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.

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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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If you are a first time home buyer looking to buy and close on a condo before the November 30^th tax credit deadline, things just got a little easier. FHA just pushed back the date that the new condo approval process starts from October 1^st back to November 2nd. FHA has been the go to program for home buyers who don’t have a big down payment saved up, and the FHA spot condo has been on fire over the last year. The FHA spot loan is a way for buyers to purchase condos that aren’t on the FHA approved list (most condos aren’t) as long as they meet FHA guidelines. The program has been a great boon to home buyers, but there were a lot of otherwise well managed properties that didn’t fit the guidelines. At the beginning of the summer HUD announced that they were overhauling the process for approving condos. The new FHA Condo approval process means that a lot more properties will be eligible for FHA financing, but it will eliminate spot loans and all the condos on the approved list (except those approved in the last 12 months) will need to be re-approved. The new rules were supposed to take place on October 1^st, and a log jam of applications was expected since all FHA Direct Endorsement lenders need to submit 5 test cases before they are able to approve condos under the new guidelines. Pushing the deadline back a month means condo buyers (and here in the Chicago area, this is a good portion of first time buyers) now have more time to find and close on their condo purchase.

If you want to see what is currently on the FHA condo approval list, here is the FHA condo search tool. (The search works best for if you search by zip code – Search Pre- HRAP/DELRAP to see what was on the old approved list.)

If you are looking at a condo that isn’t on the list, an FHA spot loan may be the best option. This means we will approve the building at the same time we approve your loan. If you’ve identified a property and want to see if it will work, the first thing you should do is talk with your mortgage lender and have them get an FHA condo questionnaire sent out for the building. This way you will get a quick idea of whether the property will work, before spending a lot of time and money trying to find out.

Here is what is needed for an FHA condo spot approval:

• The condominium project must be complete, including all common areas and facilities.
• Control of the common areas must have been turned over to the homeowners
• association for at least one year.
• The owners association must provide evidence that the project has the appropriate
• hazard, liability and flood insurance.
• Individual units in the project must be owned fee simple. The project’s legal documents must provide for undivided ownership of common areas by unit owners.
• The project’s documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is unacceptable. Such restrictions include rights of first refusal and restrictive covenants.
• At least 90% of the units in the project must have been sold.
• At least 51% of the units in the project must be owner occupied.
• No single entity may own more than 10% of the units in a project. The 10% restriction does not apply when the ownership of less than four units would disqualify an otherwise eligible project. The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time.
• Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.

This system will be changing soon, and the new process will make FHA financing available for a lot of homes that aren’t eligible now. But there will be some problems along the way until everyone gets the bugs out of this new system. With the extra 30 days now is the time to take advantage of the spot loan, before it goes away for good.

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company

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About a month ago, I wrote that it was too early to panic if you were a first time home buyer and counting on the $8,000 first time home buyer tax credit. Home sales have been inching up each month, and a big part of the increase is due to first time home buyers. The $8,000 tax credit is a big incentive, and predictions call for a surge in first time home purchases as the November deadline approaches. But it takes more time than most people realize to find and finance a home, and too much of the process is outside of the buyers control. Too many things can happen to delay a closing, or worse, kill the deal. If you are one of those people who wait until the last minute to get things done (I know I’m guilty of that), this isn’t like pulling an all-nighter to get your term paper done the day before it’s due. There are a host of parties involved in any real estate transaction, and you are at their mercy when it comes to timing. So is it time to panic yet? The answer is still no, but the clock is ticking and that time is approaching faster than you might think.

Here are some things which may add extra time to your purchase:

Are you looking at short sales or foreclosures? Some of the best bargains on the market now are short sales and foreclosures. These distressed transactions now make up about 40% of the sales here in the Chicago area. These can be great bargains, but don’t expect the deal to come together quickly. With a short sale you need to not only get the seller to agree, but also the bank that holds the mortgage. Some of the banks are now responding quickly, but it’s not uncommon to put in an offer and wait for a month or longer (sometimes much longer) before the bank makes a decision. If short sales and foreclosures are on your list to look at, you don’t have a lot of time to waste.

