large loan will have less of an impact than higher fees on a smaller loan.

The Good Faith Estimate: Many people focus on the loan’s APR, but the best way to shop is to directly compare the costs of one loan against another. To do this we use a form called The Good Faith Estimate of Closing Costs. This needs to be sent out to you after you’ve applied for a loan, but you should ask for it before you have committed to a lender. This form will show you the interest rate and program you are considering, a breakdown of your payment, a list of all the closing costs and pre-paids associated with the loan and a tally sheet showing the amount you will need to bring to closing. A lot of information is listed on the Good Faith, but when comparing loan offers the numbers you need to compare are the companies bank fees. Title charges, escrows and pre-paid interest can be changed around to show a lower bottom line, but the bank fees are the items that they can control. 

The Good Faith is an estimate, but it should be very close to the final numbers. Comparing offers takes more time, but it gives you a truer picture of what each lender is proposing. If a lender will not put his offer in writing, that should be a red flag that something may be wrong. In order to know what to compare, you need to understand what closing costs are spent on, and what to expect.

This still brings up the question of how you compare two offers if one has a lower rate but higher fees. To do this takes one more step, you need to figure your payback period. To do this you need to know how much the difference will be in your payments, and how long you plan on staying in the home. For example, say you are borrowing $200,000 and you have one offer of 6.25% with $1,000 in bank charges and another offer at 6.00% with $3,000 in bank charges. The payment at 6.0% is $1,199 for principal and interest. The payment at 6.25% is $1,231 - a difference of $32 per month. Now you take that $2,000 difference in up-front costs and divide it by the $32 difference in payments. This comes out to 62, which is the number of months before the lower payment will payback the higher fees you paid at closing. In this case it will be over 5 years before you break even - longer than that if you factor in the effect of inflation on your mortgage payments. If you are planning on being in your home for a long time and you don’t expect rates to drop at any time, this could make sense, but it shows that the lower rate isn’t always the best deal.

This approach takes a little more work on your part, but it gives a better picture of what option is best for your needs. In the next part of the series I’ll go over the one thing that may be the most important factor when shopping for a mortgage.

Illinois Mortgage Rates and News

In the first installment of this series we looked at some of the things to look out for when shopping for your mortgage. Here are some more things to be aware of:

Hidden Fees – As I said before, most lenders are borrowing money from the same sources and their cost of business is similar. So if one company’s rates are unnaturally low, it mans they are making up the money in other ways. There is a relationship between the rate that is quoted, and the amount of fees that are charged. The lower the rate is, the more money you will have to pay to get it.

It costs a certain amount of money to process and fund a mortgage. Mortgage companies are in business to make a profit, so they know that they need to bring in enough income to pay all their expenses and earn a reasonable profit. There are two ways to do this. First through the rates – the investors, mostly big banks and financial companies, pay lenders for bringing them loans (this is called a yield service premium. I’ll go into this more in a later post.) The second way is through fees that are charged to you, the borrower. Either way is fine, as long as you know exactly what you are getting. Where it gets tricky is when the lender hides fees in order to make the rate seem better than it is.

There are a number of fees that are normally paid as part of getting a mortgage (I’ll go into more on this in another post). But sometimes the fees can get excessive. In many parts of the country origination fees are standard. Here in the Chicago area it is more common not to charge an origination fee. Rates should be lower if the mortgage company is charging an origination fee. Look for things like discount point, warehouse fees, document preparation, administrative fees and the like. Ask what each of the fees goes for and if the fee is negotiable. I’ve seen lender charges of several thousand dollars plus the origination fees. At my company, Professional Mortgage Partners, the normal bank fees are under $1,000. Again, there’s always a trade off between rates and fees. But if you are paying thousands of dollars in fees up-front, it will take you years before you’ve broken even by getting the lower rate.

