Sue Fox, @Properties. Direct 773.816.1788
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In his State of the Union speech last night, President Barack Obama proposed a new plan to let all underwater homeowners refinance at today’s super-low mortgage rates — a proposal that could help heal the housing market and inject fresh cash into the economy.
If Congress approves it, that is. And with a Republican-controlled House that continues to block many of Obama’s initiatives, that is a big if.
The Obama administration has already offered a variety of programs aimed at stemming the tide of foreclosures, helping people modify their loans, and promoting refinancing for government-backed mortgages. But so far, the impact has been minimal and more than 3 million homes have been repossessed since the housing boom ended in 2006.
In Chicago, where the median home price has dropped about 30% since the downturn began, thousands of underwater homeowners have either lost their homes to foreclosure or been forced to sell in a short sale. Nearly half of the recent sales here now involve distressed properties. Each year, I meet dozens of people who would like to sell, if only they could get enough to pay off their mortgage.
Obama’s plan would at least help these folks hang onto their homes. Each homeowner could save an estimated $3,000 per year if he/she could refi and take advantage of the lowest rates (around 4% for a 30-year fixed mortgage) in half a century. Then they could pump those savings back into the economy, whose lifeblood is consumer spending. The Obama administration estimates that the program could benefit two to three million homeowners, according to the New York Times.
It’s a sensible plan all around, but some financial analysts are already proclaiming it dead on arrival, saying it won’t get through Congress. The sticking point seems to be a “small fee” that would be imposed on large banks to help fund the plan. Will this prove to be another instance of Congress protecting Wall Street profits at the expense of Main Street homeowners?
Good news for Chicago home buyers: Lenders are finally starting again to offer loans with minimal down payments. Guaranteed Rate, for example, announced this week that it can now do conventional loans (not FHA!) with 3% down, provided the borrower has a credit score of 680 or higher.
This is especially good news for condo buyers, who have been forced to turn to FHA in recent years for a low-down-payment loan… but in Chicago, FHA and condos are often a lousy fit.
The trouble is, many first-time buyers can’t scrape up much cash to buy their first home. Ever since the real estate downturn led lenders to dramatically tighten the purse-strings in 2008, many buyers have been told to come up with at least 10% down. For hundreds of thousands of people, the only alternative was to use an FHA loan, which requires just 3.5% down.
This was all (usually) well and good if you were buying a house. But many first-time buyers in Chicago want a condo, and the vast majority of Chicago condos are NOT currently FHA-approved. Making matters worse, the FHA changed its rules last year to make it even more cumbersome to get condo buildings approved.
But now, buyers with good credit can avoid the whole FHA bottleneck and choose whatever condo they like — and still only put 3% down. This is great news for sellers, too, since it will smooth the path for buyers who may be interested in their homes.
These days, a lot of sellers and some condo associations have become interested in getting their condo building approved by the Federal Housing Administration (FHA). That’s because FHA loans — which are insured by the government and require only a 3.5% down payment — have exploded in popularity, with more than a third of buyers now using them to purchase homes.
But in order to use an FHA loan to buy a condo, the entire condo building must be FHA approved. This is a somewhat laborious process that involves gathering up detailed paperwork to prove that the condo’s budget, reserves, collection of assessments, percentage of ownership and other factors all meet FHA’s rather stringent criteria. In Chicago, where many smaller condo buildings are self-managed, it may seem a confusing and overwhelming task for individual owners to put together an FHA application that stands a chance of being approved. Even larger buildings could often use a hand when it comes to FHA’s rules.
That is where an expert in securing FHA approvals can help. This spring, for example, I had a buyer named Michael who made an offer (which was accepted) to buy a newly-rehabbed 2-bedroom condo in Edgewater. But due to a combination of factors involving both the buyer and the building (he could only afford to put 5% down, and more than 10% of the building’s units were still owned by the developer) Michael wasn’t able to secure a conventional loan. He could use FHA, but then he was up against a major roadblock many Chicago condo buyers encounter: Most Chicago condos are not already FHA approved.
So we decided to see if, with the cooperation of the developer, we could get this 22-unit building approved. Wintrust Mortgage, Micheal’s lender, put us in touch with Steve Stenger of Condo Approval Professionals, LLC, a local company that specializes in getting FHA approval for condo buildings. And it worked!