Are you looking for the right home, or just any old home? When you have more time to look, you can afford to be picky. When a deadline fast approaching, too many buyers are going to settle on the first home that is acceptable and not the home that is right for them. Avoiding the last minute rush gives you more control.

Do you have problems you don’t know about? – One of the major factors in your loan approval is your FICO score. All loans, both conventional and FHA, now have established minimum scores for approval, and pricing is based on how high your scores are. One of the things I see on almost a daily basis is people who are surprised about what comes up on their credit report. This could be a matter of incorrect or outdated information, or it could be a real issue which you need to address. Either way, if we have time we have a better chance of fixing the problem then if you don’t find out about it until the last minute. This is one of the main reasons it makes sense to get pre-approved for a mortgage before you even start looking for a home.

Everything will take longer as we get closer to the deadline – Once you have your contract together, getting the mortgage done on time is the major hurdle. Right now we are processing loans and closing quickly, but a few months back when the system was overloaded with refinances, everything took a lot longer. As purchases pick up over the next few months, we expect a back log as we get closer to the date. And if rates drop again, and refinances pick up again, this will cause more of a back log. We, like many companies, have ramped up our staff and are ready for the higher volume, but I still hear about many mortgage companies who are taking 60 days or longer to get a loan to closing. When you are ready to close, make sure you ask your loan officer if they can get the loan done on time, and if they can guarantee that you will hit the dates in the contract.

What is the properties condition? It’s becoming more and more common to see homes that need repairs before they can close, especially with the foreclosures. Sometimes these are small things, and a lot of buyers are getting access before the close and making the repairs themselves (the banks usually won’t). But often the repairs are too extensive and cost too much. For these situations an FHA 203K loan is a great solution, but this will take more time to put together and close. I’ll write more about the 203K loan soon, but if you are looking at this as a possibility, you should get moving soon.

Are there any issues with the title? Another issue that you may not even know about until close to the closing is if there are any title issues. The title is usually pulled by the sellers attorney, and it gives a history of the property’s ownership, and shows if any liens are outstanding. If something shows up on the title, this will need to be cleared up before you are able to close. If you are near the deadline, this could be enough to push you over, losing out on the $8,000 tax credit.

There are some other new wrinkles to the mortgage process which will also add to the time required for the mortgage and the closing. The new HVCC appraisal requirements means that the appraisers aren’t as service oriented as they were before, and as volume picks up it will take longer to get an appraisal back. There are also new Truth in Lending rules which just went into effect, and if the APR on a loan changes by 1/8 of a point, either up or down, the Truth in Lending will need to be re-disclosed and there is a mandatory delay of the closing. There is a whole list of items which affect the APR including not only bank fees, but title charges and tax stamps, so until the industry gets this one down there is a potential for delay.

The bottom line is that it’s not time to panic yet, but you may have less time than you think. If you want to make sure you do everything in your control to close on time (and allow for those items out of your control) you should start soon.

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Illinois Mortgage Rates                   First time home buyer loans  

Downers Grove Mortgage Company

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Some of life’s decisions are more momentous than others. Where you go to school, who you marry, what career you will pursue or where you buy your first home, these decisions are biggies, and they will shape what happens in your life going forward. Who you work with to get a mortgage? Not so much. Using a bad mortgage lender won’t change your life. But it will make for a miserable experience while you are going through it. A lot of people look at a mortgage as a commodity, especially now when the entire market is made up of fixed rate conventional or FHA loans. The truth is, who you choose, both from a company and individual standpoint, will make a big difference in the price you pay and how satisfied you are with your experience. If you are in the market to buy a home, it pays to do more than shop for the best rate and fees. You also need to know who can best help you with your situation.

I’m not saying that rates and fees aren’t important. They are, and you should ask for a written Good Faith estimate from any lender you consider using. But rates and fees are only one piece of the puzzle. You need to ask some questions and do some research about both the company who will make the loan, and the loan officer who will work with you to make sure you are getting the right fit for you and your situation.