Pre Payment penalties: Another thing to watch out for is a pre-payment penalty. This is when the mortgage contains a clause that states that you will have to pay an extra penalty if you get out of the mortgage within a certain period of time, either through selling the home or refinancing. Some mortgages have pre-payment penalties built in, but many more conventional loans offer the penalties as an option - that is, you can get a lower rate if you agree to take a pre-payment penalty. If you know that you won’t be moving, and you’re convinced that rates won’t drop and give you an opportunity to refinance at a lower rate, this can be a fine decision. Where it becomes a problem is when you are quoted with a built-in pre-payment penalty in order to show the lower rate, but the terms are not disclosed to you. This can cut off your options, and cost you thousands of dollars in the long run if you need to get out of the mortgage earlier or can’t refinance because you are locked into a higher rate mortgage.

In the next installment of this series I will show you what you can do to protect yourself when shopping for a loan.

Illinois Mortgage Rates and News

Chicago, IL.  - Are you in the market for a mortgage? If so you are ready to compare rates and prices to make sure you are getting the deal that is right for you. Mortgage ads are everywhere. My spam folder fills up with mortgage offers I never requested, and I cringe when I hear the mortgage ads on the radio. The approach irritates me on these ads because they distort the facts and play on people’s fears. The focus of most of these ads is that they (and only they) can get you the lowest rate for your mortgage. Many people think of loans as a commodity, and that one lender is the same as another, so the decision should be made strictly based on who has the best rate. This can be a big mistake. It is true that most lenders have the same loan programs, but there are other factors you need to compare to make sure you are getting exactly what you think you are. Besides the rate, you need to compare a company’s fees, the terms, the quality of their service, and the company’s reputation. Getting a good rate is important. But if the company you choose is not able to close on time, or doesn’t deliver at the terms you expected, a low rate is no bargain.

In order to know how to compare loan offers, it helps to understand how the mortgage market operates. The truth is, nearly everyone borrows money from the same sources. Whether you are looking at a government loan (FHA and VA), a Jumbo loan for higher priced homes (currently loans of more than $417,000), or a conventional mortgage, most of the loans will be sold off to a small group of end investors. The majority of conventional loans end up in the portfolio of one of two organizations, FNMA or FHLMC, often called Fanny Mae and Freddy Mac. These organizations are government sponsored corporations that are charged with buying up mortgages in the aftermarket, packaging them into investments that are sold on Wall Street, and making sure there is always money available to lend for mortgages.

These companies set the standards for mortgage qualifying, and their purchases set a base for the prices that all of the other lenders charge. Lenders price their loans with the expectation that they will be selling their loan, and eventually delivering it to one of these organizations. What all this means to you is that the true rates on mortgages are usually going to be close to the same from one lender to the next. The range in rates for the same product is typically going to be only 1/8 to ¼ point difference among most lenders. But if you are looking at the newspapers, or searching the internet, you may see advertised rates that are much lower. These low rates look tempting, but you need to know exactly what you are getting. What makes this complicated is the way that lenders show their prices to their customers. Because most consumers are looking for the lowest rate, it’s easy for unscrupulous companies to manipulate the fees and the terms in order to appear to offer a rate lower than it actually is. When comparing mortgages, you need to compare apples to apples and that is not always an easy thing to do.

Borrower Beware! What to watch out for - The number one complaint regulatory agencies receive regarding mortgages, is that the terms they ended up with weren’t what they were promised. There are lenders who will promise whatever it takes to get the customer in the door, but don’t deliver on that promise. Here are some of the areas you need to watch to make sure you are not being quoted an artificially low rate.

Locking In – When you find a property and apply for a mortgage, you have a choice between locking in or floating the rate. Locking in means that you are guaranteed that the rate you choose will be good for a certain period of time. If you choose this option, make sure that the period you lock in for is long enough to approve the loan, and that it extends through the closing date in your contract. Floating means that you are taking a chance. If the rates go down, you will get the lower rate; if rates go up, you will end up with a higher rate than you planned on. Interest rates go up and down based on what’s happening in the mortgage backed securities markets. The markets tend to overreact to both good and bad news, so lenders try to price according to the market, which means they can change every day – lately it’s been common to see rate changes more than once a day. Because the market is so volatile, rates are priced based on how long they are guaranteed for – the shorter the time period, the lower the rate.

