Sellers Concessions Help Sell Houses in Slow Market

With the real estate market so slow these days, many Realtors are suggesting that the sellers offer incentives to the buyers who purchase their home. This can be a great way to separate your home from the many other homes on the market. These concessions are so popular now that I am going to revisit the issue I discussed in my June 11, 2007 article, “How can a “carpeting allowance” be a bad thing?"

There are right and wrong ways to give seller concessions. The way it is structured can make all the difference in the world.

Limits to seller concessions

Most mortgage programs set limits to the amount of concessions a seller can make to the buyer before it begins to affect the sales price of the home. For instance, with a conventional 30 year fixed rate mortgage, if you have a down payment of 10%, the seller can give you up to 6% of the sales price as a concession. If the concessions are greater than 10%, the sales price will be reduced by that amount when the lender calculates the down payment and loan-to-value ratios (LTV).

Types of acceptable seller concessions

Typically, sellers can pay for non-recurring closing costs up to the maximum allowed by the lender for the specific mortgage program. Also, sellers can pay points to help the buyer lower their interest rate or pay for a temporary buydown. Also, if the buyer and seller agree to a payment abatement program (see my posts on PITI Payment Abatement Programs and Interest-Only Payment Abatement Programs for more information on payment abatement programs) the seller can pay for the payments that the buyer will skip.

Types of unacceptable seller concessions

Sellers can never give the down payment for the purchase to the buyer nor can they give them allowances for decorating, carpeting, repairs, etc. Many real estate professionals do not understand this and write them into the sales contract. If you are going to do repairs or replace carpeting for the buyers, it will have to be done before closing, put into escrow for the buyers to do later, or paid directly to the contractor who is going to do the work. If not, it will affect the sales price used by the lender to calculate down payment and LTV.

Concessions are a great way to entice buyers to take a closer look at your property and make an offer. But, it must be done correctly for the buyer to get the full benefit of the conecssion.

Carnival of Real Estate

Welcome to the December 3, 2007
edition of the Carnival of Real Estate

Let's face it - it's a weird time to be in real estate. Foreclosures loom, property sits unsold, and nobody really knows what's getting better and what's getting worse.

You can't open a paper or click on a website without hearing about it, and consumers are downright scared and confused. This week's carnival focuses on things that can help us all in these uncertain times.

We have to begin this week with Joshua Dorkin's "Fish Story" posted at Real Estate Investing For Real. When it comes to foreclosure, we know the homeowners get angry. They yell at their real estate agents, they yell at their attorneys, and they certainly yell at their mortgage brokers. This family took their anger out on the entire world. Worth a read just for the chuckle. I'm glad it was you and not me in there, Joshua!

One thing is sure, there are still people making money in real estate. As Trevor Mauch explains in his post, Recent Survey on Self-Directed IRA's is great news for real estate wholesalers posted at The Real Estate Investing Brain, "for the savvy investor... even right now, real estate is the most sought after and solid investment… with all of the doom and gloom out there… this survey debunks the myth that the good ol’ days of real estate investing are done." I've been hearing from a lot of my investor clients who want to 'go shopping while property is on sale' and the idea of using a self-directed IRA is a smart one!

If there is a bright side to the subprime mortgage meltdown, it may be the re-emergence of FHA as a popular option for homeowners. BrandonL talks about the various options available through the FHA program in his blog, Different types of FHA Loans posted at FHA Mortgage Center Blog, saying, "Learn how to use an FHA mortgage to make your home loan safer and easier."

Remember, even though it seems - by listening to the media and reading the newspapers - that the entire country is spiraling out of control, real estate markets are local and not national. Doug Boggs talks about this in his blog and explains how people can find good deals if they don't buy into the fear and hype. Fear based or reality based... is posted at Boggs Development Group, LLC. Doug says "I have always stated that there is no such thing as a national real estate economy. I still believe this despite what seems to be happening throughout the United States, as reported in numerous newspapers, as well as, their television affiliate corporations. The perpetuation of fear through our news agencies gives me pause. It is too bad as there are some great deals out there for people who can see through the maze of media mayhem."

That concludes this edition. Submit your blog article to the next edition of
carnival of real estate using the carnival submission form.

Past posts and future hosts can be found on the blog carnival index page.

Technorati tags:

carnival of real estate, blog carnival.

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Mortgage rates are low. Take advantage of them while you can!

Mortgage rates have dipped to the lowest point in the past 2 years. Fueled by the fear of an upcoming recession (a result of the soft housing market, mortgage meltdown, etc.) mortgage rates have continued to fall lower than many people had anticipated.

Now is the best time to refinance your current mortgage to save money. Many of you have an adjustable rate mortgage that will be adjusting in the next year – refinance to a fixed rate mortgage before your rate, and payment, increase.

• You may have a first and a second mortgage – roll them into one mortgage for savings and convenience.


• You may have higher interest debt such as credit cards – pay them off and save a ton of money.


• Or, maybe you have a large expense coming up (college tuition, automobile purchase, vacation, Christmas) – cash out some of the equity in your home to pay for these expenses at the lowest possible rates.

Whatever your situation now is the time to take action.

But, John, what if rates go lower?

I get this question from customers all the time. The problem is, we never know for sure what is going to happen with interest rates. If we knew for sure, we would all be retired by now by investing perfectly and making a fortune.

The truth is, you can save money NOW - but you may NOT be able to save money next month, or even next year. During the refinance boom a couple years ago, I had customers that did not want to lock into a 30 year fixed rate mortgage at 5.00% because they thought rates would continue to fall. Well, they lost the opportunity to refinance and have paid all that extra money for the past couple of years.