Here are some things to consider when choosing what mortgage lender, and what loan officer you want to deal with:

The mortgage lender:

What kind of company is it? – There are several different types of lenders – banks or direct lenders, mortgage brokers and mortgage bankers. Each one makes mortgage loans, but they each do it in different ways. Mortgage brokers usually have a number of options on where they will place the loan which may help with the pricing, but they have the least control over the loan process. Banks and direct lenders usually have only one source for the loan, themselves. This means that if they are looking for more business they may be aggressive with their pricing, but once their pipelines fill up the pricing may quickly get uncompetitive. Banks and direct lenders usually control the process, but they often do everything from remote processing locations so the loan officer has little contact with the loan once it leaves his hands. Mortgage bankers are hybrids between the two, and they often have multiple sources of lending, like brokers, but retain most of the control, like bankers.

Who will order the appraisal and what happens if you need to switch lenders? This is a question that has only recently become an issue, since the adoption of the HVCC appraisal guidelines. With these new guidelines the loan officer has no direct contact with the appraiser as a way to make sure that the loan officer doesn’t pressure the appraiser into giving higher values for the properties. The problem comes with the details of the guidelines. In many cases it is the end lender who the loan will be locked in with who orders the appraisal. This not only means less control, but if you are denied with that lender or decide to switch lenders for some reason (like when rates drop), you will need to start all over again with a new appraisal from the new lender. This isn’t the case with all lenders, but it is something you should check on and a question to be asked at the beginning of the process.

How long will it take to approve the loan? The mortgage business has slowed down over the last few months as the refinance boom died down. But right now there are some companies that can close loans quickly, and others that still need a minimum of 60 days and sometimes 90 days before they will be able to close. A lot of this comes down to control. Do they do their processing and underwriting in house? Or do they ship the loan off for these loan functions? What are their underwriting turn times? Who puts together the closing documents? Will they be able to meet the contract contingency date and the close date? These are all questions you should ask up front, so you aren’t surprised down the road.

Is the lender set up to do the loan that is best for you? Not every lender has the same inventory of loan options. For example, FHA the best loan available for most first time home buyers, was not a real factor in the market until the last 2 years. It now accounts for almost half of the loans taken on. Does the lender offer FHA or will they try and steer you into another option, or say you need a much larger down payment to buy? If they can do FHA, will they broker out the loan or are they a direct endorsement FHA lender? The same goes with other programs. Check to make sure that the lender has the program you need and is able to work it for your benefit.

What is the company’s reputation? Ask your Realtor or a real estate attorney what they know of the company. Do a Google search and see what comes up.

The loan officer

Choosing the right company is critical, but it is the loan officer who will be your day to day contact. A good loan officer can make a world of difference, while a bad will make your experience a case study in frustration. The loan officer’s job is to bring in good loans for the company. The loan officer is like a concierge and a guide. Their job is to qualify you for the mortgage, find the program that works best for you, make sure that your situation fits within the guidelines of the program, get the initial approval, and gather all the documentation needed. The loan officer works with a team on the inside, but he may be your only contact throughout the loan process.

Here are some things to ask any loan officer you are considering:

How long have you been in the mortgage business? There are good new and even rookie loan officers, but as a rule, experience is a plus. Most situations will fit within the lending guidelines, but there are always wrinkles, in a situation or a property, which can cause problems. If someone has worked with a similar situation before, they may be able to smooth out the wrinkle early in the process before it becomes a real problem.

Does the loan officer work with the type of loan that is best for you? Again, using FHA as the example, if this is the best program for your needs (and it is for most first time home buyers) you want to work with someone who knows the ins and outs of the program.

How well does your loan officer communicate with you? This is a little thing, but one that can make a big difference. Does he return your phone calls in a timely manner? Does he communicate the way that works best for you (phone, email, whatever)? If you have questions, does he get back to you with an answer? If there is a problem, does he tell you about it, or just stop taking your calls? If you aren’t communicating on the same level, expect a frustrating experience.