Some lenders take advantage of this system in several ways. One way is to quote a very short-term lock period, which means a lower interest rate. But it doesn’t help you to lock into a 15-day rate guarantee if you aren’t closing for 45 days. Another twist on this is to quote you based on the short-term rate but then to encourage you to float. Or they claim that you can’t lock in until after you have been fully approved, or right before closing. These techniques are unfair because all the risk is put on you. If rates go up, you are stuck with the higher rate. Floating is always an option, but it should be your decision, not something that is forced on you.

A darker version of this is when the lender tells you that you are locked into a rate, but doesn’t lock you in with an investor. If rates stay the same or go down, you will close at the rate that was quoted and never know that you hadn’t been locked in. If rates go up, however, you may find that you are rejected for a mortgage at the last minute, or are forced to take a higher rate in order to close your loan. This is not only unethical, it’s illegal. But it happens. Every time that interest rates move up sharply, there are businesses that close their doors for good because they couldn’t honor their lock commitments, leaving their customers without the financing they had relied on.

Mortgage rate shopping is a big topic. I’ll have more on this in my next post.

Illinois Mortgage Rates and News

Last year, when the Sub Prime market was imploding, there was a lot of talk about how FHA, a Government backed loan, was going to be the new Sub Prime. It hasn’t worked out quite that way. In fact, the real truth is that FHA is the new conventional mortgage.

Sub Prime mortgages were loans for borrowers who couldn’t qualify for the more stringent conventional guidelines. This often meant borrowers who had credit problems, or it could mean borrowers who couldn’t prove their income. The thing about Sub Prime loans is they were profitable for the lenders (if they got rid of them quickly). These loans were often structured as 2 or 3 year adjustable rate mortgages, and they were priced several points higher than a conventional fixed rate would be. When the market was hot, defaults were low, so these loans were money machines for the lenders who offered them. With money to be made it was almost inevitable that conventional lenders started making more of these types of loans, that is, loans to low credit score borrowers and loans to borrowers who couldn’t prove their income. This went on for a while, but as it had to eventually, the party stopped, loan default rates rose and the whole mortgage market changed. Sub Prime mortgages were the first to disappear, but over the last 9 months conventional guidelines have continued to tighten going from a way too loose approach to where we are now when even good credit risks may have trouble qualifying for a mortgage.

After the market changed, I heard a lot of people say that FHA would take over the slack. But FHA isn’t now and never has been a loan of last resort - which sub prime was. For one thing FHA loans are full doc. That means we need to be able to verify the borrowers income and know where the money to close is coming from. FHA will take on borrowers with lower credit scores or borrowers who have had major credit problems in the past, but this isn’t an automatic thing. FHA has no set minimum credit score (though many of the wholesale lenders now do – some will only go as low as 580, others will go below 550) but the idea behind FHA underwriting is to understand the risk involved in a loan. FHA isn’t as concerned with a borrower’s past credit problems as they are about how the borrower will treat credit in the future. This means understanding what happened that caused the problems in the past, and showing that the situation has changed so that these credit problems won’t be a problem going forward. If the bad credit is over 2 years old it probably isn’t even an issue.

Conventional loans have always been the foundation of the mortgage market. But as conventional guidelines have tightened, borrowers who used to be considered great risks are now frozen out or forced to pay more for their mortgage. FHA helps to fill this gap. Earlier this year FHA upped their lending limits (Temporarily at least, if not extended it will expire by the end of this year) so that you can now buy a home in the Chicago area with a loan as high as $410,000.

What can you now do with an FHA loan that you can’t do with conventional financing? Here are a few advantages of FHA and ways that FHA has become the new conventional alternative here in the Chicago area:

