Illinois Mortgage Rates and News

Not so long ago it looked like the FHA Down Payment Assistance programs (DPAs) were gone for good. The DPAs were one of the last ways available for first time home buyers Loan and others who were short a down payment but otherwise qualified, to buy a home with no money out of their own pocket. This program was a way to launder a seller’s equity and use it as the basis of a grant from a charitable group like Ameridream or Nehemiah (here is a detailed look at how FHA DPAs work). But the DPAs were cut as one of the provisions of the new housing bill due to go into affect October 1^st. It now seems that rumors of their death may be greatly exaggerated. A compromise deal to save the DPAs appears to be about to be accepted, and the FHA Down Payment Assistance programs could be back in business before the end of this month. (here is a detailed look at Chicago mortgage refinance ).

The DPAs have long been controversial. FHA has linked the DPAs to a higher default rate, and they’ve been trying to shut them down for years. Ameridream and Nehemiah, the two biggest DPA Charitable organizations, contest the default figures, and claim that the defaults are more a function of fraudulent loans than problems with the down payment programs. It’s been estimated that 30% of FHA loans have been combined with a DPA, so this has been a big factor in the market. After the housing bill was released, a group of Realtors, lenders, builders and community organizations led the fight to get the DPA reinstated. But it looked like this was a done deal. FHA claimed that the problems with the DPAs were severe enough that it could bankrupt the entire FHA system.

My experience has been different. FHA loans aren’t and never have been Sub Prime loans. These loans are fully underwritten and the borrowers need to show that they have the income, job stability and credit responsibility necessary to handle their mortgage obligations. The down payment is one piece of the puzzle, but not the whole picture. I’ve worked with many borrowers who were otherwise great prospects to buy a home, but had not been able to save enough for the down payment and closing costs. FHA with a grant from Ameridream or Nehemiah was a way to get them into their first home. The problem as I see it wasn’t the lack of a down payment on its own, but the layering of risk. In other words, a first time home buyer with a good credit history, a good income and some money in the bank was likely to make their mortgage payments on time, whether they contributed a down payment or not. On the other hand, a borrower with a low credit score, an inconsistent job history and high debt ratios was already on shaky ground, and the lack of a down payment just increased the risk of default.

With the new compromise it looks like FHA is coming around to this way of thinking. According to details released by House Financial Services Committee Chairman Barney Frank, a new bill will allow the DPAs to remain, but with limits and risk based pricing. Those home buyers with credit scores of 680 or above would be automatically eligible for the program, those with credit scores between 620 and 680 would be able to take advantage of the DPAs, but their mortgage insurance premium would be higher. This compromise makes a lot of sense to me. When the real estate market is soft, taking away one of the best programs available for first time home buyers didn’t make much sense. This will take the riskiest loans off the table while still offering the program to more credit worthy borrowers. The new bill appears to have enough support to get through and is expected to be in place by the end of the month. I’ll have more details as they come available.

Illinois Mortgage Rates and News

One of the provisions of the recently signed Housing Bill, was the elimination of the Down Payment Assistance Programs (DPAs) like Ameridream and

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Nehemiah. These programs were a legal loop hole which allowed sellers, in a round about way, to fund the buyer’s down payment and allow them use an FHA loan to buy with no down payment from their own pockets. The DPAs have been a great deal for home buyers who didn’t have extra cash saved up for a down payment, and it’s been a great deal for home sellers because they brought in home buyers who otherwise wouldn’t have been able to buy a home. The down side has been that FHA has linked the DPAs to a higher default rate, and they’ve been trying to shut them down for years. Ameridream and Nehemiah contest the default figures, and claim that the defaults are more a function of fraudulent loans than problems with the down payment programs. Their claim is that administered properly, this is one of the best ways to bring low and moderate income buyers into homeownership and they have helped hundreds of thousands of families get their piece of the American dream. The DPAs have fought off court challenges and evaded death in the past, but it looks like this time it’s for real.

My experience lines up with the DPAs. The toughest part of qualifying for a mortgage has always been saving up the money for a down payment. I know that I’ve helped lots of otherwise well qualified buyers who without this program would have been out of the home market entirely. I also know that most of these buyers continue to pay their mortgages on time, and some of the buyer’s who started off with this program have gone on to use the equity they’ve built up to buy bigger homes – just like those homeowners who started out with large down payments. I’ve also known people who bought with larger down payments but ended up having financial problems down the road. I think most mortgage defaults are based on traumatic events like job loss, medical problems and divorce, than the size of their original down payment.

Another thing I’ve been seeing lately, now that FHA has increased their loan limits here in the Chicago area, is buyers using FHA and DPAs to buy up into a move up home. I have two clients I am working with now who are selling their homes, but because of the softness in the real estate market they need to bring money to closing in order to pay off their current mortgage and closing costs. With no money for a down payment they would be frozen out of buying. The DPAs allow them to start over again and not have to become renters again. Having a hefty down payment is always preferred, but this seems like a tough time to take otherwise good buyers out of the housing market.

So if you are looking to buy a home but you are short the down payment, this might be your last chance to buy. The new housing bill goes into effect on October 1^st. . This means you need to buy a home and close on it by September 31^st or you are out of luck. With 2 months this is plenty of time to find a home and to get a mortgage, but you need to act fast. If you are thinking of buying a new home here in the Chicago area or throughout Illinois, give me a call and we can go over your situation and get you pre-approved. You can still buy with no money down, but the train is pulling out of the station and you will have to act fast.

Illinois Mortgage Rates and News

Click here if you would like to add your name to a petition to keep the DPAs in place. It may be too late, but it is worth a shot.

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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 Loan 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 Illinois Fha Loans 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.

Illinois Fha Loans 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.

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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