Have you built a rapport with the loan officer? Going from pre-approval to finding a home and closing on it normally takes at least a few months. During this time you will be relying on your loan officer to give you the best advice throughout the transaction. Do you trust and few comfortable with him? Does the advice make sense to you? Does he understand your situation and your future goals, or is it just a matter of quoting rates? If there is a problem, do you think he will go to bat for you, or take the easy way out?

Buying a new home can be a great experience, but make sure you do your home work first. Picking the right company and the right loan officer will reduce your stress and give you a much better chance of getting to a smooth closing on time.

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If you are in the market to buy or refinance a home, having a good credit rating is more important now than ever before. Both conventional and FHA loans now use credit based scoring (where better credit scores get better rates) or credit floors (below which your loan is automatically rejected). This means a few points difference in a score can mean a difference of thousands of dollars over the years you hold onto the mortgage, or if you are even able to get the house at all. Credit scores are crucial to the loan process, but the truth is that the whole system is flawed. There are hundreds of factors which go into each credit score and credit scores change constantly. Like taking a snapshot, your credit score measures only what is happening in that moment in time. Some of the scoring items are contradictory and some are entirely illogical. You could have a perfect credit rating and never paid a bill late and still have a sub par score. Little changes can make a big difference in your scores, and with so much riding on them you need to do what you can to present your credit profile in a way that presents you in the best light. If you have time there are a lot of things you can do to improve your credit scores, but if you are on the borderline and pressed for time, there are still ways to get your credit scores up.

For a full run down on how credit works and what you can do to raise your scores, read my 4 part series:

Part 1 -How credit works

Part 2 – Fico scores and how they are figured

Part 3 – 10 Ways to raise your FICO scores

Part 4 – Fixing mistakes and credit repair

This series is a great primer on what will work to make the most of your credit scores, but this is general advice, not specific to your personal situation. If you are in the market for a home and need to get your score up 20 points in order to qualify (minimum 600 score for FHA) or to avoid paying extra (below 740 on a conventional loan) you want something that will make the difference now. One way to do this is by using a “What if?” credit simulator. This is a tool we have available through one of our credit companies. When we pull a credit report the report will tell us not only what the scores are now, but what the range can be in potential improvements. Then we can use the “What if?” simulator to try out different changes to see what will make the most positive impact in your score. Maybe paying down a credit card, or switching a balance to another lender will help. It could be a matter of adding a balance to a card you haven’t used in a while or fixing a mistake on your report. Little changes can make a big difference, and this tool takes the guess work out of the credit equation.

There are two ways we can use this tool. First, if you haven’t found a home yet, we do this as part of the pre-approval and this tells you what you need to do while you still have time to do it. It takes about a month for the credit companies to report. If you have the time make the changes now and your scores will be up when you are ready to apply for the loan. The second way to use this is if you are already at the point where you need the loan and don’t have time to wait. In this case you can do a rapid re-score and we can update the credit on the items you changed manually. This is more expensive as the credit company charges for every credit line that is updated, but paying a little more up-front can pay off big if you are able to get a better rate. Or an approval you wouldn’t other wise get.

The “What if?” simulator is a great tool, and it does work. But don’t wait till the last minute to run your credit, get pre-approved before you start looking for a home. If you want to see what can be done to make the most of your credit, give me a call or click here for a pre-approval. I’d love to help.

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I received a call from the Chicago Tribune the other day asking an excellent question – Is there still a lot of time left for the $8,000 first time home buyer tax  credit? Or to put it another way, is it time to panic yet? The answer is no, it’s not time to panic, and there is still plenty of time for Chicago area first time home buyers to find a home and close on it before the November 30th deadline comes around. But just as summer disappears before we realize it, you can bet that the deadline for the tax credit will be here sooner than you think. This means that some procrastinators will be caught in a squeeze, and there will be a rush to get the last minute closings in under the wire. Real estate deals can take time to come together and close in the best of times, and there are always little things (and sometimes bigger things) which come up and add to the transaction time. A little longer closing time in August is an inconvenience. If the same thing happens in November it could cost you $8,000.