1. No Risk Based Pricing adjustments- Risk Based Financing is the idea that those borrowers with the best credit scores will be able to get the best mortgages rates, and those with lower credit scores will have to pay more. With conventional loans buyers with credit scores under 720 and with down payments under 20% are getting hit on their pricing. With FHA if you qualify for the loan you get the best pricing. You can qualify for an FHA mortgage with credit scores in the upper 500s – without any price hits.
2. FHA uses common sense credit guidelines –FHA looks at the buyers over-all history, not just their credit scores.
3. You can buy with a low down payment – or no down payment – This is another area where FHA has a big advantage over conventional loans. It is now much harder to get a conventional mortgage with a minimal down payment. But FHA only requires 3% down which can come as a gift from a relative or as a grant from a down payment assistance program. That means that you can still buy a home with no money out of your own pocket.
4. FHA allows a seller concession of up to 6% - By using seller concessions, you can structure your purchase in more creative ways including paying all your closing costs.
5. FHA is more lenient with past bankruptcies – FHA is MUCH more lenient with past bankruptcies. Conventional loans just changed their guidelines to make financing harder. FHA takes a more common sense approach.
6. FHA financing is available for Permanent Resident Aliens – With FHA you don’t need to be a U.S. citizen and you don’t need to have your green card. You will need to have a social security number, established credit and proof that you are able to work in the United Sates.
7. No cash reserves are required – All you need with FHA is enough to pay the down payment and closing costs. No reserves necessary.
8. No income limits – Many of the low and no down payment conventional loans are set up to help low and moderate income home buyers. This isn’t the case with FHA.
9. Non traditional credit is accepted – Most conventional loans require that you have a credit score and an established credit history. But not every one uses credit. With FHA we can build up a credit history from other payments you have mad. This would include your rent and utility payments, and any other non-traditional credit you have used.
10. Mortgage insurance is lower than conventional – FHA splits their mortgage insurance into 2 parts – an up-front insurance which is added to the loan amount, and a premium which is paid monthly. If you are buying with a minimum down payment, the combined premium on FHA is better than it is with conventional loan programs – especially if your credit scores aren’t the highest.
11. You can buy a 2-4 unit building with only 3% down – Conventional financing isn’t even close here, and rental income is looked at in a way that makes it much easier to qualify. With a 2-4 unit you will need 3 months of reserves, though.
12. FHA refinancing - FHA has a streamlined refinance that makes refinancing easier and less expensive, and a cash out refinance program that goes up to 95% of your home’s value, giving you more flexibility in your debt management.

In short, more people will qualify at a lower price with FHA financing. Put it all together and there is no doubt, FHA is the new conventional.

Illinois Mortgage Rates and News

In a recent post, I talked about how an underwriter looks at a borrower’s credit history, income and job history to determine how much of a mortgage they can qualify for. The other big part of qualifying for a mortgage is showing how much skin you have in the game, that is how much are you investing in the home, and where the money is coming from. We need to make sure you have enough money for your down payment and closing costs, and in some cases, money in reserve. Again, this all goes back to the idea of risk. Not so long ago it was common to buy a home with no money down. But that was before the real estate market turned down. Conventional lenders have now eliminated 0 down financing and you will, in most cases, need to have at least 5% of the purchase price for a down payment. You still can buy a home with little or no money down, but you have to plan ahead and it won’t work in all situations.

Why does the lender want you to have your own money invested in the property you’re buying? There are a few reasons. First, if you have your own money at stake, you’re more likely to take care of the property and make sure you make your payments on time. An investment in your home strengthens your commitment. Mortgage insurance and 2^nd mortgages allow you to buy with lower down payments while taking some of the risk off the lender. How ever much you are putting down, we need to verify it, know where it’s coming from and be able to prove that you have enough to close.

In order to check for assets, we need to know where the money you need to close (down payment and closing costs) is coming from. Here are some acceptable sources for a down payment:

• Money on deposit in the your checking, savings, money market, certificate of deposit or any other liquid account.
• Money from liquidation of stocks or bonds.
• The proceeds from the sale of a house or other assets (an extra car, a boat or having a garage sale).
• A loan against your current home or other secured asset.
• A liquidation or loan against your 401K or IRA.
• A gift from a relative or a grant from an agency (like AmeriDream or Nehemiah) that doesn’t have to be repaid.
• Cash value from a life insurance policy.

If you are using money from a bank or other cash account, we will need to verify that the money in the account is really yours. We will look at the statements for the last 2 months. If there are any large deposits (not counting your normal payroll checks) we need to show proof with a paper trail of where the money came from. As you can see, there are lots of ways to raise the money for your down payment - here is a bigger list. Where it can’t come form is an unsecured loan (no credit cards). Again, the lender wants to make sure you have skin in the game, and borrowing more money doesn’t cut it.