And remember, if rates go lower, you can always refinance again.

Won’t that cost me more money?

Yes, and no. If you refinance, there will be some closing costs. If you refinance a second time, you will have to pay closing costs again, but they will be much lower. And, if you continue lowering your rates and payments, it can make perfect sense financially.

The real fear should be NOT refinancing now and rates NOT getting any lower. If rates remain the same as they are now, and you wait a couple of months to refinance, you have LOST the cost savings for those couple of months by paying at your current payment. If rates go up, you have lost even MORE money because now you will have to refinance to a higher rate or, worse, not be able to refinance at all.

Also, if you refinance before the end of the year, you may increase your deductions on your income taxes for the year, thereby reducing the amount of tax you owe the government, or increasing the amount of your tax refund (check with your tax professional to see what you can or cannot deduct from your taxes).

What if the value of my home has fallen?

There will be situations where the value of the home has fallen to a point where you cannot refinance your home. There is nothing you can do about that now. But, by contacting your loan officer, he or she can at least let you know what is possible. Your loan officer can ask the appraiser for an opinion on the value of your home to see if it is worthwhile to have the appraisal done. And, at least you know for sure what is happening, rather than just wondering.

Give your loan officer a call so he can do a mortgage checkup to see if refinancing is right for you. Or, give me a call at 708-473-3788 or send me an email – I would be happy to help you.

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HUD’s Ban on FHA Down Payment Assistance Programs on Hold

I recently wrote about HUD’s new rule that would eliminate the use of third-party down payment assistance programs to help people purchase a home.

On October 31, in AmeriDream, Inc. v HUD, the US District Court for the District of Columbia said that HUD acted against the wishes of the House of Representatives who had just passed a law in support of the program in July. The judge also ruled that HUD acted without supplying a reasoned analysis from its departure from its long-standing policy and failed to consider proposed alternatives. The court ordered a temporary injunction against the new rule.

Both sides will be presenting their arguments and the judge approved an agreement by both sides that they will try to end the case by February 29, 2008.

I will update this blog as the case progresses. This has been a great program that has allowed thousands of families to purchase a home. Please contact your US Representatives and Senators in support of this program.

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Financial Relief for Military Servicemembers

What is the Servicemembers’ Civil Relief Act of 2003?

The Servicemembers’ Civil Relief Act of 2003 (SCRA), which replaced and updated the Soldier’s and Sailors’ Civil Relief Act of 1940, is a federal law that gives members of all branches of the armed forces important rights and protections as they enter active duty. It covers mortgage interest rates, foreclosures, rental agreements, evictions, civil judicial proceedings and income tax payments.

These protections are for active duty military members, reservists and members of the National Guard called to active duty, and, in some situations, their spouses and dependents. To receive protection under some parts of the SCRA the member must be prepared to show that the active military service has had an adverse affect on the legal or financial matter involved.

The Six Percent Rule

The most well-known part of the SCRA is the Six Percent Rule. This provision allows the member to reduce the interest rates on consumer and mortgage debt to 6% under certain circumstances.

This does not happen automatically. The member would have to notify their creditors and lenders in writing and provide a copy of their mobilization orders. Then, the creditor or lender is required to reduce the interest rate on their debts to 6% for the period of time the member is on active duty. The SCRA does not apply to debts that are incurred after the start of the active duty.

The creditors or lenders can take the member to court to fight this. In court, the creditor or lender, not the member, must prove that the member’s ability to repay the loan at the agreed terms has not been “materially affected” by his military service.

Will the forgiven interest have to be repaid later?

No, any interest above and beyond the 6% is forgiven and the member will never have to repay that amount. However, as soon as the member’s active military service has ended, the interest rates will be reset per the original agreement and the payment adjusted accordingly. Also, the member will have to make the regular payments during the active duty to avoid having the account considered delinquent.

There are numerous other protections that a member can receive under the SCRA. To see the entire act please go to www.navy.mil/navydata/policy/hr100-scra.pdf.

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PITI Payment Abatement Program

In my July 2007 article,"Payment Abatement: What the Heck is That?", I wrote about a payment abatement program where the sellers can pay for the interest portion of the buyers mortgage payment for up to the first 6 months of the loan. The buyers were still responsible for the principal payments (if it was not an interest-only loan) and the escrows payments.

Now, on certain Fannie Mae loans, we offer a PITI Payment Abatement Program. For up to 6 months, the seller can pay the buyers entire payment which includes principal, interest, taxes and insurance (homeowners insurance, mortgage insurance, and flood insurance, if required).

Many sellers, and especially builders, are finding that they are having a hard time getting buyers to look at their properties, let alone purchase them. Sellers often offer incentives such as free home warranties, paying points for the buyer, etc. Builders are making even bigger offers to buyers such as free upgrades, free basements, finished basements, etc. I even heard of a builder offering the chance for a buyer to win a BMW SUV!

When these incentives fail to attract the right buyer to the property, the sellers or builders will typically reduce the sales price low enough to attract buyers ahead of other properties. The problem with this is everyone loses. The sellers make less money on the sale of the home. The buyer purchases a home at a low price, thinking he is getting a great deal. However, when this happens, the value of all homes in the community falls, thus, impacting all homeowners in the area, not just the buyer and seller.

Payment Abatement Can Help You Sell Faster

With the PITI payment abatement program, you can advertise your property like this: “Purchase this property and make no payments for up to 6 months!” Do you think that would attract more buyers to your home? Do you think that would give your home the edge over a home that is offering a free TV or home warranty? I think so. A buyer can live in a new home, payment free, for up to a half year. They can use the money they would be sending to the mortgage company toward the expense of decorating the new home instead of putting it on their credit cards. Or, they could make large payment to pay off their other debts. Or, they could invest the money for the kids college? Or... well, you get the point.

