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

If you are buying a home in Chicago or the Chicago area, an FHA mortgage might be your best financing choice. With FHA there are two ways to get your mortgage approved. The first is through an automated approval. This is the way nearly all conventional loans are approved, and most FHA loans are approved this way, too. When you apply for a mortgage approval or pre-approval your loan officer enters all your personal and financial information into a computer program and uses an Automated Underwriting System (AUS) to determine the risk in the loan. The system issues either an approval or a refer to the underwriter decision. This is a very simplified explanation. Part of getting the approve decision is based on how your loan officer interprets your loan information and how it corresponds to FHA guidelines. If the wrong information is put in, or if the information is right but not acceptable according to the guidelines, you may get an automated approval, but when the underwriter goes over the details she may overrule the approval and deny the loan. So it is important that your loan officer understands all the ins and outs of FHA financing. But if the loan is put together correctly and the right information put in, an automated approval is the quickest and easiest way to get an FHA Loan approved.

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But what happens if the loan doesn’t get the automated approval decision? Sometimes there are borrowers who don’t quite fit the box for the automated approval, but have reasons why they should be able to own a home and pay a mortgage. The AUS measures risk, but it isn’t a live person, and sometimes a loan that looks too risky based on the computerized decision is a safe loan when all the facts are presented. The loan could seem too risky for a number of reasons: maybe because of recent credit problems, maybe it appears there isn’t enough income to handle your debt, or it could be an employment issue. My job is to find the strengths in the borrower and present their file in the best light. If there is a problem in the file, I need to understand what happened and why it happened. Maybe the credit looks bruised and the credit scores are low, but there was a reason for the late payments which make them isolated and unlikely to happen again. Explaining the special circumstances can lessen the risk and show the underwriter why the loan should be approved.

One of the common reasons that loans are close calls is when the ratios are too high. Ratios, the percentage of your income which goes toward your mortgage payment and the percentage of your income which takes up the mortgage payment plus all your other debt are set at 31% and 43% respectively, but you can go higher than those percentages with the automated approval. If you don’t get the automated approval and you need to go beyond these stated ratios, you will need compensating factors to show that you are not taking too much risk. Here are some of the things looked at as compensating factors. The more of these that your loan has, the stronger your case for an approval is:

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• The borrower has substantial documented cash reserves after closing. (At least 3 months’ worth).

• The borrower has demonstrated the ability to accumulate savings.

• The borrower makes a large down payment (10% or more.).

• The borrower has demonstrated a “conservative” use of credit.

• The borrower has demonstrated the ability to pay housing expenses equal to or

greater than the proposed monthly housing expense for the new mortgage over

the past 12 months.

• Previous credit history shows that the borrower has the ability to devote a

greater portion of income to housing expenses.

• The borrower receives documented compensation or income not reflected in

effective income, but directly affecting the ability to pay the mortgage (this could be a 2^nd job that we can’t count as full income or even public assistance).

• There is only a minimal increase in the borrower’s housing expense.

• The borrower has substantial non-taxable income.

• The borrower has potential for increased earnings, as indicated by job training or

education in the borrower’s profession.

• The home is being purchased as the result of relocation of the primary wage earner

and the secondary wage-earner has an established history of

employment, is expected to return to work, and there is reasonable prospects for

securing employment in a similar occupation in the new area.

There are other issues like having been on the job or your current residence for a long time which add to your stability and make your case stronger, but aren’t really compensating factors. If your case is a close call, the way that your case is presented can mean the difference between loan approval and a denial. If you are considering an FHA loan in Chicago or the Chicago area, give me a call, I’d love to help.

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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Over the last months conventional mortgage guidelines have tightened, and with risk based pricing mortgage financing has gotten more expensive for most borrowers. Conventional mortgage insurance has pulled back on what they will cover, and the cost of mortgage insurance has gone up (more increases are coming in August). This combination has made it harder to qualify for a conventional loan, and more expensive for those who have lower down payments and good but not great credit scores. The one bright spot in the real estate financing market has been FHA. Earlier this year FHA raised their maximum loan limit (up to $410,000 for a single family home here in the Chicago area, lower in other parts of Illinois) making FHA a great option for many borrowers who would have once been conventional borrowers. But FHA is feeling the pinch of the market, too. Effective July 14^th FHA is changing to risk based mortgage insurance.