To make the loan approval process as smooth as possible, it’s important to know where your down payment money is coming from. It’s best not to transfer money from account to account, if possible, but if you have to, make sure you keep records so we can trace the flow of funds. If you have any questions about your down payment, and whether it will be acceptable, discuss it with your loan officer before you are ready to make an offer, to make sure you can structure it correctly and this won’t be a problem later.

Gifts for your down payment - Gifts are a special case, and if you are expecting that some of your money will be from a gift, a little planning ahead of time will make your experience much easier. First of all, gifts aren’t allowed on every program. With some conventional programs, unless you are putting at least 20% down, 5% of the down payment needs to be from your own funds - all the rest can come from a gift. With FHA loans all your cash can come from gift, or a grant from a non-profit agency.

Gifts also have to be documented in a particular way. We have to be able to show that this truly is a gift, not a loan. To show this, we use what is called a gift letter. This is a form that is filled out by you and the person giving the gift. It states how much the gift will be, what your relationship is to the person (it has to be a family member of some kind), and that this is a gift and won’t need to be repaid.

The next step is we need to prove that the donor (the person giving the gift) has enough money to give the gift. For this we will need an account statement or a letter from the donor’s institution stating that they have the funds available. The last step is that we need to show the transfer of funds from their account to yours. The easiest way to prove this is for them to give you a certified check showing them as the donor and you as the payee. Make a copy of the check and show the deposit into your account, and we’re done. If they give you the gift as a personal check, you will need to allow extra time because then we’ll have to see the canceled check. This whole process is clumsy and redundant, but following each step will make things much smoother in the long run.

One other note, this letter and the documentation are only used for approving the loan. None of the information will be shared with the IRS, or any other government agency.

Your credit, income and assets are what we look at when approving you for a mortgage. The other part of the approval is approving the property. I’ll have more on appraisals in a future post.

Illinois Mortgage Rates and News

Are you just starting to look for a home in the Chicago area, and wondering how much of a home you can afford? There are all types of rules of thumb for how much of a home you can qualify for, but rules of thumb are simply estimates, not guidelines. It used to be that there was a hard set formula for how much of a loan you would qualify for, now the underwriting process is more technology driven and in many cases you can qualify for more of a mortgage than you can comfortably afford. But how much you can qualify for is just a first step. The mortgage you choose has to fit your life style and future goals, as well as your current financial situation. To find out how much of a home you can afford, and how much of a mortgage payment is right for you, you need to understand what we look for in the mortgage process, and how mortgage loans are approved.

What lenders are looking for: When qualifying for a mortgage, I look at it as a game of twenty questions. I need to get as much information about you and your finances as possible to make sure we find the best loan program for you. The whole idea behind the qualifying process is to measure the risk, that is, to figure out how likely it is that a borrower will pay back the money they’re borrowing. I ask a lot of questions, but the personal qualifying issues all revolve around 3 areas:

Credit

Income

Assets

Your history in these 3 areas determines what type of loan you can get, how much you can afford, and what your payments will be. All conventional loans (those loans eligible for purchase by Fanny Mae and Freddy Mac, the 800 pound gorillas in the mortgage market) are now put through an automated underwriting process. This is a computerized artificial intelligence program which weighs all of your risk factors and spits out a decision on whether or not the loan is acceptable. In most cases the loan decision is made by computer, but loan officer and underwriter have to make sure that all the information that is put in is true and verifiable. FHA also uses the same programs, but there is more leeway and more chance of an approval if the loan is underwritten manually (that is, by a real live person). Let’s break these factors down a little.

