A good option for the Chicago first time home buyer

The Freddie Mac Home Steps program is a good option for the Chicago first time home buyer looking to buy a foreclosure or REO property. Home Steps is a division of Freddie Mac that handles their foreclosed homes. Home Steps handles foreclosed homes across the nation and works strictly with Realtors@. So why is the Smart Buy program so good for the Chicago first time home buyer? As part of the Smart Buy program Home Steps is currently offering the following:

1. Two year Home Protect warranty.

2. Pay up to 3.5% of the Chicago first time home buyer’s closing costs

3. Home protect appliance discount (up to 30% savings on appliances)

There are some things that Chicago first time home buyers should know about the Smart Buy program:

1. All homes have been through the foreclosure process.

2. The homes are as-is and no repairs will be done on the home.

3. The buyers will not be allowed to enter the home prior to closing to perform repairs.

4. For people who are not first time home buyers the Home Step will not accept an offer contingent on the sale of another home.

5. Buyers will not receive a credit for repairs needed on the home.

The fact that Home Steps will not accept offers contingent on the sale of another makes the Chicago first time home buyer a perfect candidate for the Smart Buy program. To find out what homes might be available in your area fill out the contact form below and I will refer you to a Realtor@ familiar with the Smart Buy program.

Chicago First Time Home Buyer: Often Overlooked Down Payment Source #3

Okay this down payment source may not really be overlooked by Chicago first time home buyers but  it is often not presented the way it should be. Let’s say you have exhausted all other options for your down payment except for one, family members. I know you are probably just cringing at the thought of approaching mom and dad to say,

“Mom and dad we were wondering if we might be able to borrow a few thousand dollars for a down payment on our first home?” On the surface it is not a bad request and if your parents or other family members have the money maybe they would consider giving you a loan for your down payment. As many of you know the government is giving a tax credit of up to $8000 to first time home buyers. What if you were to try the following approach?

Mom and dad have you heard about that first time home buyer tax credit the government is giving? John and I have been looking at homes and right now we do not quite have the down payment required. We were wondering if you could borrow us the money we are short for our down payment with the understanding that once we get our first time home buyer tax credit we will repay you what we borrowed? Not only have you told them that you intend to repay them but you are also telling them how. Now if mom and dad do not have the money there is not much you can do. Maybe other family members would be willing to help you get into your first home.

Like i said borrowing money from family members is nothing new. Approaching the repayment of the money you borrowed with a government tax credit that is a bit different. Now do not forget the first time home buyer tax will expire in April of 2010. This means you will need to have a contract on the home you intend to purchase by the end of April and you will need to close by June 30,2010. I hope this helps Chicago first time home buyers who would like to get a new home but cannot seem to find the money for the down payment.

Those who know me know that I am a huge fan of Survivor. Friends, family even clients know that Thursday nights I will be glued to the TV watching Survivor. Now other than NFL football and Monday funnies on CBS, Survivor is the only show that I absolutely must see. Back in season one I heard about this Survivor show and actually poked fun at my friends who were watching it. Prior to season two my friends said I should just watch the first episode and decide for myself. My wife and I decided to give it a watch since she liked CSI which was the show that followed Survivor. After watching the premiere of Survivor season two I was hooked. I know you are wondering where exactly this is going.

Fast forward to this season, the 19th season for Survivor. This has been one of the best seasons of Survivor. I really cannot believe that I have followed a TV show for almost 10 year now. This season I have been amazed at the play of one survivor, Russell. Well going in to the final episode Russell has clearly played the best game of Survivor that I have watched. So when the final vote was read the winner of Survivor Samoa was Natalie. Now do not get me wrong Natalie played a good game but Russell was by ar the most controlling, out front scrambling Survivor. In Survivor terms he was able to outwit, outplay and outlast.

Okay sorry about the rant but thanks for listening. Tomorrow we will be back to our regularly scheduled program.

Chicago First Time Home Buyer: Down Payment Source #2

Okay so where else other than the savings or checking account can Chicago first time home buyers find their down payment money? We already talked about taking money out of an IRA. The next option is to borrow money from your 401k. I have had several clients who were paying in to a 401k but never considered using this money toward their down payment. Many 401k plans will allow you to take money out for the down payment on a home. Unfortunately there are downsides to Chicago first time home buyers using your 401k for your down payment on a new home. Unlike the money you take out of your IRA you will have to pay back the money withdrawn from your 401k.

As with any financial advice you will want to consult your accountant. You will also want to check with the company that administers your 401k to make sure they allow for withdrawals to purchase a home.

While the 401k may seem like an obvious source for you down payment many Chicago first time home buyers have overlooked this option. Over the weekend we will look at a third option with a bit of a twist.

Chicago First Time Home Buyer: Often Overlooked Down Payment Source #1

Many times when I am talking with Chicago first time home buyers I hear the following:

“Roy, I would love to buy a home but I do not have the money for the down payment”

Over the next three days we will look at three different ways to come up with your down payment that are often overlooked.