FHA is a government backed loan which is designed to help more people buy homes. FHA doesn’t loan the money themselves, they set up the guidelines and insure the lenders against loss through their mortgage insurance premiums. The goal of FHA isn’t to make a profit, like the private mortgage insurance companies, but to encourage more home ownership which makes a more stable society. This means they are willing to take on borrowers who are considered higher risk due to low down payments, lower credit scores, and those who haven’t built up traditional credit. This is still their mission, but now the riskier borrowers will end up paying a little more to make sure the program stays solvent.

FHA breaks their mortgage insurance premium down into 2 parts: an up-front portion that is added to the loan amount and financed over the life of the loan, and a monthly insurance premium which is part of your normal payment. This used to be a one size fits all solution, as long as you qualified for FHA financing you paid the same premium. They are now basing the premium on borrower’s down payment and credit scores. This means the borrower’s with the lowest risk will get the best pricing, and those who are higher risk will have to pay a little more. The current cost of FHA is a 1.5% up-front mortgage insurance premium and .50% yearly premium which is paid monthly. The new schedule will lower the up-front premium for most borrowers who invest at least 5% for their down payment. The monthly premium is going up for all minimum down payment buyers (3% cash investment) and the up-front portion changes based on their credit score.

FHA is still the best choice for many borrowers and the only choice for home buyers with little or no money for a down payment and closing costs. Here is some more information on some of the advantages of FHA financing.

This is what the premiums will be after July 14^th.

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 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

Not so long ago, FHA loans were the red-headed step child in the housing market. They didn’t get any respect. That wasn’t always the case. Back in the old days FHA loans were the only option for most first time home buyers or others who had little money to put down. FHA was the way for many borrowers to take their first steps into home ownership here in the Chicago area. Not only could you buy a home with a small down payment, but the entire down payment could be a gift, and your credit didn’t have to be perfect. There were problems with FHA loans, though. It took longer to get a loan approved and closed than with a conventional loan, and if there were issues with the homes condition (like peeling paint) the issues had to be fixed before closing. Many people felt that FHA underwriters were professional nitpickers, so if they had a choice, many Realtors and home sellers would take a conventional buyer over an FHA buyer. As time went on

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FHA became less and less of a factor in the market. Conventional loans came out with low, and later no down payment options, and other loans catered to borrowers with bruised credit. Another part of the problem was that FHA didn’t keep up with the market values. As home prices moved up in Dupage County and throughout the Chicago area, FHA kept their loan limits low, and became a non-issue for all but the lowest priced homes. Now, as the conventional market is in turmoil, it looks like FHA has another shot at its glory days, and there is no doubt that FHA financing is the best loan option for many Chicago area home buyers and the best first time home buyers loan available today.

Over the last few years FHA has updated the way they make loans. They’ve eased off on their property conditions, and with direct endorsement underwriters we can approve and close an FHA loan as fast as we can a conventional loan. But the biggest change is that FHA has increased their loan limits here in the Chicago area and throughout the nation. In the Chicago area (this includes all of the collar counties including Dupage, Kane, Lake, Gruny, Kendal and Will) you can now get an FHA loan on a single family home up to $410,000. This is already making an impact. FHA’s market share in 2006 was about 3% of total mortgage originations. Today FHA is closer to 10%, and moving up.