The PITI Payment Abatement Program is subject to the following rules:

1. The seller must provide the payment abatement funds.
2. Payment abatement funds are subject to seller concession limits
3. Property must be a 1-2 unit Primary Residence or Second Home
4. Maximum term is 30 Years.
5. Buyers must qualify at the total amount of monthly payment

Example:

Suppose you sell your home for $250,000 and the borrower has a 10% down payment – their mortgage amount would be $250,000. Let’s assume the mortgage is a 30 year fixed rate mortgage with an interest rate of 6.5%; the taxes on the property are $5,000 per year; the homeowner’s insurance is $600 per year; and the mortgage insurance is $97.50 per month. The total PITI Payment for this property will be:

• Principal and Interest $1,519.22
• Taxes $416.66
• Homeowners Insurance $50.00
• Mortgage Insurance $97.50
• Total Monthly Payment (PITI) $2,083.38

If you agree to pay for the buyers PITI payment for 6 months, the total would be $12,500.28, or just over 5% of the sales price of the home.

Most people, in a regular real estate market, sell their homes between 90 – 98% of the asking price. In a slow market, homes typically will sell for less than that. But, if market your home with creative financing such as the PITI Payment Abatement Program, you could walk away with more money, and a quicker sale.

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FHA Bans “Gift” Down Payment Assistance Programs

The Federal Housing Administration (FHA) has written a new rule that will no longer allow down payment assistance from popular programs such as the Nehemiah Program and AmeriDream. As I stated in my blog “Down Payment Assistance Programs” in February of this year, these programs “gift” money to the buyers for the down payment of the home provided the seller agrees to make a donation to the charity in the amount of the down payment plus a service fee. These changes will take effect 30 days after the FHA publishes them in the Federal Register.

Brian Montgomery with the FHA said, “These contributions often function as an incentive to purchase the home. But, these gifts are ultimately paid for by the borrower through a higher mortgage amount. The home buyers are often unaware that the ‘gift’ is something they end up paying for and is not a gift at all.”

Although these programs provide much-needed funds for down payments to otherwise-qualified buyers, the default and foreclosure rate on mortgage with the down payment assistance programs are much higher than for normal FHA mortgages. In 2005, the Government Accountability Office (GAO), the investigative arm of the US Congress, reported that borrowers who receive gifts from these seller-financed down payment assistance programs are more than twice as likely to default and become delinquent than other FHA borrowers and in 2006 the Internal Revenue Service called the charities “scams” and blamed them for increasing the cost of housing for these buyers.

The Mortgage Bankers Association of America (MBA) blasted the new rules. Steve O’Connor, Senior Vice President of Public Policy for the MBA, stated that the programs offer “important assistance to cash-strapped borrowers. O’Connor also said, “While there is a need for stronger quality control measures, we shouldn’t throw the baby out with the bathwater and end the program.”

Both Nehemiah and AmeriDream have filed lawsuits against HUD in federal court seeking an injunction against HUD from implementing these rules. Nehemiah, as a result of a 1998 settlement with HUD, will have 6 months before the rule becomes effective for them. For all other down payment assistance programs, the rule becomes effective October 1, 2007.

I will update my blog as more information becomes available on the down payment assistance programs. Please contact your Senators and Representatives in support of the programs and ask them to block the new HUD rule.

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FHA Offers Relief to Homeowners with FHA Secure

President Bush recently announced that HUD’s FHA will be able to help an estimated 250,000 homeowners avoid foreclosure by enhancing some of its refinancing guidelines effective immediately.

The FHA secure initiative is a temporary program designed to provide refinancing options to borrowers of conventional adjustable rate mortgages (ARM) who are delinquent under their current mortgage as a result of an interest rate adjustment.

Eligible borrowers must be able to demonstrate that they were current in their mortgage payments prior to the interest rate adjustment of their ARM and are now delinquent due to the subsequent increase in monthly payments. Borrowers may be able to include the past due payments in their new FHA loan subject to FHA loan limits and loan-to-value limits.

Eligibility Criteria for FHA Secure Refinance Option:

• The current mortgage must be a non-FHA ARM
• The new FHA mortgage may be fixed or adjustable
• The borrowers’ payment history must show that they were current on their payments prior to their interest rate adjustment
• The borrowers must qualify for a new FHA mortgage using standard FHA guidelines
• If there is sufficient equity in the property, the new FHA loan may include past due mortgage payments up to the FHA loan limits
• Borrowers may obtain secondary financing if the new FHA mortgage is not sufficient to pay off the existing first lien plus closing costs

If you have an adjustable rate mortgage, and are delinquent due to increases in your interest rate, contact me or your current mortgage lender to see if this option can help you.

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What do I do if my mortgage lender shuts down?

If you are already making payments on a mortgage, you will continue to make the payments as you have in the past. You may receive a notice that the mortgage has been transferred to another lender but the terms of your mortgage will remain in effect until the mortgage is paid off. If you're concerned, call your current mortgage company at the customer service number located on your mortgage statement.

What if my mortgage lender shuts down before my loan closes?

Until recently, I worked for American Home Mortgage (AHM), the nation’s 10th largest lender. And, like many other lenders, AHM went bankrupt and shut down their mortgage operations with little to no warning. While this is hard for the employees of AHM and the other lenders that have had the same fate, what about the people who are in the process of purchasing or refinancing their homes? What do they do?