Credit Qualifying – Credit scores are key. With a high credit score you can get approved for a much higher mortgage than someone with the same income and debts, but a lower score. Your credit score is crucial not only for approval, but for how much you pay for your loan. One big change in the mortgage market is the new Risk Based Pricing model. This is the idea that those borrowers with the best credit scores and higher down payment will be able to get mortgages at the best rates, and those with lower credit scores and lower down payments will have to pay more. The people affected by this change are borrowers with credit scores good enough to qualify for Fannie Mae and Freddie Mac based conventional financing. This concept has been talked about for years, but it is only now with the soft real estate market that it is going into effect. Or more to the point, it’s only going into effect now when the big mortgage players are taking it on the chin for all the bad loans they wrote when credit was easy. Those with lower scores and not much equity (first time home buyers?) will be hit hardest. FHA does not have risk based pricing, which makes it a good option for many home buyers. Here is some information on what you can do to make the most of your credit.

Income Qualifying - The second area we look at is your income. Again, we’re measuring risk here. In this case we want to make sure that your income is high enough to comfortably make the payments on your new mortgage and that your income is . To do this, we look at two things: How stable is your income? and, How does your income relate to the housing payment and your other debt? I’ll go over both.

Income stability - When people are trying to figure out how much they can afford, this is one area where it’s easy to get bad information. First we need to determine how much you make each month. We use gross income, not your take home pay. If you’re in a job where you get the same amount of pay each month, it’s pretty simple. But if you have a job where your income fluctuates from month to month, like commissioned sales or construction, or if part of your pay comes from bonuses, it gets more complicated. In these cases we need to go back and look at the history of your income over the last two years and make sure that this income is likely to continue.

The truth is, lenders look more favorably on someone who has been in the same (or similar) line of work for at least 2 years. If you haven’t been working steadily for the last two years, we need to know why. There are many acceptable reasons, including:

· You recently finished school, vocational training, or left the military.

· Your work is typically seasonal and gaps in employment are normal in your industry.

· You have been laid off from your job.

· Frequent employment changes are normal in your line of work (if you are in car sales, for example), but you have been consistently employed and maintained a consistent level of income over the past 2 years.

Besides income from your job, other sources of income can also be used. These can include alimony or child support (we need to see that you have a history of receiving it), pension or disability payments, investment income, trust income, income from a part time job and so on. Again, in order to use this income to qualify, we need to be able to show that the income is likely to continue.

Housing and Debt Ratios -This is a big factor in how much you qualify for, but one that has changed a lot recently. There are actually 2 ratios we look at. The first, the housing ratio, is a measure of your total housing cost compared to your monthly income. The housing figure includes all the normal monthly costs of owning a home: the principal and interest payment, the monthly taxes and insurance, mortgage insurance, and the association fee if it’s a condo or townhouse. The second ratio is the total expense ratio. This measure includes not only your housing expenses, but all your other monthly debts, too. So this takes into account all your minimum credit card payments, car payments, student loans, any alimony or child support, and the like. (There are some obligations that you are required to pay, things like car insurance and day care for children, that don’t count in the ratio. You do, however, need to keep these items in mind when budgeting.)

For years, the maximum ratios were 28/36; that is, no more than 28% of your income could go toward your housing payment, and all your debts combined couldn’t be above 36% of your income. This isn’t the case anymore. As I mentioned before, credit scoring changed everything. With good credit, it’s now common to qualify for a much larger payment than you would have before. You still need to budget and make sure that the payment you qualify for is one you are comfortable with.

What if you can’t prove all the income you receive? This is another area where the underwriting guidelines have changed a lot. Not so long ago, there were lots of loans that didn’t even ask about how much you made, or if they did, they didn’t try to verify it in any way. These programs went under a variety of names such as, no income verification (NIV), no ratio loans, stated income and ‘No Doc’ loans. These opened the system to a lot of abuse. Some people bought houses they had no hope of making the payments for, and foreclosures in these loans skyrocketed.

Because of these problems, lenders have pulled most of these loans off the table. Still, if you are self employed, or if you know that you’ll be able to make the payments, but there’s income that we can’t use for qualifying, and you have good credit, there are some options available. It all depends on the amount of your down payment and your credit score. If you have questions about whether we can use all of your income to qualify, give me a call and I can find the program that works best for your circumstances.

I’ll go over the third area, asset qualifying, in my next post.

Illinois Mortgage rates and News

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

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

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

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

Illinois Mortgage Rates and News

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

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

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

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

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

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

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

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

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

Illinois Mortgage Rates and News