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Archive for the ‘Mortgage Products’ Category

Today is August 16th.  If you are in the market to buy a home, you have approximately 45 days to find a home and get it under contract if you want to ensure you can take advantage of the first time home buyer tax credit.

Why 45 days?  Because in forty five days, it will be around October 1st which is the latest you can get a home under contract to purchase and still reasonably close  on the transaction by the November 30th.   Remember, it takes about 45 to 60 days to get to the closing table from the time the seller accepts your offer.  Thefore, if you expect to finalize your transaction by the November 30th deadline, you need to have found a property and come to terms with a seller by October 1st.

So get out there and find a home; $8000 is a lot of money to pass up.   Time waits for no one…

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The mortgage market has created a sort of no-man’s land in Chicago with non-conforming financing.  A no-man’s land is an area that you don’t want to be.  In Chicago, it is selling a luxury condominium priced between $475k and about $650k.  Recent changes in mortgage guidelines are going to cause condo units in this price range to fall into a death spiral value wise.

Over the past year, mortgage lenders and private mortgage insurance companies have been slowly but surely tightening up underwriting requirements to minimize risk.  In particular, the changes overtly affect loans that are larger than the maximum loan amount that Fannie and Freddie Mac will purchase from banks of $417,000.  

For loans larger than $417,000, private mortgage insurance companies (PMI) will not provide insurance coverage.  The second mortgage market is all but dried up, so it is nearly impossible to get a second mortgage with combined loan-to-values greater than 85% and even those are hard to come by.  In fact, some lenders are just saying no to condominiums altogether.  The bottomline is that if you need a loan larger than $417,000 to buy a condo in Chicago, it is going to be damn near impossible to without a 20% down payment. 

Herein lies the problem.  The buyers…

The typical purchaser of units in no-man’s land tend to be high income young professionals (usually couples).  These are buyers who have very high incomes, but generally have not been working a very long time – attorneys, bankers, doctor’s finishing up residencies, etc.  They may earn household incomes of $200k plus per year and can easily afford the mortgage debt from a cash flow standpoint, but they do not have a lot of liquid savings available to sink into an illiquid asset such as a home when a 20% down payment is required. 

The issue with the Chicago market is obvious.  The borrowers who would normally buy all of these high end condo’s downtown cannot readily get financing because of lack of large down payments.  They are being forced to save up for a long time if they want to stay in that price range or are setting their sights on cheaper units.  The owners of these units in no-man’s land are going to have to drop their prices to make them more attractive to the most borrowers or hope they are one of the lucky ones that appeal to well heeled empty-nester with 20% or greater down payments.

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I just wrote a big ole fat check to pay my second installment of Cook County property taxes so I thought it would be an opportune time to shed some light on property taxes.  Property taxes are just a fact of life when it comes to owning a home.  As such, lenders consider the annual cost of property taxes when approving you for a mortgage.

Here in Chicago, property taxes tend to run about 1.25-1.5% of the value of the home.  However, they can be as high as two percent in some of the suburban communities.  For example, a $400,000 condo in Chicago will typically have annual property taxes of about $5000.  Property taxes is primarily how schools are funded.

Escrowing

In most cases, homeowners escrow their property taxes.  This means the lender collects 1/12th of the annual tax bill along with your mortgage payment and pays the taxes when they are due.  In Chicago, taxes are due in September and March.  However, the September bill is almost always late which is why it was not due until November 3rd this year.  Twice per year, the lender will disburse the money that has been collected in your escrow account and pay the bill on your behalf.  Lenders prefer that borrowers escrow property taxes because it lowers the risk that you will not pay the bill.  As such, unless you are putting 20% down, the vast majority of lenders will force you to escrow your property taxes.

Prepaid Taxes

When you are escrowing taxes, lenders will collect anywhere from 3 to 8 months of property taxes from you at closing.   This money is used to fund the escrow account to ensure you have enough money available to pay the first tax bill after you move in.   The amount collected depends upon when taxes are due relative to your closing date.  The following shows how many months of taxes are collected as part of closing costs when escrowing taxes for purchases and refinances in Cook County

Closing Month/# of Months Taxes Collected

January / 8

February / 3

March / 4

April / 5

May / 6

June / 7

July / 8

August / 3

September / 4

October / 5

November / 6

December / 7

Waiving Escrows

When you put 20% down on a home purchase or take out a purchase money second mortgage (80/10/10) you will have the option of waiving escrows.  Basically, the lender lets you pay your taxes on your own.  This means the bank will not collect tax payments with each mortgage payment and nothing will be collected at closing to fund an escrow account.