Stenger worked hand in hand with the condo board to bring the building into FHA compliance, assembled the necessary package of documents, submitted everything to FHA and got the building approved in less than 30 days. And yesterday, Michael finally was able to close on his new condo.
“I think the key is really having someone with the ability to get it done, who knows what things need to be worked on to get the building into compliance,” Stenger said. “Some condo associations might try to do it on their own, but it’s difficult because there is a lot involved in terms of the budget, having the right insurance, looking at the declaration of bylaws. It’s not just ‘gather and submit.’ That’s why the FHA doesn’t want people to just pull documents together and send them off.”
Stenger, who has been in the business for 16 years, said he starts by “prequalifying” the building with a condo questionnaire and a budget review “to determine if they’re even eligible for FHA right out of the gate.” Sometimes, as was the case with Michael’s condo, the building isn’t in compliance — but could be, with a few changes. In this case, Stenger advised the board to collect some unpaid assessments (FHA won’t allow buildings with more than 15% of the units beyond 30 days delinquent in their assessments) and to use the condo reserves to cover some upcoming sewer repairs rather than levy a special assessment, which could also derail FHA approval.
“When I put that package together, I fully expect it’s going to be approved,” Stenger said.
Condo Approval Professionals doesn’t charge to prequalify a condo building, he added. But to work with the building and shepherd the whole FHA application package through, the fees are:
$500 – Building with 5 units or less; $750 – 6 to 10 unit building; $1500 – 11 to 20 unit building; $2000 – More than 20-unit building
In my opinion as a realtor who helps many condo buyers, it may be well worth the investment. Once a building is FHA approved, buyers can now use FHA loans to finance units there — which gives the building a huge competitive edge in a very sluggish market.
Steve Stenger of Condo Approval Professionals can be reached at (847) 293-2962.
Ever since February, when the Federal Housing Administration adopted new rules for the approval of condos, confusion has clouded the Chicago condo market. Buyers hoping to use an FHA loan (which requires only 3.5% down) can no longer obtain “spot” approvals for the unit they want to buy, because now the entire building must be FHA approved. And condo sellers — observing that at least a third of buyers are now using FHA mortgages — are eager to get their buildings onto the FHA list.
So how does a seller obtain FHA approval? I attended a seminar on this very topic last week, and the consensus seems to be that the simplest, fastest way is for the condo association to hire a project consultant or lender for a minimal fee. The paperwork that the government requires can be cumbersome, and the condo building has to meet a long list of requirements. For example, no single entity can own more than 10% of the units, no more than 15% of the units can owe overdue assessments, the building must be at last half owner-occupied, and at least 10% of the condo budget must go towards the reserve.
There are companies like Condo Approval Professionals LLC (which sponsored my seminar) that can walk condo boards through a 2-page questionnaire to see if the building is likely to qualify for FHA financing. The cost of getting the building approved runs from $500 to $1000, depending on the number of units. And the process is now taking only a few weeks, which means a seller can get still his/her FHA-approved condo onto the market in time for the spring/summer buying season!
If you are trying to sell your condo, FHA approval will give it a huge boost in the marketplace. Keep in mind, however, that the FHA maximum loan limit is $410,000 in the Chicago area, which means a purchase price of $424, 350 or less.
It’s a tricky time to be using FHA to buy a condo. Most Chicago condo buildings are NOT already FHA-approved, and the Federal Housing Administration recently changed its rules to eliminate “spot” approvals. This means that the whole condo building must be approved before FHA will insure any mortgages there, a process that now takes about a month.
Many buyers are attracted to FHA loans because they require low down payments (just 3.5%). But after a few weeks out looking at condos, people often tire of the FHA game, because (at the moment) it is severely limiting which buildings they can buy in.
But there is an alternative! If you have good credit and can come up with a slightly higher down payment, several Chicago lenders — including Guaranteed Rate and Wintrust Mortgage — are now doing condo loans with just 5% down. Northern Trust is also offering low down payment loans for people with good credit, although that program has some income restrictions.
Eventually, once many condo associations complete the paperwork to become FHA-approved, there will be a broader selection of Chicago condos for FHA buyers. But at the moment, with thousands of first-time buyers trying to close in time to claim their $8,000 tax credit, trying to find an FHA-approved condo in a hurry can be challenging.
Why limit your choices? If you can scrape together a bit more cash, you may be able to qualify for a 5% down mortgage that will work for a much wider selection of properties.