The biggest part of the housing market in the Chicago area this year has been made up of first time home buyers. Low home prices and low mortgage rates have been big incentives, but the icing on the cake has been the first time home buyers tax credit. Most first time home buyers are now buying with FHA financing, which means a minimum payment of just 3.5% of the purchase price. So if you were to buy a $300,000 home, after the close you could amend your tax return and get more back from the tax credit than what was invested in the down payment. Not a bad deal at all. Up until now there hasn’t been a sense of urgency to buy. We are in a buyers market, and with so many good properties available, if one doesn’t work out another will. But if you are a first time home buyer, and if that tax credit is part of your motivation, there are some real reasons why you need to step things up.

Here are some reasons that the whole process might take longer than you expect:

1. It takes time to find the right house. Buying a home is an emotional decision. This is more than just a place to live, it is an extension of who you are. I hear it all the time and it was the same when we bought our houses, you know the house is right for you when you first see it. Waiting until the ‘last minute’ means you are more likely to settle for what is acceptable, rather than what you really want.

2. Foreclosure and short sale properties take longer. In the Chicago area, over 40% of the sales have been short sale or bank owned properties. With these homes the bank is making the final decision as to whether to take your offer, or not. You can get some great deals with these homes, but don’t expect to close fast. Banks have become quicker and more responsive over the last year, but it can still take 30 days or longer before you even get an answer back on a purchase offer.

3. Condos can take longer to approve. Condos are the home of choice for many first time home buyers because they fit the lifestyle best. But condo financing has tightened up considerably over the last few years, and now it is a matter of not only approving you for a loan, but making sure that the condo building conforms to all the new rules and regulations. Gathering the information takes time, and the home owners association or management company needs to provide the information, and they are more likely to do this on their time schedule than yours. The bottom line is that if you are looking at buying a condo, try and do the research to make sure it fits the guidelines up front (your Realtor and lender can help with this), and allow a little extra time.

4. Appraisals can take more time. The new HVCC appraisal guidelines make the appraisal process more complicated for all mortgage lenders, but for many, including mortgage brokers and some of the big banks, this has meant that appraisals now take longer too. I’ve heard from a lot of buyers who were still waiting for the appraisal 30 days into the process and were concerned that they wouldn’t close in time. Make sure you talk with your lender early in the process and ask how long the appraisal will take so you aren’t surprised as you get near the dead line.

5. Financing can take extra time. It wasn’t that long ago that we were in the midst of a refinance boom and mortgage turn times were out of control. A lot of lenders are still out of control. A lot of companies have staffed up so this isn’t a problem now, but if rates come down again and the first time buyer boom hits a peak at the same time, approval and closing times could stretch out again.

6. Unexpected problems can occur. So much of the real estate transaction is out of your control, and there can be problems and delays that no one foresees. This can be a matter of a title issue which needs to be cleared, a seller who won’t let the appraiser in to see the property, or one hundred other possibilities. In a case I ran into last week, the buyers got to the closing ready to close, but the sellers needed to bring cash to the closing and they didn’t have it. This one did close, but it wasn’t quick and it wasn’t pretty. Most of these problems can be worked out, but if you are on a deadline, they might not be worked out in time to help you.

You can’t control the entire home buying process and it always makes sense to be proactive rather than waiting until the last minute. But there are some things you can do to put yourself in the best position so you can buy your home with more control and make sure you get what is best for you:

