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 Chicago 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 illinois home 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 FHA loans : Mortgage Chicago il 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.

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First Time Home Buyers Loan : Tax Benefits Make Real Estate a Smart Investment for Chicago Area First Time Home Buyers

I read a lot about the economy and what the experts say about it, but I get the best feel for what is happening from talking with my clients. People need mortgage money whether the economy is up, or down, but they need it for different reasons. When the economy was flying high, a typical phone call would be about buying a new, bigger home, starting an addition to their current home or buying a vacation home. I’m still doing a fair amount of new purchases, but a lot of my calls now are about cash out refinances to consolidate debt. It always makes sense to make sure your mortgage is in line with your overall finances, but it is especially important when money is tight. A debt consolidation loan can help you to restructure your debt in a way that puts more money in your pocket and gives you a plan to actually pay down your debts.

Most people look at their home mortgage and other debt separately. For many people their home is their security and paying it off quickly is their biggest financial goal. It’s not unusual to find someone who has a 15 year mortgage because they are trying to pay down their home quickly, but also has a big balance on their credit cards. The problem here is that the mortgage rate is almost always lower, and tax deductible besides. If you are carrying a balance on your credit cards you are paying interest on the interest, and if you pay the minimum payment there is almost no way to get rid of the debt. What is your over-all debt level? Are you feeling pressure making all the payment on your credit cards and other consumer debt? This is where the debt consolidation mortgage comes in.

A debt consolidation mortgage is a type of cash-out refinance where you use the equity in your home to pay off high interest debts. If you have owned your home for a few years, chances are you’ve built up some equity. Here in the Chicago area, even in this soft real estate market, appreciation has driven home prices much higher over the last years. If you are like most people, the equity in your home may be your biggest asset or source of wealth. A debt consolidation refinance doesn’t change the amount of money you owe, what it does is restructure the type of debt. By converting credit card and consumer debt into your mortgage you can lower your monthly payments, increase your tax benefits and use the savings to pay down your debt or start a savings plan. With conventional mortgages you can remortgage up to 90% of your home’s value for a cash-out loan, but the best rates are available at 70% of the appraised value ( We do have one lender who will loan 100% of your value). With an FHA loan you can take out up to 95% of your home’s appraised value at the best rates.

Here is an example of how this works. Say you have a home that is now worth $350,000. You still owe $200,000 on your first mortgage and have a home equity loan for another $75,000 and you have credit card and consumer debt of $50,000. The monthly payments (not counting taxes and insurance) might look like this.

Principal and interest on your first mortgage $1,319

Interest on your home equity loan 375

Minimum payments on credit cards 1,200

Total payment $2,894 per month

If you refinanced this into a new FHA loan at 95% of the home’s value, you could borrow up to $332,500. This is enough to pay off all the debt, plus the closing costs and the amounts to set up the new escrow accounts. If the new rate is at 6.0% on a 30 year fixed rate – the same rate as I used in the example – here is how it turns out.

Principal and interest $2,023

Monthly mortgage insurance 140

Total payment $2,164

This means that the debt consolidation chicago mortgage refinance saves you $730 each month.

This plan has a lot of advantages, but you are increasing and extending your mortgage which can be a scary thing. Also, you need to have a plan on what you will do with the new savings. There can be a danger in this strategy. First, you are extending your mortgage and paying the loan over a longer period of time. You also need to watch how much the refinance costs. If you are paying too much for the refinance, it will be a long time before you see any benefits. But the biggest problem is that it is too easy to get back in the same trouble if you don’t change your credit habits. I’ve seen too many people who used a cash-out refinance to consolidate their debts and get a new start, only to run up their credit cards and get right back in debt. For a long term solution you need to be able to change your outlook and credit habits, too. On the other hand, if you take some of the money you saved and use it to start a monthly savings or retirement fund, or maybe shorten your mortgage so you are debt free years faster. What is best for you depends on your financial situation and your long and short term goals. Refinancing, if done properly, can be a tool to eliminate your debt and build wealth over time. Any time you take out a loan against the equity in your home you are trading some security for the cash you need, but if you have high balances on your credit cards it can be the right way to go.