Many borrowers prefer not to escrow because banks do not pay interest on the money held in escrow.  In addition, it is one less thing the big banks can screw up!

Be aware though that choosing to waive escrows is not free in most cases.  Most banks charge a risk premium of about .25%  to waive the escrow account which ultimatley gets reflected in your interest rate (will usually result in final interest rate of .125% higher).   When comparing two mortgage loans, it is good to know if one is requiring escrows and the other is not to ensure it is an apples to apples comparison.

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Fannie Mae is trying their hardest to make it impossible to qualify for a mortgage.  Out of left fields comes a guideline change that will soon be in effect and make it difficult for buyers to keep their current residence when they are buying a new one.

In a big city like Chicago where a lot of young professionals purchase condos as their first home, it is not uncommon for them to keep their property as a rental unit when they decide to move out to the ‘burbs or get a larger place.     Since the rental market in Chicago is fairly strong, several of my clients found they could cash flow their condos and decided to just keep them as an investment.

In the past, the borrower would just produce an executed rental agreement showing they are receiving a certain amount in rental income and we could apply 75% of the gross rents to their total income to offset the mortgage.  In most cases, this allowed the borrower to carry both mortgages.  Now you can’t do that unless the borrower can demonstrate that they have at least 30% equity in the property being rented! 

I would bet the vast majority of condo owners do not have at least 30% equity in their homes right now.  I am also sure that there are quite a few who might have trouble qualifying with two mortgages.  It makes no sense to count both mortgages if one of the properties is clearly rented – but that is Fannie Mae for you.  I literally just closed on a deal on Monday that would have been blown to pieces if this guidelines was in effect.

The important point here to remember is that qualifying for a mortgage nowadays is a lot more involved than simply a high credit score.  Little issues like these can sink a loan approval if you aren’t careful.

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When you are buying a home, it is important that you understand all of the terminology you are going to encounter.  Those of us who breathe this everyday often times forget we are talking to people who aren’t familiar with the language of mortgages and residential real estate.  I thought I would just provide some definition to the various type of mortgage loans available.   

Conforming:  A conforming mortgage is the run of the mill mortgage loan that “conforms” to Fannie Mae and Freddie Mac guidelines.  If you have decent credit and a loan less than $417k, the odds are you are getting a conforming mortgage.  Conforming mortgages are always the cheapest mortgages in the market place.

Sub-Prime: Largely, non-existent since 2007, these loans are for borrowers who typically have less than stellar credit.  You know you have a sub-prime mortgage if it is an ARM that is called a 2/28 or 3/27. 

Non-Conforming: These loans are generally for people with good credit, but there is something about it that doesn’t conform to Fannie/Freddie guidelines.  The most common is when the loan size is larger than the $417k, so the borrower needs a “jumbo” mortgage.

FHA:  A loan insured by the Federal Housing Administration.  These loans have gained in popularity over the past two years after being largely ignored due to sub-prime lending.  FHA allow for higher loan-to-value (smaller down payments) and less restrictive credit policies than conventional mortgages.  However, there are still some quirks about them that make them difficult to use in many situations such as with condominiums and the loan amounts can be restrictive in certain high cost areas.

VA: A loan insured by the Veterans Administration that is open to current and former military personnel.  Allows 100% financing up to $417,000 and lower down payments up to $1 million in loan amounts.  Competitive rates and a great alternative for military personnel in certain situations.

Second Mortgage:  The most common is a Home Equity Line of Credit (HELOC).  Used in conjunction with a first mortgage, these loans can help you avoid paying private mortgage insurance (PMI).  They also are how many people access the equity they have built up over time in their homes.  The market for second mortgages has severly contracted with the liquidity issues in the market.  Most lenders will not grant a second mortgage with a combined loan-to-value above 85% now.  Just a year ago, most would go to 100%.

For definitions of other common terms, please refer to the glossary on this site.

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Second PlaceUnless you are putting 20% down on your home purchase, odds are you are familiar with second mortgages.  Second mortgages are usually smaller loans used by lenders to make up a financing gap.   For instance, you can only put 5% down, so your loan is structured as an 80-15-5. The first mortgage is 80% of your purchase price and you receive a second mortgage for 15% of the purchase price.  Together, both loans equate to 95% combined loan-to-value.  You only have to come up with a five percent down payment and avoid paying private mortgage insurance

While most people tend to focus on the interest rates and loan types of the first mortgage, choosing the right second mortgage is also a part of the puzzle.  Second mortgages come in two flavors – home equity lines of credit (HELOCs) and closed-end second mortgages (CES).  While both serve the same purpose, there are some subtle differences between the two.