• Get pre-approved for a mortgage – Mortgage pre-approval is not only easy and relatively pain free, but it is the first step toward buying a home, and most Realtors won’t even work with you unless they know you will be able to buy. Getting your pre-approval upfront means you know what you can afford, and more importantly, if there are any problems you have time to deal with them. You can start the whole process with a short phone call and if you are serious about buying there is no excuse for putting it off. If you want to go over your situation quickly and with no obligation, give me a call.
• Get your down payment together – Finding the down payment is the biggest obstacle for most first time home buyers. FHA allows a 3.5% down payment and this can all be from a gift. There was talk about finding a way to use the tax credit up-front as part of the down payment, but the way it set you will need to come up with your down payment first and you can get the tax credit after the closing (by filing an amended 2008 tax return). Here is a list of ways to come up with your down payment.
• Find a good Realtor – I’m always amazed at how many people try and find a home by themselves without using a Realtor. The seller pays the commission, but you will get the benefit of the Realtor’s experience. There are hundreds of sites you can go to and search the MLS for properties. But there is a big difference between what you see on the Internet and how the home will work for you in real life. You want someone who is an expert in the neighborhoods you are looking at and has the experience to help make the transaction go smoothly.
• Start looking – You will need to look at a lot of homes to find the one that’s right for you. Get off the computer and get into the car. It’s the only way you will find your home.

Lastly, don’t wait till the last minute. If you do your homework and get going now you will be able relax and enjoy your new home as the calendar flips into December, and with $8,000 extra cash in your pocket you will feel a whole lot better.

Illinois Mortgage Rates                   First time home buyer loans  

We Lend in All 50 States

It costs a lot of money to buy a home. For most first time home buyers, coming up with the down payment is the biggest challenge, and even the low 3.5% down payment that FHA requires can be a big hurdle to buying (Here are some ways to get together the down payment). But getting the money together for the down payment is only part of the problem. In addition to the down payment there are a lot of other costs you will need to come up with at the closing. Some of the items you will need to pay for include:

Bank fees, including the appraisal and credit report, underwriting and processing charges.

Title charges.

Transfer taxes. In Chicago the transfer tax is .75% for buyers, or $2,250 on a $300,000 home, so this can be a big item.

Attorneys fees and home inspection costs.

The first year’s insurance payment.

Pre-paid interest,  and the money to set up your escrow accounts.

The truth is, real estate is a high cost transaction. It can cost thousands of dollars in addition to the closing costs to buy your first home. You will get tax credits from the seller (for whatever taxes he hasn’t paid up through the date of closing) which will reduce your cash needed, and if you are a first time home buyer you can claim your $8,000 credit after you close. But what happens if you are ready to buy now, but your pockets are empty and your wallet is still a little light? There are ways to buy with no money out of your pocket for closing costs, but you need to plan ahead.

One way is to ask the seller to pay for your closing costs through a seller concession. This used to be rare, but over the last two years, with a real buyer’s market in real estate, this has become much more common. You need to ask for this concession as part of your initial negotiation, once you have a signed contract and agreed to price and terms, 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. Work out the numbers with your lender beforehand, and have him put together a Good Faith Estimate so you know everything you will need to cover at the closing. You can ask for these closing costs either as a dollar amount, or as a percentage of the purchase price. Because there are so many fixed items, the percentage needed will be much higher for lower priced items (bank fees and title charges) then for higher priced homes, so there is no rule of thumb as to what percentage of the sales price you will need. Once you know how much cash 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 $200,000 and they are paying $3,000 for closing costs and pre-paids, the true sale price is $197,000. They are most interested in how much they will net after all expenses, how they get there isn’t as important.

When your Realtor writes up the contract, have them insert the phrase – “________ (dollar amount or percentage of the sale price) seller credit will be applied toward closing costs and pre-paids”. This gives you the most flexibility with structuring the transaction.

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.

Another way to pay for closing costs is through a lender credit. This is more common with illinois Mortgage Refinancing 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

(This is an update of a previous blog post)

The one question I am asked more frequently than any other is, What is your rate? This is a great question because you obviously want the lowest rate, but it’s a question that is impossible to answer. First of all, the rate will depend on what type of loan you are getting, whether you want to pay extra money in points and fees to get the best rate (which is what happens with the low rates you see in ads). Even if you were comparing apples to apples and making sure the loans are priced the same way, you can’t compare mortgage rates without without taking into account all the factors in your personal situation which go into pricing a loan. When  a lender takes on a new mortgage their goal is to minimize their risk and make sure that they are getting paid for the risks they are accepting. Some loan characteristics increase the chance that the borrower will default on their loan, costing the lender money. Over the last year Fannie Mae and Freddie Mac, the buyers of most conventional loans, have instituted a whole new series of price hits called LLPAs or loan level price adjustments, based on situations they consider more risky. This means that loans that fit into these situations will cost more than other loans. These price hits can be paid as extra fees at closing, or by increasing the rate on the loan.