Illinois Mortgage Rates and News

If you are a home buyer here in the Chicago area or around Illinois, and are looking for a Jumbo mortgage, your options aren’t what they used to be. A Jumbo loan is a mortgage higher than the conforming loan limit set by Fannie Mae and Freddie Mac, the two big purchasers of loans on the mortgage after-market. The current Fannie Mae limit here in the Chicago area is $417,000 for a single family home, so anything above that is considered a Jumbo mortgage. Because these loans aren’t covered by Fannie and Freddie, Jumbo loans are considered slightly riskier than conventional loans and have always been a little more expensive. Last summer, before the credit crunch (also known as the sub-prime melt down) hit the mortgage industry, the premium on a Jumbo 30 year fixed rate was just a ¼ point higher than a conforming fixed rate. This made sense at the time. Jumbo mortgages are typically made to people with higher incomes, good credit and good assets. These are usually people who have owned homes before, and are considered good credit risks. But then the credit crunch hit, and suddenly the market for Jumbo loans disappeared. The market for Jumbo loans has returned, but now the difference between a 30 year fixed rate Jumbo and the 30 year fixed rate conventional has grown to as much as 1% difference in rate, so if a conventional is at 6.0%, a Jumbo would be at 7.0%.

This means that Jumbo loans have gotten much more expensive than they were before. If you are a Jumbo buyer, the difference in rates and the larger loan size means you are paying thousands of dollars more now than what you would have before. So what are your options if you are in the market for a Jumbo loan? Do you need to just grit your teeth and pay the extra money? Not necessarily. There are a few options for Jumbo buyers that can keep the rates and payments down, and save money.

1. Adjustable rate Jumbos are still competitive. The market for fixed rate loans has been hit the hardest, but there are still adjustable rate loans which are priced more aggressively. The most popular adjustable mortgages are actually a combination of a fixed rate and an adjustable. That is they are fixed for a set period of time, typically 5 or 7 years, before they become ARMs. This gives you the security of knowing that your payment and interest rate are fixed for the first 5 or 7 years while saving you thousands of dollars in payments. If you are planning on staying in the home longer than that you are taking a risk that payments may go up, but you can refinance your mortgage at any time, and odds are good that you will have some opportunities to refinance into a lower rate sometime down the road.
2. Break the loan into 2 parts a first and a second mortgage. This works best if you are in the lower range of jumbo mortgages. Here is how this works. Let’s say that you are buying a home for $700,000 with a 20% down payment and financing $560,000. If the interest rate for a 30 year fixed rate on the full loan amount is 6.75%, the payment would be $3,632 per month. If you break the mortgage in to two pieces, the first mortgage would be at the conforming limit of $417,000 and the second mortgage would be for the difference, $143,000. Let’s say the rate on the first is 5.75%. That gives you a payment of $2,433 per month. The rate on the second is higher, say 6.50% for a fixed rate. This means a payment of $904 per month. Add the two payments together and you get a total payment of $$3,369 – a savings of $263 each month compared to taking out a single jumbo loan.
3. 3. Portfolio Investors. All the problems with Jumbo mortgage pricing stem from the breakdown in the mortgage backed securities markets. With the uncertainty in the market, buyers for these loans have dried up and prices have risen. But there are some lenders who don’t sell their loans in the mortgage after-market. These lenders price their loans based on what makes sense for their own investment needs. We have one lender who is currently offering Jumbo loans at 6.125% with no points, much lower than anyone else in the market. The guidelines are tighter and the money is available only for a limited time, but it is a great deal.

The conventional wisdom is that the credit markets will eventually loosen up and Jumbo mortgages will be in demand again. When this happens I expect that the rate difference will narrow and Jumbo loans will be priced much more attractively. In the meantime, there are still options.

Illinois Mortgage Rates and News

As we head into the Spring home buying market, first time home buyers in the Chicago area and throughout Illinois will be making their first tentative steps toward buying a home of their own. It’s conventional wisdom that buying a home makes sense, even now with all the bad news on the housing front. But the question is, does owning a home make sense for you? Some of the reasons you might want to buy are more intangible but emotionally compelling – the pride of having a place of your own, a chance to establish your roots, the joy of having a real home where you can express your own personality and style. These are real reasons for buying your first home. But the some of the best reasons to buy may be financial. In fact, buying a home may be the smartest financial decision you will make in your lifetime.

You know some of the reasons to buy, rates are low and it is a buyer’s market. But the reasons to buy a home go beyond that. If you are a first time home buyer, thinking about buying your first home, you need to know what the advantages of buying are, and how buying a home compares to renting. There are three prime financial benefits of home ownership:

Principal reduction

Appreciation

Tax Advantages

Let’s look at principal reduction. First of all, a quick explanation – with most mortgages each payment is divided into two portions, principal and interest. Interest is the lender’s profit, the amount they charge for the use of their money over the time you hold the mortgage. Principal is the amount of the mortgage you are paying back each month.