Why would you consider an FHA loan over a conventional loan? Here are some of the advantages:

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. Fannie Mae and Freddie Mac, the two big buyers of mortgage loans in the mortgage aftermarket, recently changed their guidelines in a way that meant all but the very best borrowers will pay more for a loan. Now buyers with credit scores under 720 and with down payments under 20% are getting hit on their pricing. This isn’t the case with FHA. 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. FHA uses a common sense underwriting approach that understands credit problems can happen to anyone. Their concern is that the problem has been addressed and isn’t likely to occur again. If you have had credit problems in the past, you may need to document why they happened and what you have done to correct the problems, but you aren’t automatically frozen out of a loan, as you would be now with most conventional loans. If you have some issues with your credit, give me a call before you are ready to buy. Working to fix your credit earlier will help you save money later.
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. And this down payment can come from 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. One way many buyers use this is by converting a seller concession into a grant from a non-profit down payment assistance program like Nehemiah or AmeriDream. Here is how it works. When you negotiate the contract with the seller, you would ask for a concession on the price upfront — the amount will usually be between three and a half to four percent of the price (more if you want to build in closing costs, too). Three percent will go for the down payment; the rest goes to pay for the organization’s administrative costs. The seller agrees to give this negotiated concession to the grant provider at the closing table, and they in turn give a “grant” to you for your down payment. This is all done on paper and no money really changes hands, but it allows you to buy your home with no money down. There are other ways to use the seller concession, including buying down your interest rate to lower your monthly payment. The important thing is to make sure you ask for the concession right up front when you first start to negotiate your purchase.
5. FHA is more lenient with past bankruptcies – With FHA you can buy a home 2 years after a Chapter 7, and 1 year after a Chapter 13 bankruptcy – sooner if the bankruptcy is medically related or due to actions beyond your control. You will still need to show that you have reestablished your credit and can afford your new payment.
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 – This is another way that FHA differs from conventional financing. Saving up for a down payment is the biggest obstacle to buying for most first time home buyers. With conventional loans you need to have saved not only the amount for the down payment, but also have some money left over in reserve. With FHA they only require enough cash to close and you don’t need money in reserves.
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. It’s goal is to help more people buy homes and there are no limits on how much you can make.
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 upfront 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.

These are other just a few of the advantages of FHA financing. There are other advantages of FHA financing which help some individual needs. One of the biggest things to keep in mind is the pricing. FHA pricing is as competitive as conventional financing –and much lower if you are buying with a low down payment or if your credit scores aren’t the absolute best. If you would like to see how FHA could work with your situation, give me a call or contact me. I would love to work with you.

Illinois Mortgage Rates and News

FHA just released their new loan limits for Northern Illinois and the Chicago area. This determines the maximum loan for FHA financing in Cook County, Dupage County, Kane County, Lake County, Will County and McHenry County. The limits are:

1 unit $410,000

2 unit $524,850

3 unit $634,450

4 unit $788,450

This is great news. As underwriting for conventional loans has become progressively tighter, FHA is shaping up to be a great alternative. Some of the advantages of FHA financing include:

3% down payment required – the down payment can come from a gift from a relative or as a grant from a down payment assistance program, so the buyer can come in with no money out of their own pockets.

FHA allows a seller concession of up to 6% – this allows more creative ways to structure your purchase, including ways to buy with no down payment or closing costs, or using this concession to lower your interest rate.

FHA is not credit score based – this means you can qualify for an FHA mortgage with credit scores in the upper 500s – without any price hits. With low down payment conventional mortgages the rates go up if your FICO score is below 680. FHA uses a common sense underwriting approach. It understands that credit problems can happen to anyone. Their concern is that the problem has been addressed and isn’t likely to occur again.

FHA is more lenient with past bankruptcies – you can buy a home 2 years after a Chapter 7, and 1 year after a Chapter 13 bankruptcy. If the bankruptcy is medically related or due to actions beyond your control, you can buy sooner.

FHA pricing is as competitive as conventional financing – the pricing on FHA is on par with any conventional program, and much lower if you are buying with a low down payment or if your credit scores aren’t the best.

These are just a few of the advantages of FHA financing. When I first got into this business, a long, long time ago, FHA was the preferred program for first time home buyers or others who didn’t have a lot of money available for a down payment. FHA lost favor over the years as more low down payment conventional options came on the market. It was hard to do an FHA here in Dupage county and other parts of the Chicago area when the max loan limit didn’t keep up with the increase in housing prices. FHA has worked toward modernizing their underwriting over the years, and it is now much more streamlined and user friendly. For many home buyers FHA is now the best loan alternative, by far.

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