Here are some of the things that factor into the price of a loan, and how I price out my Illinois Mortgage Rates:

Credit scores – Fico scores are a measure of how likely a borrower is to pay back the loan. It used to be that if you qualified for a conventional loan (a loan that was eligible for purchase by Fannie Mae or Freddie Mac) your pricing would be the same whether your score was in the low 600s or the high 800s. If you didn’t meet these guidelines you could still get a mortgage at a higher rate, but these were considered Alt-A or sub prime loans. Now you will need a score above 780 to get the best interest rate and if your score is below 680 the price hits will be substantial (if your score is below 680 you may be better off with an FHA loan). In order to quote an accurate mortgage interest rate, we need to know your Fico score first. This makes it all the more crucial to review your credit and work on any problems before you are ready to apply for a loan.

Loan type – Even when comparing 30 year fixed rate loans, there are a whole variety of programs available, each to meet specific needs. The pricing changes based on the loan type. Conventional loans (Fannie and Freddie) are good up to $417,000 for a single family home. If your loan is above that you would most likely look at a Jumbo loan. Jumbo mortgages are not able to be sold to Fannie Mae and Freddie Mac and they are priced much higher. If you qualify best for an FHA loan, the pricing would be different.

LTV and CLTV – This means the Loan to Value and the Combined Loan to Value, or how much is the mortgage compared to the value of your home, and how much if you include any other mortgages on that home. This is another way of stating how much equity you have in your home – the higher the equity, the lower the loan to value. And the less equity you have, the higher the risk is to the lender. This is tied in with your credit score, and if you are buying with a lower down payment, this could make a big difference in your rate.  Are you buying with a second mortgage added on? In the past this has been a great way to buy with less money down and avoid mortgage insurance. It is harder to do in many cases now, and you may pay more on your first mortgage if you have a second loan attached.

Loan purpose – Are you buying a home or refinancing? If you are refinancing your home and taking cash out, it would cost you more if your loan to value is greater than 70% (less than 30% equity). A purchase or a rate term refinance would be priced the same.

Occupancy – Is this your primary residence, a second home or an investment property? You get the best rates and fees for your primary residence. Second home loans are often the same, but in some cases they can be slightly higher. Investment property is looked at as a riskier type of loan and investors are more likely to walk away from a bad investment, than home owners are on their homes. So there are higher rates and fees when you buy non-owner occupied or investment homes.

Type of property – Mortgages for single family homes are are priced better than loans for two, three or four unit homes. In one of the biggest changes, you will pay more if you buy a condo with less than a 25% down payment.  (Here is more information on Chicago condo loans)

Loan amount – On conventional loans, pricing is usually better for larger loans. It costs the same to process and close a small loan as it does for a larger mortgage. Because of this the pricing improves on loans over $200,000. On the other side, loans under $100,000 have increased fees, and the fees go higher as the loan price drops.

Property location – There are some areas in the city of Chicago and in the Chicago suburbs that are considered target areas. These neighborhoods are targeted for redevelopment and banks are encouraged to lend in these areas – more than encouraged, they have to have to lend a certain amount in low income areas or they could face big problems with the federal government. Because of this pricing in these areas is better. The original idea here was to offer more homes for low and moderate income borrowers. Often the areas marked for redevelopment are the hot areas where prices are rising. Make sure your loan officer checks to see if you are in a CRA or targeted area.

Buying out of state the pricing can be different, too. I specialize Illinois Mortgages, but also close loans in most states. The wholesale lenders have different rates for each state.