Unfortunately, in the case of AHM, borrowers with over $800 Million worth of mortgages went to the closing table on July 30 & 31 expecting to close on their loans. Since AHM had no money to fund these loans, these borrowers had to cancel their closings and re-apply for a mortgage with another lender. In many cases these loans that did not fund affected even more closings that were dependent on these closings.

What should I do if I am in this situation?

In this crazy market it pays to be prepared for the worst. The first thing to do is to make sure you are working with a true mortgage professional. I understand that rates and costs are important considerations, but it is more important to make sure the loan will get closed on time. That means working with someone experienced, competent and professional.

Second, make sure that you always keep copies of all of the documentation you provide to your lender. If the lender happens to run into trouble and you need to find another lender, you will be prepared. On the same note, make sure you get a copy of the appraisal from your lender as soon as you can. If you have to find another lender you can forward this appraisal to them to help speed up the process.

Third, don’t panic and just run to the first lender you see. If you are working with a professional loan officer, contact him or her and ask for advice. Chances are they are already working on taking care of their customers’ loans before you even know there is a problem.

I had several mortgages that were set to close in August. As soon as I knew there was a problem, I contacted my borrowers and assured them that I would find a lender to close their loans on time. Luckily, several national lenders, including GMAC Mortgage, put plans in place to help these customers who found themselves suddenly without a lender. All of the customers who chose to stay with me closed on time and at terms as good as, or better than, they had at AHM.

Some of my customers chose to contact another lender for their mortgage. I heard from a few of them and, unfortunately, they received rates and fees higher than they should have gotten. When you panic and you're desperate, the chance of having someone take advantage of the situation is greater.

Pre-Screened Offers of Credit (Part 2)

On February 9, 2007, I wrote about receiving unsolicited credit offers from lenders as soon as you apply for a mortgage with another lender (Is My Mortgage Company Selling My Name?) Since then, I have spoken to a few customers who have been annoyed by the amount of offers they receive, and they want them to stop.

Mark Strassmann of CBS News did a report on this topic for The Early Show in May. Take a look at the amount of harassment this one couple had to endure: "Lenders Target Home Buyers"

Remember, you can stop this from happening by opting out of this process. By opting out, you will remove your name from lists sold to other mortgage companies. Simply visit http://www.optoutprescreen.com or call 888-567-8688 to opt out. You will have to give them some personal information necessary to process your request, and you can opt out for 5 years or permanently.

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Payment abatement? What the heck is that?

You've probably seen advertisements for new construction homes that say, “Purchase a new home and don’t make payments for up to 6 months!” This is a payment abatement program. The seller, in this case the builder, will make your first six mortgage payments (interest-only payments).

With the slower housing market, there are more properties on the market and it is taking them longer to sell. This increase in inventory of homes will affect the housing market until they are all sold and/or taken off the market.

How can someone sell their home in a slow market?

Many Realtors have asked me about the payment abatement program over the past several weeks as a way to drive more traffic to their listings. They are beginning to advertise their listings by saying, “Move into this beautiful home and don’t make a payment for up to 6 months!” Now, that will surely attract more buyers and could possibly be the deciding factor when the buyer is looking at several similar properties in the area.
How does it work?

When the contract is written, the seller offers the payment abatement for 1 to 6 months the same way as they would any other seller’s concession (e.g. closing costs, points, etc.). They agree to pay an amount equal to the number of interest-only mortgage payments they are willing to make for the buyers. The amount of the payment abatement is still subject to the limitations of the mortgage programs. Generally, if the borrower has a 5- 10% down payment, the seller can give up to 3% of the sales price as a seller’s concession. For a 10% - 25% down payment the seller can give up to 6%. And, for a 25% or more down payment, the seller can give up to 9%.

The payment abatement program is an interest-only mortgage program and is offered as a 30 year fixed rate mortgage or a 3/1, 5/1, 7/1, or 10/1 ARM. The interest-only period for the fixed rate mortgage is 10 years (there is also a 15 year option) and the interest-only period for the ARMs is equal to the initial fixed rate period. After the interest-only period, the payment is calculated by amortizing the balance of the mortgage over the remainder of the 30 year period.
Can the buyers pay off their principal during the interest-only period?

Yes. The amount of interest due on the following payment will then be reduced to reflect the reduction in principal. May people may be uncomfortable with an interest-only loan (especially with all of the bad press they’ve received lately) so this makes them more like a traditional fully-amortizing loan. But, the buyer is the one that has to add the principal each month. This is also a good idea to avoid payment shock when the interest-only period ends and the new payments are now fully-amortizing.

Want to know more about how a payment abatement program might work for you? Just drop me an email or give me a call.

Does a Bi-Weekly payment plan save me enough money to make it worthwhile?

Yes! With a bi-weekly payment program, the homeowners pay one-half of their normal mortgage payment every two weeks instead of once a month. Because you are making a payment every other week, you make a total of 26 payments a year (there are 52 weeks in a year.)

These 26 payments are the equivalent of 13 full payments for the year, versus the 12 payments you would make with the regular monthly payments. So you are essentially making one extra payment a year. Even though it doesn’t sound like a huge savings, it can really add up over time.

Let’s take a look at a $200,000 mortgage at 6.5% interest rate. Your monthly Principal and Interest (P&I) payment would be $1,264.14. By splitting that payment in half ($632.07) and making this payment every other week, you would pay off your mortgage in 23 years instead of 30 years. The savings in interest over the course of your mortgage would be in excess of $60,000.00.