1.  IRAs –

The IRS will allow a first time home buyer to withdraw up to $10,000 from an IRA penalty free and tax free. If your are married, each spouse can each withdraw $10,000 with no penalty, which would give you $20,000 to put down on the home. If you do not have an IRA you can ask someone in your family if they have an IRA. Family members are allowed to give you money from their IRA to use toward the down payment of a home for a first time home buyer. The IRS allows a first time home buyer, their spouse, a child, a grandchild, a parent or other ancestor, to withdraw $10,000 from their IRA penalty free and apply it to the purchase of the home. Be sure you do not withdraw your money too soon. The IRS requires you to use the IRA funds within 120 days toward qualified acquisition costs. These costs include buying, building or rebuilding a home. along with normal settlement, financing or closing costs.

One of the best parts is the IRS definition of a first time home buyer. According to the IRS, a first time home buyer is defined as “you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.” (from IRS publications) What this means is this does not have to be your first home you just cannot have owned a home for the past two years.

The rules for a Roth IRA are different. The $10,000 taken out or your first home is a qualified distribution as long as you have had your Roth account for 5 years. This means you can take the money out of your Roth penalty free plus because your Roth earning are tax free you won’t have an IRS bill either.

All first time home buyers should be sure to check with their accountant before you take money out of your IRA.

Tomorrow we will look at another option that is often overlooked by the Chicago first time home buyer.

Well a bit of a departure from our normal mortgage stuff. I just wanted to throw a quick picture of our Christmas tree. Every year on the day after Thanksgiving we put up our Christmas tree. The kids are always very excited even our oldest who is in college. The kids each have their own line of Hallmark ornaments that they collect. For example one of my son’s is a Star Wars fan. Each year Hallmark comes out with a cool new Star Wars ornament that makes all kinds of noise. The prize ornaments on the Christmas tree are the ornaments the kids have made at school.

Each year while we put up the Christmas tree we watch our favorite Christmas movies. While the tree goes up we start off with the Home Alone movies. We usually get through the first movie putting the tree up and hanging the lights. Next we move on to sorting the ornaments into each kid’s pile which carries us most of the way through the second Home Alone movie. Now while the kids like the third Home Alone movie it is not high on my list. Our third and final movie which is watched while hanging the ornaments is of course my favorite, “Christmas Vacation.” As we near the midway point of Christmas Vacation the level of interest varies from “are we done yet?”, to “what’s next?”

I really enjoy the time we spend together putting up the tree and hanging the ornaments. Each year is different and there is always one of those memorable moments. Okay enough of my story feel free to share your Christmas tree stories.

The Chicago first time home buyer could see some drastic changes in upfront costs in 2010. HUD Secretary Sean Donovan is asking congress to raise the minimum down payment for FHA loans from 3.5% to 5%. Mr. Donovan stated that buyers need to have a stronger equity position in the homes they are buying.  This request comes as the FHA loan guarantee fund has slipped below its mandated 2% level. Representative Scott Garrett (R – NJ) who is the sponsor of a House Bill, The FHA Taxpayer Protection Act 2009 which would raise the minimum down payment feels the increase would help make home buyers more committed.

Estimates are that 75% of first time home buyers are using FHA loans to finance the purchase of their new home. Approximately 30% of the homes in the US are secured by FHA loans. Not too long ago FHA was losing their market share to other types of loans. Due to the real esate collapse and the mortgage meltdown FHA loans are quickly gaining market share every month. This dramatic increase in FHA loans has put a higher risk of loans defaulting. By increasing the requirements FHA is hoping to weed out people who are who might notbeable to keep up with their payments.

HUD Secretary Sean Donovan gave three options for increasing the amount of money home buyers have to pay in upfront.

1. Raise the minimum down payment from 3.5% to 5%

2. Raise the upfront mortgage insurance premium from 1.75% to 3%

3. Decrease the allowable seller concessions from 6% to 3%

Unfortunately if these changes are made I believe it will definitely hurt the housing market. Some Chicago first time home buyers are already having a hard time coming up with the current 3.5% down payment that is required. We already have lenders increasing the minimum credit score required to obtain an FHA loan. I think that the elimination of down payment assistance combined with the increased credit score requirement are already making a big impact on the quality of FHA borrowers.

Many of the loans that are in default were from a time when there was no minimum score requirement and seller assisted down payments were allowed. The biggest problem I foresee right now is unemployment. You can require a higher down payment, higher credit scores, more cash reserves and any other add on criteria. If a homeowner loses their job for any length of time none of these requirements is going to protect FHA.

The bottom line is if you have a perfect borrower with no money coming in then they will not be able to make their monthly payment. Will these changes help to stem the tide of defaults? As I stated above I think the changes HUD has already made will help to protect the future of FHA loans.

Should any of the above options be passed the Chicago first time home buyer will definitely be impacted in a negative way.

HOW MUCH MONEY DO I NEED!!!!