Length of the rate lock – You will get better pricing for a 15 day rate lock than if you locked your rate in for 60 days. The longer the rate is locked in for, the greater the risk to the lender, so they pass the cost of hedging the loan on to you.

Escrows – Mortgages are usually priced so that the end lender will hold your escrows for taxes and insurance, collect 1/12^th of the payment from you every month and pay the bills when they come due. Many borrowers want to pay these bills themselves and earn the interest on their money until the bills come due. You can do this if you meet certain guidelines, but it will cost you. Most lenders charge a quarter point fee if you waive your escrows. On a $300,000 loan this is an extra cost of $750.

Pre-payment penalty – If you know you aren’t going to be moving or refinancing for a while, you can sometimes get a lower rate by agreeing to pay a pre-payment penalty. This will lower your costs, but it also handcuffs you into staying in the mortgage. If you end up moving or refinancing before the time expires, it could cost you a lot.

These are some of the things that factor into the rate and cost of a mortgage. Even bigger though is how the loan fits your needs and what you qualify for best. It doesn’t make any sense to shop the rate on a conventional mortgage if you can only qualify for FHA. Also, make sure you look at the bigger picture, not only the interest rate but the costs of the loan and how the financing works for your personal situation.

Illinois Mortgage Rates                   First time home buyer loans  

We Lend in All 50 States

Are you in the market to buy a home this year? The first step to buying a home is to see how you best qualify for a mortgage. This means you need to be pre-qualified, or pre-approved for a mortgage. Both terms are different levels of the same thing. With both, you are sharing your financial information with a mortgage loan officer, and they are helping you figure out how much of a home you can afford to buy, and what the best program is for your needs. I often start with a mortgage pre-qualification, which is usually just a conversation over the phone. I often start out the conversation by saying, we are going to play a game of 20 questions (sometimes it turns out to be more). The idea is that I will ask you everything about your jobs and financial situation, your future plans and goals. My questions are designed to find out all I can about a potential home buyer’s income, credit and assets. By going into depth, I am looking for both opportunities and red flags. If a red flag pops up and I see a problem of some sort, I will ask more questions to make sure I have the full story. Sometimes things that look like major problems can be easily solved with a little foresight. The other part of what I am doing is narrowing down the options, and figuring out what loan programs you can qualify for, and what programs would work best for you, both now and down the road.

Once I have had this pre-qualification conversation, I generally have a pretty good idea of whether you are ready to buy, or not. But to make sure, it makes sense to take the next step, mortgage pre-approval. This is especially important now when mortgage guidelines are changing on a regular basis. A mortgage pre-approval means we are investigating further, and approving you for a mortgage before you find a property. This means I will need to have the right documentation. Depending on your situation and the loan program you are applying for, we may need more or less, but typically we’ll need to see at least the following:

• W2s for the last 2 years (full tax returns if you are self employed).
• Your pay stubs for the last 30 days.
• Full bank statements for the last 2 months, along with statements from any retirement or stock accounts.

Once I have your documentation, I will run your credit, and put all the information into our automated underwriting system. With most loan programs, the underwriting system has become the key factor in loan approval. The underwriting software is set up based on Fannie Mae and Freddie Mac or FHA guidelines depending on what is best for your situation, and takes into account the same factors that a human underwriter would consider. Years ago, it could take a week or more to get a pre-approval. Now I can usually do it with a single phone call, and have a preliminary answer for you within an hour.

There are times when we need to go a step further and have the underwriter sign off on the loan, but in most cases this approval is what you need for the first step. One thing to keep in mind is that the approval is only as good as the person asking the questions. Garbage in, garbage out. So make sure that you work with someone who knows enough to ask the right questions and understands your full situation, as well as the current mortgage guidelines.

If you are just starting your home search, be sure to get your free copy of The Real World Home Buyer’s Guide – what you need to know in order to buy your home and get the mortgage that’s right for you.

Illinois Mortgage Rates                   First time home buyer loans  

We Lend in All 50 States