Below is an amortization tables that shows a standard 30 year mortgage versus one using the bi-weekly payment plan:



So you see that the mortgage is paid off in 24 years. With the traditional mortgage, you would still have 6 years of payments left. Over the 24 years that you made bi-weekly payments, you made extra payments (that 13th payment each year) of $30,339.84, which gives you a savings of $60,751.68.

Even if you don’t plan on living in your home for 30 years, the bi-weekly program can still save you thousands of dollars in interest. After 5 years, your principal balance would be $7,730.13 lower. In those 5 years, you made extra payments of $6,320.80 for an interest savings of $1,409.33. After ten years, the cost savings would be $5,759.82 and the principal balance on your mortgage would be $18,401.42 less than with the regular payment program.

So, is the bi-weekly payment program good for everyone?

No. The bi-weekly payment program works really well for those homeowners who are sure they have the funds available when the payments are due. Bi-weekly programs almost always require an automatic withdrawal from a checking or savings account. If you typically use the 15-day grace period that is standard with a mortgage, you would NOT be a good candidate for this program. This program works very well for those homeowners who have bi-weekly pay periods, because you can make your payments fit your pay schedule to make sure the money is always there.

Can I save this kind of money without signing up for the bi-weekly payment program?

Yes. You can achieve the same results without the bi-weekly payments if you add an additional principal payment to your regular payment each month. In the above example, if you add an additional $105.35 to your payment each month (the equivalent of 1/12 of your regular payment) you will achieve the same results that the bi-weekly payments will. You will pay off your mortgage in about 24 years by adding one additional payment each year.

I actually advise my clients to do this for several reasons. First, there is usually a fee to enroll in the bi-weekly payment program. Second, if you use the grace period on your mortgage (or, if your income fluctuates and is not consistent) it can be easier to make the payments yourself and add the additional principal.

On the other hand, some of my clients see the bi-weekly payment plan as a forced savings plan. They say they don’t even notice that there are two extra half-payments made each year, and it pays down their mortgage more quickly without them even thinking about it.

Bottom line, you can save a lot of money by paying extra on your mortgage – whether you use a bi-weekly payment program or do it on your own.

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How can a “carpeting allowance” be a bad thing?

On many real estate sales contracts we see credits from the seller to the buyer in the form of “carpeting allowances” or “repair credit.” Basically, a buyer wants to purchase a home but wants the seller to replace the carpet or make some other repairs to the property. The sellers are unwilling to make the repairs before the close of the property, either because they don’t want to pay for the repairs out of their own pockets or they don’t want to wait to close on the property. So the sellers agree to give the buyers a credit at closing out of the proceeds from the sale.

So, what’s the problem? Sounds like everyone is getting what they want.

The problem with this is that the lender will not usually allow a credit directly from the seller to the buyer at closing. They will allow the seller to pay for closing costs, and other prepaid items for the buyer, but the money does not go directly TO the buyer. One of the reasons for this is that sellers are not allowed to provide the down payment for a home purchase to the buyers. So lenders do not allow these types of 'repair credits' because it would be an easy way for sellers to get around the no-down-payment rule.

When there is a repair credit on the contract, the lender will reduce the sales price by the amount of the repair credit and calculate the loan to value (LTV) off of that reduced sales price. For many transactions this will not have much of an affect. If the buyer has a large down payment, and if the repair credit is relatively small, the buyer will not really notice any difference.

The problems arise when the buyer has a smaller down payment, and/or the repair credit is large relative to the sales price of the property. Let’s look at the following transaction:

Sales Price: $150,000
Down payment (5%): $7,500
Mortgage $142,500

Let’s now assume that the seller is giving the buyer a $3,500 carpeting allowance at closing. The lender will reduce the sales price by the allowance and calculate the LTV off of that sales price.

Sales Price: $150,000
Allowance: $3,500
Effective Sales Price: $146,500
Mortgage $142,500
LTV: 97.2%

Now, the buyer thought they were going to be able to do a 95% LTV Conforming Fixed Rate loan. Because of the credit at closing, they either have to increase their down payment to $10,825 which would give them a loan amount of $139,175 and an LTV of 95% or, they would have to get a different mortgage program that allowed for a higher LTV. Most likely, since the buyer was only putting 5% down on the property in the first place, the second option is the most likely one. And, the mortgage programs available to the buyer now, would usually result in a higher interest rate and/or higher mortgage insurance payments on the program.


So, what can we do so everyone comes out a winner?

There are a few ways to deal with repair credits that will accomplish the goals of the credits without breaking the rules or harming the buyer. Here are three:

1) The seller agrees to lower the sales price by the amount of the credit. The sellers will still walk away with the same amount of proceeds from the sale of the home and the buyer will still be able to make a smaller down payment and get the mortgage they initially wanted. The buyers are also getting a better sales price. Unfortunately, the repairs have still not been completed and the buyers will now have to make these repairs with their own money. Chances are, they do not have the money to make the repairs or they would not have asked for the credit in the first place.

2) You can write in the contract that the seller agrees to pay a certain amount of money to a contractor of the buyer’s choice from the seller’s proceeds at closing instead of making the repairs. The money is not going directly from the seller to the buyer – it is going to the contractor for repairs agreed upon in the contract. This would have to be approved by the lender.

3) The seller can get bids for the work that needs to be completed and agree to set up an escrow account for the work to be performed after closing. The work will have to be completed, and an inspection will need to be performed, before the money will be released from the escrow account. Any money left in the escrow account after the repairs have been made will go back to the seller unless other arrangements were made. This is generally more acceptable to the lender since the money is held in escrow until the work in performed and the lender will verify that the work has been completed.