This week, my sellers finally closed on the sale of their Lincoln Square condo. I say finally because in this case, unfortunately, the couple who was buying the condo ran into some trouble getting an FHA loan. Everything seemed fine when they made an offer in October, but their first lender — A&N Mortgage — could not get the deal done.
We even gave the buyers an extra month to try to secure their loan. But despite what appeared to be solid jobs, good credit and hard work on the part of their loan officer, the loan was ultimately denied. The property fell out of contract and my sellers had to put it back on the market in January.
But wait! These buyers (and their realtor) did not give up. The realtor referred them to another lender — Bank of America, this time — and somehow the BofA mortgage sales manager Tammy Hajjar managed to get their FHA loan approved and closed six weeks later. Same buyers, same jobs, same down payment, same property … but a totally different outcome.
The difference in mortgage lenders, Hajjar said later, is twofold: how thoroughly the lender assembles the loan file (the front end of the process) and the access she/he has to an underwriter (the back end). “There is no room for a lack of detail these days,” she said. “You need someone who is thorough enough on the front side to really submit a good application and financial statements.”
At the same time, large banks like Bank of America, Chase, Wells Fargo and Citibank have in-house underwriters who work for them, so their mortgage lenders can quickly get questions answered. A broker like A&N Mortgage, Hajjar explained, has to “go through an extra step” of submitting the loan to an outside underwriter. That adds another level of interpretation to the loan file — and another place the process could potentially go awry.
This particular condo deal was a stark example of why it’s so important to choose an experienced lender with a track record of getting deals closed. It’s not all about getting the best interest rate (although, of course, this helps!) But many lenders offer comparable rates, and at the end of the day the interest rate is irrelevant if you can’t close the deal.
A good lender will patiently explain loan products and fees to prospective buyers and identify any red flags they see up front. Securing a loan entails crossing many little hurdles along the way, from the appraisal to underwriting, and an experienced lender will be able to navigate his/her way through them. One of the best ways to find a good lender is actually to ask your realtor, because realtors work with lenders all the time and after a while, most of us develop a go-to list of a couple great lenders that we know can get that loan closed.
I regularly refer buyers to a few good lenders I have worked with for years without a hitch. (I get nothing in return for the referral, by the way — except the knowledge that the loan is going to close.) Buyers should make sure their lender knows the business and has a solid record of closing deals, because it could mean the difference between scrapping the deal or moving into your new home.
Effective Feb. 1, the Federal Housing Administration’s new rules for insuring condo loans are just starting to flummox buyers who had hoped to use an FHA loan. Since FHA requires just 3.5% down, these mortgages have grown increasingly popular in the last year as other low-down-payment options dried up.
But using FHA to buy a condo always involved a few extra spools of red tape. Unless the condo building in question was already FHA-approved, buyers had to seek a “spot approval,” which meant more requirements to be met and paperwork to be filed by both the borrower and the condo association. Now, however, the government has abolished spot approvals.
To obtain an FHA loan now for a Chicago condo (or any other condo), the entire building now must be FHA-approved. This could throw a substantial monkey wrench in the works, as Chicago condo buyers and sellers scramble to win FHA approval in the next few months — especially before the home buyers’ tax credits expire at the end of April!
“I think it’s going to be a few rocky months until everyone gets their arms around this,” a Chase mortgage loan officer told me today. Basically, under the new rules, condo associations better have their ducks in a row or else they are cutting themselves off from approximately 25% of buyers now using FHA.
Among the FHA’s new condo rules:
• The property must be for residential use and occupied by the owner.
• At least 50% of the total units in the project must be sold.
• At least 50% of the units must be owner-occupied or sold to owners who intend to occupy the units.
• No more than 10 percent of the units may be owned by one investor. This will apply to developers who have rented out vacant and unsold units. For two and three-unit condo buildings, no single entity may own more than one unit.
• All of the units, common elements, and facilities within the project must be 100 percent complete.
• No more than 15% of the total units can be late on their condo assessments (more than 30 days past due).
• Projects in designated wetland and flood zones will not qualify for FHA insurance. There are also restrictions on condos located near airports, railroads, highways or landfills.
It’s ironic that FHA is tightening its rules now, with just three months to go until the home buyer’s tax credits expire. Will this push more buyers into single-family homes rather than condos? Or will they make do with the limited list of condo projects that have already earned the FHA approval stamp? Or will buyers will other means scrap FHA altogether and try to get a conventional loan with a bigger down payment?