Interest is charged on the outstanding loan balance each month. This means that in the beginning years, you are paying mostly interest. But with each payment you make you pay off a little more of the principal, and the loan balance goes down a little more each month. This doesn’t seem like much at first, but it adds up over time.

Let’s say you borrow $200,000 with a fixed rate mortgage at 5.75% interest over 30 years. That means your mortgage payment each month is $1,167. On your first payment, about $958 will go to pay the interest, and just over $208 will go toward the principal, or paying back the loan. That means after one payment, your loan has been reduced by $208 to $199,791. The next month’s payment is based on 5.75% of the new balance, so your interest portion goes down, and the principal payback goes up a little more.

Each month a little more of your payment goes toward reducing your principal, and you pay little less toward interest. If you stay in this house, and this mortgage, for the whole 30 years, you will off the entire mortgage and you will own the home free and clear.

In the early years, you are paying off mostly interest, and chances are you won’t be in that same home 30 years from now (Even if you are, odds are you won’t be in the same loan. Refinancing your mortgage is a way to tap into the equity you’ve built up). Principal reduction is a benefit, but there are other, bigger, advantages to home ownership.

I’ll cover these benefits of owning in my next posts.

This weekend is Super Bowl Sunday. This is always an exciting time of the year for me, and I’m not just talking about the big game. I expect New England will dominate, and hopefully the Giants will make a game out of it, and we won’t stay tuned just for the commercials. I enjoy the beer and the food and the chance to visit with friends. But that’s not why I’m excited either. Here in Chicago, Super Bowl Sunday traditionally represents the start of the Spring home buying season. As a mortgage banker who loves working with first time home buyers, that’s a great reason to get excited.

Are you a first time home buyer in the market for a new home? With the Chicago area home market slow, and interest rates low, this could be the best time in years to buy your first home. It is a buyer’s market, and you can find bargains if you are ready to go.

One of the biggest hurdles keeping people from buying their first home is coming up with the money for the down payment and closing costs. The good news is there are a lot of ways to buy a home, even if you don’t have much cash. If you’ve been saving and you have ready cash, that’s great. But if you don’t, there are still ways to raise what you need to buy. Here are a few random ideas:

1. Lotto tickets. Well, maybe not. If you’re truly lucky you might be able to buy a home and skip the mortgage. But odds are against it. Big time.
2. Tax refund. This is what usually gets the Spring market going. You’ve received your W2s by now, and refund checks will be in the mail shortly. Your refund might be just enough to get you into a home. 
3. Stocks, savings bonds. Do you have any savings bonds that are tucked away? Many people have stocks and bonds from gifts years ago. A good use for them might be to buy your first home,
4. Gift from a relative. Many programs allow the down payment to come from a gift from a relative. If you have a generous relative who is willing to help, this could be just what you need.
5. Cash out your 401k. If you have money in your company retirement plan, you can liquidate it and use it for your down payment. Because you didn’t pay taxes on it up front, you will have to pay taxes on the amount you liquidate as well as a penalty for withdrawing it early. This can still be a good option in some cases, but a better option might be -
6. Take out a loan against your 401k. The advantage here is that you are paying your self back and you still have your retirement account. Most plans will let you borrow up to half the value in your account, and the interest rate and terms are set so the payment (to yourself) will be affordable.
7. Sell something – If you’re like most people, you probably have more stuff than you know what to do with. Some of this stuff may have value, if you are willing to part with it. Do you have a boat or a motorcycle? How about baseball cards or other collectable’s? EBay makes it easy to convert stuff, to cash, and this could be just what it takes to get you into a home.
8. Down payment assistance programs.  Nehemiah and AmeriDream are two versions of these programs. These are non-profit groups that, in a sense, launder a credit you negotiate from the seller in a way that you can use it for your down payment. These are usually used in conjunction with an FHA loan. I’ll post more on these later. If you have questions on how they work, give me a call.
9. Government grant programs. There are programs like the Chicago Bond Program and the Illinois Bond Program, which provide you with a grant at closing for the money you need for the down payment and closing costs. You need to meet the guidelines, but if you qualify it is often the best way to buy.
10. Look at the long range. Maybe you don’t have the cash to buy what you are looking for, but this might be the time to put yourself on a savings program so you will have it down the road. What can you do now to get extra cash?  Can you take on a second job? How about cutting your expenses? You might be surprised at how much you can save if you have a goal and a plan.

There are lots of ways to buy without having a lot of cash. Use your imagination and you can come up with some more ways to come up with the down payment.

Illinois Mortgage Rates and News