Although seller credits have not been allowed by mortgage lenders for quite awhile, I do still see them written into contracts. Many Realtors and attorneys are not aware of this, so if they are written into your contract, make sure it's done properly.

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What is a short sale?

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.

Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.

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Great new tools make Zillow a hit!

Back in July 2006 I wrote “To Zillow or Not To Zillow” as my first blog entry. Since then, Zillow has added many features which make it a pretty good web site to go for home buying and selling information.

The first new feature that helps with the accuracy of the Home Value Estimates, which Zillow calls “Zestimates,” is now the owner of the property can log in and make any changes necessary to give a better value. For instance, when I look at my home address, Zillow says that I have 1.5 baths and does not list the number of bedrooms in the home. The Zestimate I get from Zillow seems very low. When I go in and correct the number of bathrooms from 1.5 to 2.0 bathrooms, and enter 4 bedrooms, the value of the home is much closer to what I would have expected. Again, Zillow is using mostly public records data which can be inaccurate and incomplete. But, it still can be a good starting point to look for approximate values in a neighborhood.

The next features all deal with selling your home. If you are planning to sell your home without the use of a Realtor, you can list your home for sale. You can list your sales price and all of the features and amenities of your home as well as all of your contact information and any upcoming open houses you may have scheduled. You can even pick comparable properties in your neighborhood to show the value of your home.

If you are a Realtor, you can have a profile on Zillow and advertise all of your listings – for free! Just another tool to let potential home buyers and sellers get to know you and another avenue to get exposure for your listings. There are several other cool tools for Realtors such as a Real Estate Guide where you can contribute and share your expertise with the people who visit Zillow.

They will also allow professionals within the real estate field (e.g. Realtors, loan officers, home inspectors, attorney, etc.) create EZ Ads to advertise their services. It is a very cheap way to get your name out (only $0.01 per showing) and you can target specific zip codes and you are in complete control of how much you spend on these ads. I have just completed my first EZ Ad so I do not know if it is at all effective, yet. But, in the future I will let everyone know my experience.

The last feature I am going to talk about is the “Make me Move” listings. Let’s say you like where you live, the house is fine, you get along with the neighbors, etc. You aren’t actively looking to move but, if someone offered you the right price, you’d be out the door. That is what this tool is for. You set the price that would make you want to leave your property. You don’t have to deal with all of the hassles of actively marketing your home or having a Realtor do it for you but, if there is a buyer that would love to buy your home, he can contact you and make an offer.

Again, the Zestimates offered on Zillow are still dependant upon the information contained in the public records and, therefore, you need to be careful when relying on these estimates. But, they are moving in the right direction. And, the cool new tools make it a great site to check out when looking to buy or sell a home.

Interest-Only Mortgages - Are they for you?

Over the past few years, interest-only mortgages have become much more popular. An interest-only mortgage is one where the required monthly payment only covers the interest payment on the loan. With a traditional mortgage, part of the required payment is for interest and part of the payment is to reduce the principal amount of the loan – called amortization. With an interest-only loan, the loan amount will not go down (amortize) unless the borrower chooses to pay additional money with their payments.

Usually, the mortgage requires interest-only payments for a set period of time – 5 or 10 years. Then, the loan converts to a fully-amortizing loan over the remainder of the term of the loan.

There are many reasons that people may opt for an interest only loan. Many borrowers may need the lower, interest-only payments to be able to afford the home they want. This can be a good option for those borrowers who anticipate an increase in their income in the near future. They are able to afford the home they want now and, when the loan converts to a fully-amortizing loan, their income has increased so they can cover the higher payment.

Another reason for an interest-only loan is cash flow. Many real estate investors will use an interest-only loan in order to maximize the cash flow they receive from their rents. With a lower interest-only payment, the investors will have more money to work with each month.

Many people also choose this option so they have more money left over to pay down higher-interest debt such as credit cards and auto loans or to invest in hopes of earning a higher rate of return than the interest rate on their mortgage.

Some people feel that interest-only loans are dangerous. And, they can be. But so can any mortgage program if the borrower is not fully educated on the features, benefits, and possible problems with a loan program. There are several benefits to this program which were listed above. But, borrowers must understand that, if they do not make more than the interest-only payment, the balance of their mortgage will remain the same. When home values are rapidly increasing this is usually not a problem. But, if home values remain flat or decline, borrowers may find themselves with little to no equity in their properties.

If you’re interested in an interest-only loan, make sure your loan officer takes the time to fully explain this program and make sure you are comfortable with all the facets of the program before you sign.

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How does the Subprime Crisis Affect My Home?

I've received this question several times from my past customers so I figured it was a topic to cover here.

No doubt, you have heard about the crisis in the subprime mortgage market by now. Subprime mortgage lenders are truly in a tough situation. According to the New York Times over 20 mortgage lenders have already shut down their operations for good. And, many of the top 25 lenders in the nation from 2006 are reporting serious losses, filing for bankruptcy protection, or looking for another company to buy them.

Bill Dallas, former CEO of Ownit Solutions has been quoted as saying that all subprime lenders will be severely hurt by the current market situation. He also stated that 10% – 40% of all borrowers will be affected by tightening credit standards that lenders are adopting in light of this crisis. Anyone looking for a mortgage in the near future will notice tighter qualifying criteria and fewer products available to them.

What happened?

Over the past several years housing prices in the US have been soaring. It has benefitted almost every homeowner in the form of additional equity in their property. Over this time period many lenders had relaxed many of their underwriting guidelines and introduced and/or expanded mortgage product offerings that did not seem as risky as long as the value of homes continued to rise. Some of these products include interest only loans and loans with no down payments – even for applicants with less than perfect credit. Even if the borrowers were in trouble, the increase in equity would allow them to refinance or at least sell their homes for more than they borrowed.