One of the first questions most Chicago first time home buyers ask is “how much are the closing costs?” While this is a straight forward question the answer is not so easy. Closing costs can vary depending on what town or even what county you are buying a home in. For now lets just review the costs that home buyers will need to pay for out of pocket prior to closing. These costs are typically overlooked by many first time home buyers.

1. Appraisal – $350-450 – The cost of the appraisal can vary depending on whether you loan is an FHA loan or a conventional loan. The fee for the appraisal is typically required to be paid for upfront either by credit card or by check to the appraiser. As of January 1st FHA appraisals will also require payment by credit card upfront.

2. Homeowners Insurance – $500-1200 – This number can vary depending on the size of the house, the city where the house is located, your credit and many other variables. I will be doing an interview later this week with an agent I work with that will go more in depth on this subject. Typically proof that you have paid one year of homeowners insurance in advance is required for closing.

3. Home Inspection – $275-400 – The home inspection is different from the appraisal. The home inspector does a more thorough inspection of the home looking at the structural, mechanical and functional aspects of the home. While some Chicago first time home buyers choose to bypass the home inspection this could potentially be a huge mistake. See my previous post on Home Inspections for more information.

4. Earnest Money – $1000 and up – This money is given to the seller to show that you are serious about your offer. The amount can vary depending on the seller, selling price etc.

So as you can see when buying home there is more money involved than just the down payment. Many time Chicago first time home buyers i work with are surprised at how much more than their actual down payment is needed to buy a home.

Feel free to ask any questions you may have regarding financing a new home purchase or any other mortgage questions.

Earlier this year the Home Valuation Code of Conduct was put in force for all conventional loans. HVCC was supposed to help enhance the integrity of the home appraisal process. Prior to the implementation of HVCC mortgage brokers would order an appraisal on a conventional loan from one of the appraisers they regularly used. HVCC would change the whole appraisal ordering process for conventional loans. As of May 1, 2009 the lender and mortgage broker could no longer order the appraisal directly from the appraiser. HVCC requires that lenders and mortgage brokers order their appraisals through an appraisal management company. The appraisal management company (AMC) would then order the appraisal from one of the appraiser on their roster of appraisers. The idea here was to eliminate any pressure that the lender or mortgage broker might have put on the appraiser to deliver a specific value.

In theory HVCC seems to be a good idea. Unfortunately HVCC has not worked as well as expected. The following are some of the issues that have cropped up with HVCC:

1.  The average cost of appraisals has increased significantly. A conventional appraisal prior to HVCC ran $275-325 however now a conventional appraisal runs from $350-450. This unfortunately is an added expense to the borrower.

2.  The appraisers that are used are not always familiar with the actual area where the home is located. This can cause an inaccurate estimate of value which in turn can cause a new home purchase to fall apart.

3.  The time it takes to get an appraisal can take a week longer than it used to. This can be an issue when you are buying a home. In some cases delays with the appraisal can also delay closings.

4.  Some major lenders now also own AMCs. HVCC was brought on because certain large lenders had their own appraisal companies who were accused of producing appraisals that were not accurate. In some cases these values were supposedly pushed to make loans fit guidelines.

Above are just some of the issues that have come with the implementation of HVCC. I think in theory HVCC was meant to do help protect the first time home buyer however in many cases it is the home buyer that has been hurt. As of January 1, 2010 FHA appraisals will also have to be ordered by someone other that the lender or mortgage broker. HUD is not requiring the appraisals to be ordered through an appraisal management company so it is left to be seen how this change will impact Chicago first time home buyers.

Okay this is going to be a bit of an off topic rant. No mortgage info today. The official BCS matchups were announced yesterday and I must say I am a bit miffed. It was announced that the two BCS busters, Boise State and TCU would play each other in the Fiesta Bowl. Now you have to understand I tend to root for the underdog, you know the little guy. I mean after all I am a long suffering Cubs fan. So the little guys, Boise State and TCU who have just been waiting for a chance to challenge the so called BIG Conferences have to play each other instead. Both schools are repeatedly turned down when they try to schedule regular season games versus the BIG guys. This season both schools were able to run the table and go undefeated. TCU is ranked 4th and Boise State is ranked 6th in the country. Realistically then since #1 and #2 play for the National Championship shouldn’t #3 Cincinnati and #4 TCU play next? How about #5 Florida against #6 Boise State? No instead the powers that be decided to have the two little schools that could face each other.

Now I am not saying that Boise State or TCU would beat either of the big schools but shouldn’t they have a chance? Wouldn’t a true David versus Goliath be a matchup that everyone would want to see? Oh wait that’s right the BCS Committee is concerned with who travels well and don’t forget we need to protect the teams from the big conferences. What would happen if say little Boise State were to knock off a powerhouse like Florida? Wait a minute didn’t that happen a couple of years ago when Boise State upset Oklahoma? Oh well i guess we will have to wait another year to see if the little guys can finally get a game against one of the BIG schools.

Thanks for listening to my rant. We will return to our regularly scheduled program tomorrow.