HELOCs:  The main characteristic of the HELOC is that they basically turn your house into a credit card.  HELOC debt is revolving.  This means that as you pay the initial loan down, you can continue to borrower against the equity.  For example, you have a HELOC with an initial balance of $100,000.  You receive a bonus and decided to pay down the HELOC to $50,000.  Because HELOC debt is revolving, your credit line is still $100,000 and you now have access to $50,000 in equity ($100k credit line – $50k principal balance = $50k in usable equity).   Many people tend to use their HELOCs to pay for vacations and weddings, buy cars, and pay off credit card debts when the principal balance is paid down lower than the total available credit line.  

The rates on HELOCs are usually tied to the Prime Rate which the interest rate that banks usually charge their most valuable and stable customers.  The Prime Rate is always the same across banks and currently stands at 8.25%.  When you hear of the Federal Reserve raising interest rates, it directly impacts the Prime Rate.  Most HELOCs usually have a final rate of Prime plus or minus a margin which is usually determined by your creditworthiness.  For example, the most credit worthy borrowers may get an interest rate of Prime for life.  This means the rate on the loan is whatever the current Prime Rate happens to be.  Obviously, having an adjustable interest rate can help or hurt you depending on which way the market is headed.   Three years ago, the Prime Rate was at 4%.  Obviously, many homeowners were caught off guard with the rising rates seeing thier payments increasing substantially.  However, if the Federal Reserve starts cutting interest rates, homeowners with HELOCs would benefit.

The other characteristic of HELOCs is that they loans have an interest-only feature.  This means you only have to pay the interest each month, instead of both principal and interest.  Depending on your situation, this could be a benefit.  Most HELOCs have ten year amortizations. 

Closed End Seconds: During the refinancing boom, most consumers preferred the HELOC because Prime rate was as low as 4%.  However, as the Federal Reserve has continued to raise the Fed Funds rate which directly impacts the Prime rate, HELOCs have lost quite a bit of their luster.  Enter the closed end second mortgage (CES).

A closed end second mortgage is basically a regular mortgage loan.  Nothing fancy.   The interest rate on a CES is fixed which makes them very attractive in unstable and rising interest rate environments.  There is no risk.  You know exactly what your payment will look like for the life of the loan.  As the Prime Rate increased, CES mortgages gained in popularity because the fixed rate was cheaper than than the adjustable rate on the HELOCs.  Top credit borrowers in the current market right now can see rates in the upper sixes to low sevens, substantially better than the 8.25% HELOC rates.

CES mortgages can be amortized in 15 years, 20 years, 30 years, or be a 30/15 balloon.  The 30/15 balloon is the most common.  This means the loan payment is based on paying back the loan over 30 years, but in year 15, you are required to pay off the loan by making a large balloon payment.  If you plan to move or refinance prior in fifteen years, this should not be an issue.

Generally, CES mortgages do not allow you to borrow against the mortgage as you pay down the principal like a HELOC.  However, there are a few lenders who have been rolling out similar features, but they are uncommon.  Once you pay the loan off, it is gone.  The credit is not revolving for future use.

As always, if you have any questions, don’t hesitate to give me a call.

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Do you go to the same place for a vacation every year? Looking for a weekend getaway? Need a weekend condo downtown? Want to buy a condo for a child in college? Already know where you plan to retire? If so, buying a second home might be a choice for you. With interest rates still very low, it is becoming more and more popular for people to purchase second homes for entertainment and investment purposes.

Second homes are defined as a property that your reside in for at least two weeks per year. Obtaining financing for second homes is almost identical to buying a primary residence. You will need to be able to make at least a five percent down payment. Your income will also have to support the total housing payment of principal, interest, taxes, and insurance/condo fees along with your other debts (you will not be able to use rental income to qualify). Interest rates are also basically the same as a primary residence. In addition, the mortgage interest is also tax deductable.

While purchasing a second home is a huge financial commitment, you really need to give a lot of thought to the practicality of owning two homes before making the jump. You need to consider how often you will use the property. Does it make sense to buy a second home if you only live in it a few weekends per year? How are you going to manage the upkeep of the home?

Most of my client’s who own second homes tend to spend an inordinate amount of time at their getaways. For instance, I know someone who goes their second home in Michigan nearly every single weekend during the summer. I also know people who spend nearly two months “summering” in Cape Cod.

If you can afford it, buying a second home can be a good investment. Don’t hesitate to give me a call if you have any questions about financing a vacation or second home.

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