When a mortgage is originated, prime or subprime, the loan is typically sold to a company that combines these mortgages in big pools of loans and then markets them as securities on Wall Street. This is the backbone of the mortgage system in the US and allows lenders to constantly have enough money to lend to borrowers. But, with up to 15% or more of these loans now in default, many of the Wall Street bankers are sending these loans back to the lenders and demanding them to re-purchase these loans. This has crippled many of these lenders.

In addition, mortgage lenders traditionally have warehouse lines of credit from the major commercial banks. This allows them to fund loans until they can be sold to the Wall Street Bankers. Many of these commercial banks have closed or reduced the amount of credit extended to the subprime lenders. This caused them to no longer be able to fund any more loans.

How will this affect my home and my mortgage?

If you are current on your mortgage and do not plan to move or refinance in the near future, the answer is it will not affect you.

If you are planning to move or refinance in the near future you may notice that the underwriting guidelines for many mortgage programs (both prime and subprime) have been tightened. For many people this will simply mean that they need to provide more documentation than they have in the past few years or certain programs may not be as readily available. Many of the interest only mortgages and no income verification loans may require larger down payments that before and/or higher credit scores. But, the impact for you will be limited.

If you are currently late or in default on your mortgage you may be impacted. In the past, if you were late or in default on your mortgage you could always refinance to a subprime mortgage program. Since the value in your home was always rising, there was usually an option for refinancing. Now, with home values flat, or in some cases declining, and the current crisis, there are far fewer options for you. Please contact me, or another experienced loan officer right away, to see what options are available to you.

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How will Illinois HB 4050 affect you?

Illinois HB 4050, “The Illinois Predatory Lending Database Law,” was a pilot program designed to protect consumers in certain areas of Cook County Illinois from getting into mortgage programs they do not understand or cannot afford, thus, reducing the number of foreclosures in these zip codes.

This law called for all high risk loan applicants to attend counseling provided by approved counseling companies. High risk applicants were defined as:

1) applicants with a FICO score below 620;
2) applicants with a FICO score between 621 and 650 if they are applying for an interest-only loan, a no-income verification loan, an ARM loan with an initial fixed period of less than 3 years, or if the property had been previously financed in the past 12 months;
3) all applicants who applied for a mortgage with a pre-payment penalty and/or possible negative amortization; and
4) all applicants applying for a mortgage with points and fees that total more than 5% of the loan amount.

While this sounds like a great idea, it was disastrous. There were several reasons for this. First, it only applied to a few zip codes in Cook County. Second, it only covered borrowers who applied for a loan with state-registered loan originators – federally chartered banks were exempt (eg. Chase, Bank of America, Citibank, etc.). There was a lot of opposition to this law from title companies, lenders, the Illinois Association of Mortgage Brokers, Realtors, and consumer right advocates. Still, the law went forward.

In December 2006 a report from the University of Illinois reported that the law was not achieving its goals. It showed that the neighborhoods in which the law was active were negatively impacted. The home sales in the affected zip codes declined by over 50% while other similar zip codes not affected by the law only saw a decline in home sales of 20% in the same time period. It also went on to say, in addition to other things, that the law does not offer borrower’s additional consumer protection. You can read the report in its entirety at http://www.sal.uiuc.edu/sparc/research/working-papers/pdf/bates_vanzandt_revised_0131.pdf.

In response to this report, Gov. Blagojevich issued a press release stating he had ordered the Illinois Department of Financial and Professional Regulations (IDFPR), the state department charged with implementing this law, to “immediately suspend the Illinois Predatory Lending Database Pilot Program, also known as HB 4050. You can read this press release at http://www.idfpr.com/newsrls/011907GOVIDFPR4050SUSP.pdf.

This measure was applauded by many consumer advocates, as well as mortgage lenders, brokers and Realtors. It was thought that this was the death of HB 4050.

On March 21, 2007 another press release was released which announced the new rules of HB 4050 – bringing this law back to life: http://www.idfpr.com/newsrls/032107HB4050PressRelease.asp

This time, it applies to ALL zip codes in Cook County which may affect thousands of borrowers per year. These new rules, although not yet confirmed by the IDFPR, apply to the following classes of borrowers:

1) first time homebuyers;
2) borrowers who have not purchased a home in the past three years; and
3) all refinance borrowers. If a borrower is in one of these classes, they may be subject to counseling if the loan they are applying for have any of the following features:
• Interest-only payment
• Possible negative amortization
• Pre-payment penalty
• No-income verification
• A Loan-to-value (LTV) of 100%
• An ARM that adjusts within the first 5 years
• Has points and fees in excess of 5% of the loan amount

The last time this law was in effect, the affected zip codes were adversely affected – now it will affect all of Cook County. A group called the “Concerned Citizens of Cook County” launched a web site (http://www.nocounseling.com) to try to fight the new proposed rules of HB 4050. It gives you a lot of information on the new rules along with their opinion of the rules. It also gives you an easy way to contact the members of the Joint Committee on Administrative Rules (JCAR) – the people who are responsible for making decisions on HB 4050.

As of this writing, I am not sure who comprises the “Concerned Citizens of Cook County.” They could be anybody, and they do not take credit for their actions but rather have a generic yahoo e-mail address. But, the information I found on the web site seems to be accurate and if this law concerns you, this site makes it very easy for you to voice your opinions to JCAR.