Alarmed by rising loan defaults, the Federal Housing Administration this week announced that it was clamping down on the cash that is now financing a quarter of all U.S. home purchases. In the Chicago area, already gripped by high unemployment, this means it will be even harder to buy and sell property in the coming months, especially for people with spotty credit or little cash available for a down payment and closing costs.
Here are some of the changes:
* Buyers with credit scores of 580 or lower will now have to put down at least 10% of the home’s purchase price. People with better credit can put just 3.5 % down.
* FHA’s mortgage insurance premium, which buyers are required to pay, is going up from 1.75% to 2.25% of the loan amount.
* Sellers can now credit buyers 3% or less of the purchase price towards closing costs, down from 6%.
From where I stand, the mortgage insurance premium increase will be the most significant for most buyers. For loans of $200,000 and above, for instance, the new rules will add another $1,000 or more to their costs. It’s just one more hurdle to overcome, and for people who are scraping together every last penny, cashing in 401(k) accounts and borrowing cash from parents to buy their first home, it may mean the difference between buying and renting for another year.
It’s becoming clear that the government’s Making Home Affordable program is failing to yank most struggling homeowners out of foreclosure. Lenders just aren’t modifying loans quickly enough — or on a permanent basis.
As of the end of November, more than 728,000 modifications were under way nationwide, but almost all were still in the trial period, according to the U.S. Treasury Department. Only 31,382 mortgages — about 4% — had their payments permanently reduced. Some analysts are now predicting we could see as many as four million foreclosures in 2010.
This is dreadful news for millions of families and the communities where they live. There is no question: Foreclosures hurt people, property values, cities, and the broader economic recovery. But for a handful of buyers who are willing to jump in, they also represent an opportunity to buy property they might not have otherwise been able to afford.
This year, I have unlocked the padlocked front doors to dozens, probably hundreds of foreclosed homes. There are boarded-up bungalows and chilly two-flats where the utilities were shut off months ago. Condo buildings whose developer went belly up before selling all the units. Single-family homes with children’s wallpaper still decorating the bedrooms. Half-renovated houses missing stoves and refrigerators and electrical outlets, where some investor started a rehab and then ran out of money. Deserted and now owned by a bank, some of these homes have also been damaged by water or mold.
Most of my buyers wind up passing on these homes. The price may be low, but they often require a lot of work. You need to be handy, or have money saved, or be willing to apply for an FHA 203K loan to rehab the place. But the opportunities are certainly there, and more are coming.
More than 9% of Chicago-area mortgages were 90 days or more delinquent in October, compared with 5% a year ago, according to First American CoreLogic. As mentioned in my previous posts, the foreclosure rate in Illinois doubled in the past year, and more than 8,500 homeowners received default notices last month.
If you are interested in purchasing a foreclosure, please give me a call. I can help you find a property that suits your needs, and I will refer you to capable lenders who can get the deal closed with a minimum of fuss. And if you act soon, you may qualify for a $6,500 or 8,000 home buyer tax credit.
The Federal Housing Administration has been putting buyers into homes this year like never before. With the rest of the mortgage market in disarray, FHA has stepped boldly into the gap, insuring mortgages so that banks could keep lending even as default rates continued to climb.
In 2006, when most lenders were happy to hand out money to just about any borrower, FHA mortgages accounted for only about 3% of the U.S. market. Today nearly a third of all purchase loans are insured by the FHA — making the federal government a huge player in the mortgage market, and putting the FHA at huge risk if these loans start to falter.
And falter they have. The delinquency rate for FHA loans is now more than 15%, according to the Mortgage Bankers Association. Which means that the FHA must tighten the purse-strings, making it harder than ever for borrowers to qualify for a loan.
This year, at least half my clients used FHA to seal the deal, either as buyers taking advantage of the low 3.5% down payment these loans require, or as sellers who found an FHA buyer for their home. FHA was the grease that kept the battered, broken-down jalopy known as the housing market running in 2009.
But things are about to change. Among the measures the FHA is considering: Hiking the minimum down payment to 5%. Raising the required credit score to 640 or higher. Increasing the mortgage insurance premiums borrowers must pay.
All of these changes would squeeze out borrowers who have middling credit profiles or who don’t have much cash to put down. They will certainly limit risk for the government… But they will also make it tougher than ever for people to buy a home.
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