If you are a resident of Cook County, and are concerned that you may be affected as adversely as the residents of the first 10 zip codes were by the old rules, you should be concerned. The current 45 day comment period is when you should be contacting JCAR to give your comments and opinions on the law. The 45 day comment period began April 6, 2007.

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This is not your father’s FHA

Mention the term FHA Mortgage, and you get different responses from different people. If you ask a buyer who was able to purchase a home due to the availability of FHA mortgages, the response is quite favorable. Ask a seller or a Realtor, and the response will be much different.

Many sellers feel FHA mortgages are too restrictive on the seller, costs the seller too much money, requires the property to be perfect, has a million forms to sign, and take too long to close. Many sellers will not accept offers with FHA financing. Most Realtors have horror stories about how long an FHA loan took to close or how much the sellers had to pay for unnecessary repairs to the property.

Many of the negative idea about FHA were not warranted, though many were.

But, in 2005 and 2006 HUD has made many changes to the FHA program that reflects a more “user-friendly” approach to appraisals, forms and costs. By accepting homes that are less than perfect, lower down payments, and weaker credit histories FHA loans are more attractive than ever to buyers, sellers, and Realtors.


No Longer Required:

• Automatic Termite Reports – these are no only required when there is evidence of previous wood-destroying insect damage, and evidence of un-repaired structural damage.
• Repair of peeling paint in homes built after 1978
• Repair of broken windows or damaged exit doors
• Roof certification of flat roofs
• Separate well and septic inspections on existing homes
• Handrails for steps and stairs
• Repair of minor cosmetic issues such as cracked plaster/drywall, soiled carpeting, minor plumbing leaks, crawlspaces with debris or trash, etc.
• 10 year builder warranty if a property is 90-100% complete at time of appraisal with a building permit and certificate of occupancy

Now accepted:

• “As-is” appraisals; no more cumbersome evaluation condition sheets!
• Minor property deficiencies, usually a result of normal wear and tear, that don’t affect the safety of occupants or security of the property.
• Down payment assistance (DPA) from the seller, in the form of a contribution to a non-profit organization that is gifted to the buyer; the DPA is allowed in addition to the 6% seller concessions for closing costs, prepayments or discount points.
• Fee structure similar to conventional loans; the only non-allowable FHA closing cost is the tax service fee.
• 95% cash out refinance.
• Maximum financing for non-arm’s length transactions under certain conditions.
• Conventional HUD forms for FHA loans, versus those formerly required.
• Buyers in a Chapter 13 Bankruptcy or consumer credit counseling program are eligible with a satisfactory 12 month payment history, versus complete payment of all accounts.
• Collections up to $3,000 may remain open – over $3,000 considered on a case by case basis.
• Buyers with a Chapter 7 Bankruptcy are eligible 24 months after discharge.
• 15% vacancy factor (vs. 25% on conventional loans) for cash flow analysis on 2-4 unit properties.

Last year, the Expanding American Homeownership Act was introduced in the Senate which would make FHA mortgages a more attractive option in today’s market. Some of the proposed changes are:

• Eliminate the statutory 3% minimum investment for borrowers. Many first-time home buyers are now getting mortgages will no money down. FHA would offer various down payment options.
• Increase and simplify the FHA loan limits. In many parts of the country home prices have risen to the point that FHA financing is not an option. By raising the loan limits to become closer to conventional loan limits more borrowers will have the option of using FHA for their home financing.
• Create a risk-based mortgage insurance premium that would be determined by the borrower’s credit risk. FHA is already less restrictive on credit histories than conventional loans, but this would open the program to borrowers who now only have the option of sub-prime lending prorgrams.

FHA has always been a great program to help people afford the American Dream. With the crisis facing the sub-prime mortgage market, FHA is again becoming a more popular financing option and, with the changes already made as well as the upcoming changes, will become more popular in the future.

Pre-Qualification vs. Pre-Approval

These are two terms in the mortgage industry that have often been confused with each other and sometimes (unfortunately) are used interchangeably. Let's take a look at each term and the similarities and differences.



Pre-qualification means finding out how much mortgage you will qualify for.
Simply put, it means contacting a mortgage lender and supplying your basic financial information (income, assets, liabilities, downpayment, etc.) so he/she can determine the amount of mortgage you can afford.

Sometimes, but not always, the lender may check your credit report during a pre-qualification. This is usually the first step in looking for a home as it gives you the price range of homes you should be looking at. However, the usefulness of a pre-qualification is limited since the information has not been verified and it has not been approved by an underwriter.

Pre-approval, on the other hand, takes all of the information that is given for the pre-qualification and verifies it.

Your lender will definitely have to check your credit for a pre-approval as well as ask for documentation that verifies the information (W-2s, check stubs, bank statements, etc.). Your information is then sent to underwriting where an underwriter will approve the mortgage application. This gives the buyer a firm loan approval, subject to some conditions specific to the property (e.g. fully-executed sale contract, appraisal, homeowners’ insurance, etc.)

The pre-approval is superior to the pre-qualification since the buyer actually has an approval that he can show to the seller when negotiating a sales contract. It gives the buyer more bargaining power because the seller is at less risk of taking his property off the market while waiting for the buyer to be approved. Also, it makes the process much quicker since most of the work has already been completed.

If a lender tells you you are pre-approved, but does not verify the information provided and have it approved by an underwriter, it is simply a pre-qualification that they are calling a pre-approval. Typically, this will have many more conditions such as verification of the information, etc.

Pre-qualification is an important first step - but make sure you get an actual pre-approval right away. The bargaining power and convenience will make your home shopping experience much less stressful and more rewarding.